Fire Sale – Managing the Geopolitics of Climate-Related Financial Risk in the Age of Covid
To date, dialogue on the risks climate poses to financial stability has focused mostly on how companies should prepare for and respond to rising insurance premiums and stranded fossil assets. Yet most of the world’s fossil fuels are owned by states, and state-owned entities. And it will be governments picking up the tab for more frequent and extreme climate-driven weather events. Covid-19 starkly illustrates how the international community and global financial architecture is woefully ill-prepared for a scenario of cascading sovereign insolvencies and the geopolitical consequences.
A new set of rules are urgently needed for how responsibility for climate financial risk is shared and managed between countries and institutions. Agreement is needed in two specific areas: first, how to respond to sovereign risk from climate change, including capital flight from vulnerable regions that could lead to instability; and second, how to improve debt transparency and prevent countries from attempting to offload underperforming fossil fuel assets to opaque jurisdictions.
Covid-19 must be a wake-up call. The potential size of these risks has already been exacerbated by the Covid-19 pandemic and the global debt crisis. But it also provides a window for the world to act now to address the discrepancy between the near certainty of transition and physical risks from climate change, and the failure to systematically consider and prepare for the possibility of cumulative sovereign defaults as a result. The paper offers several recommendations for near-term action to minimize the risk of this scenario.
Keywords: Geopolitics, financial risk, COVID