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Climate change and financial risk: Is there a role for central banks?

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  • Wang, Jun-Zhuo
  • Narayan, Paresh Kumar
  • Gunadi, Iman
  • Hermawan, Danny

Abstract

We hypothesize and test how climate change (CC) impacts financial risks (FR) and the effectiveness of central banks' green policies (CBGP) in mitigating these effects. Using data from 115 countries, our analysis reveals that climate change, particularly through events like wildfires and floods, significantly heightens FR. However, CBGP is found to moderate this relationship, reducing the adverse effects of CC on FR. Specifically, two components of CBGP—requirement policies and green finance—are identified as the most effective tools in alleviating the FR associated with climate change. Additionally, our study highlights that the moderating effect of CBGP varies depending on a country's credit risk profile, with CC exerting a pronounced impact on FR in countries with large-scale credit markets.

Suggested Citation

  • Wang, Jun-Zhuo & Narayan, Paresh Kumar & Gunadi, Iman & Hermawan, Danny, 2025. "Climate change and financial risk: Is there a role for central banks?," Energy Economics, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:eneeco:v:144:y:2025:i:c:s0140988325001434
    DOI: 10.1016/j.eneco.2025.108320
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    More about this item

    Keywords

    Extreme weather events; Financial risk; Central Bank's green policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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