The Next Big Financial Crisis Could Be Triggered By Climate Change

The year 2008 still lingers in the minds of many US citizens, especially investors who witnessed the worst financial crisis ever recorded. More than a decade later, the world’s economy is under threat, and this time, climate change is the force behind it. The magnitude of its impact will once again rely on the measures taken by central banks and other financial regulators. Many companies and organizations have come forth to sensitize the masses about the threat that climate change poses.

Big companies such as Microsoft and Tesla have played a significant role in ensuring they limit their carbon footprint and also provide financial assistance to regions experiencing drastic climate change. Companies in the gaming and gambling niche also contribute to the greater course by sensitizing large masses through video games. For example, in 2019, major video game companies formed the Playing For The Planet Alliance.  The alliance was aimed at helping address climate change through ‘green nudges’ in-game designs.

On the other hand, casinos are contributing to climate change because of the sheer amount of energy it takes in electricity, especially lighting and slot games. For example, most casinos in India are located on ships that consume huge amounts of energy. Indian gamblers, on the other hand, can reduce their carbon impact by using online casinos.At the same time, gamers may still play a wide variety of casino games, including live dealer casino gameslike live poker, teen patti, and baccarat, and get the same experience for free or with real money.

An Overview of Impact of Climate Change on the Financial Sector

The impact of climate change can be looked at from various dimensions, and as such, the potential risk is not always obvious. In 2015, the governor of the Bank of England, Mark Carney, identified some crucial risks associated with climate change, all potentially sabotaging financial systems. These risks include the rising cost of extreme weather, the high numbers of lawsuits against companies that have contributed to climate change, and the falling value of fossil fuel assets.

A US economist, Joseph Stiglitz, recently commented that the sudden rise in carbon price due to the levies imposed by the government on companies could trigger a financial crisis. He notes that the fossil fuel industry will be the first to experience the shock and will spill over on the financial institutions that support them. This impact will then spread to the broader economy.

Climate-Stress-Testing Banks

The primary strategy that regulators should deploy is to compel banks to disclose the risks they face from climate change. They can further stress-test their capacity on whether they can independently manage change. In the US, President Biden released an executive order requiring that US companies assess their exposure to climate change and provide outlines on how they will cope with future policies.

The UK has already made significant steps towards the management of climate change. Major companies are obligated to release their carbon footprints. The UK government also has an elaborate plan to include all industries. In the EU, before any company undertakes an investment decision, the law states that it should submit a climate and sustainability report to the European Commission.

Monetary and Financial Policy Solutions

The fight against climate change is a collaborative effort involving many stakeholders. The front runners include academics and central banks that have designed financial regulation strategies and monetary policies. The first policy is green quantitative easing which is similar to quantitative easing deployed to manage the financial crisis in 2008. It means that the central bank acquires financial assets to increase the supply of money in the economy.

Another viable policy is to revise the banking regulations to acknowledge the dangers banks face regarding climate change. Central banks have capped the capital requirements for banks to improve stability in the financial sector. Each institution has a minimum amount of liquid capital that allows it to advance credit.

On the other hand, central banks should consider incorporating environmental factors in the capital requirements to protect the banks from financial risks associated with climate change. A specific example is banks giving loans to carbon-intensive companies who will be subjected to higher capital requirements to discourage them from advancing credit to such firms.