IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v144y2025ics0140988325001434.html

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988325001434
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2025.108320?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Vasco Cúrdia & Michael Woodford, 2010. "Credit Spreads and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 3-35, September.
    2. Kazeem Isah & Adedapo Odebode & Oluwafemi Ogunjemilua, 2023. "Does Climate Risk Amplify Oil Market Volatility?," Energy RESEARCH LETTERS, Asia-Pacific Applied Economics Association, vol. 4(2), pages 1-5.
    3. Lamperti, Francesco & Bosetti, Valentina & Roventini, Andrea & Tavoni, Massimo & Treibich, Tania, 2021. "Three green financial policies to address climate risks," Journal of Financial Stability, Elsevier, vol. 54(C).
    4. Wen, Jun & Zhao, Xin-Xin & Fu, Qiang & Chang, Chun-Ping, 2023. "The impact of extreme weather events on green innovation: Which ones bring to the most harm?," Technological Forecasting and Social Change, Elsevier, vol. 188(C).
    5. Jeffrey D. Sachs & Wing Thye Woo & Naoyuki Yoshino & Farhad Taghizadeh-Hesary, 2019. "Why Is Green Finance Important?," ADBI Working Papers 917, Asian Development Bank Institute.
    6. Allie Goldstein & Will R. Turner & Jillian Gladstone & David G. Hole, 2019. "The private sector’s climate change risk and adaptation blind spots," Nature Climate Change, Nature, vol. 9(1), pages 18-25, January.
    7. Klomp, Jeroen, 2014. "Financial fragility and natural disasters: An empirical analysis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 180-192.
    8. Antoine Mandel & Timothy Tiggeloven & Daniel Lincke & Elco Koks & Philip Ward & Jochen Hinkel, 2021. "Risks on global financial stability induced by climate change: the case of flood risks," Climatic Change, Springer, vol. 166(1), pages 1-24, May.
    9. Paola D’Orazio & Lilit Popoyan, 2022. "Realising Central Banks’ Climate Ambitions Through Financial Stability Mandates," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(2), pages 103-111, March.
    10. Giuzio, Margherita & Krušec, Dejan & Levels, Anouk & Melo, Ana Sofia & Mikkonen, Katri & Radulova, Petya, 2019. "Climate change and financial stability," Financial Stability Review, European Central Bank, vol. 1.
    11. Mallucci, Enrico, 2022. "Natural disasters, climate change, and sovereign risk," Journal of International Economics, Elsevier, vol. 139(C).
    12. Bergmann, Anne & Stechemesser, Kristin & Guenther, Edeltraud, 2016. "Natural resource dependence theory: Impacts of extreme weather events on organizations," Journal of Business Research, Elsevier, vol. 69(4), pages 1361-1366.
    13. Diluiso, Francesca & Annicchiarico, Barbara & Kalkuhl, Matthias & Minx, Jan C., 2021. "Climate actions and macro-financial stability: The role of central banks," Journal of Environmental Economics and Management, Elsevier, vol. 110(C).
    14. Wanhai You & Yue Zhang & Chien-Chiang Lee, 2021. "Climate Risk, Economic Stability, and Tourism - A Cross-Sectionally Dependent Heterogeneous Panel Causality Analysis," Energy RESEARCH LETTERS, Asia-Pacific Applied Economics Association, vol. 2(2), pages 1-5.
    15. Giovanni Dell’Ariccia & Deniz Igan & Luc Laeven & Hui Tong, 2016. "Credit booms and macrofinancial stability," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 31(86), pages 299-355.
    16. Corey Lesk & Pedram Rowhani & Navin Ramankutty, 2016. "Influence of extreme weather disasters on global crop production," Nature, Nature, vol. 529(7584), pages 84-87, January.
    17. Chabot, Miia & Bertrand, Jean-Louis, 2023. "Climate risks and financial stability: Evidence from the European financial system," Journal of Financial Stability, Elsevier, vol. 69(C).
    18. Irene Monasterolo, 2020. "Climate Change and the Financial System," Annual Review of Resource Economics, Annual Reviews, vol. 12(1), pages 299-320, October.
    19. Dinh Hoang Bach Phan & Paresh Kumar Narayan, 2020. "Country Responses and the Reaction of the Stock Market to COVID-19—a Preliminary Exposition," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(10), pages 2138-2150, August.
    20. Paresh Kumar Narayan & Stephan Popp, 2010. "A new unit root test with two structural breaks in level and slope at unknown time," Journal of Applied Statistics, Taylor & Francis Journals, vol. 37(9), pages 1425-1438.
    21. Olivier Deschênes & Enrico Moretti, 2009. "Extreme Weather Events, Mortality, and Migration," The Review of Economics and Statistics, MIT Press, vol. 91(4), pages 659-681, November.
    22. Abroon Qazi & Mecit Can Emre Simsekler, 2022. "Prioritizing interdependent drivers of financial, economic, and political risks using a data-driven probabilistic approach," Risk Management, Palgrave Macmillan, vol. 24(2), pages 164-185, June.
    23. Howard C. Kunreuther & Joanne Linnerooth‐Bayer, 2003. "The Financial Management of Catastrophic Flood Risks in Emerging‐Economy Countries," Risk Analysis, John Wiley & Sons, vol. 23(3), pages 627-639, June.
    24. Narayan, Paresh Kumar, 2021. "COVID-19 research outcomes: An agenda for future research," Economic Analysis and Policy, Elsevier, vol. 71(C), pages 439-445.
    25. Afees Salisu & Philip Omoke & Olalekan Fadiya, 2023. "Climate Policy Uncertainty and Crude Oil Market Volatility," Energy RESEARCH LETTERS, Asia-Pacific Applied Economics Association, vol. 4(1), pages 1-5.
    26. Merve Tuncay, 2018. "Do political risks matter in the financial markets?: evidence from Turkey," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 8(2), pages 209-227, June.
    27. Andrea Bigano & Jacqueline M. Hamilton & Richard S.J. Tol, 2005. "The Impact Of Climate Change On Domestic And International Tourism: A Simulation Study," Working Papers FNU-58, Research unit Sustainability and Global Change, Hamburg University, revised Jan 2005.
    28. Bourdeau-Brien, Michael & Kryzanowski, Lawrence, 2020. "Natural disasters and risk aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 818-835.
    29. Eiji Ogawa & Pengfei Luo, 2024. "Macroeconomic effects of global policy and financial risks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 177-205, January.
    30. Valeria Groppo & Kati Kraehnert, 2017. "The impact of extreme weather events on education," Journal of Population Economics, Springer;European Society for Population Economics, vol. 30(2), pages 433-472, April.
    31. Paresh Kumar Narayan & Stephan Popp, 2013. "Size and power properties of structural break unit root tests," Applied Economics, Taylor & Francis Journals, vol. 45(6), pages 721-728, February.
    32. Chun-Ping Chang & Li Wan Zhang, 2020. "Do Natural Disasters Increase Financial Risks? An Empirical Analysis," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 23(Special I), pages 61-86, January.
    33. Lanfear, Matthew G. & Lioui, Abraham & Siebert, Mark G., 2019. "Market anomalies and disaster risk: Evidence from extreme weather events," Journal of Financial Markets, Elsevier, vol. 46(C).
    34. Lena Boneva & Gianluigi Ferrucci & Francesco Paolo Mongelli, 2022. "Climate change and central banks: what role for monetary policy?," Climate Policy, Taylor & Francis Journals, vol. 22(6), pages 770-787, July.
    35. Dinh Hoang Bach Phan & Paresh Kumar Narayan, 2020. "Country Responses and the Reaction of the Stock Market to COVID-19—a Preliminary Exposition," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(10), pages 2138-2150, August.
    36. Byoun, Soku & Xu, Zhaoxia, 2014. "Contracts, governance, and country risk in project finance: Theory and evidence," Journal of Corporate Finance, Elsevier, vol. 26(C), pages 124-144.
    37. Evan Mills, 2009. "A Global Review of Insurance Industry Responses to Climate Change," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 34(3), pages 323-359, July.
    38. Abroon Qazi & Mecit Can Emre Simsekler, 2022. "Correction to: Prioritizing interdependent drivers of financial, economic, and political risks using a data‑driven probabilistic approach," Risk Management, Palgrave Macmillan, vol. 24(2), pages 186-186, June.
    39. Yuhang Zheng & Jiaying Peng & Xiangzhong Wei & Jing Zhang, 2022. "Low-Carbon Transition of Enterprises and Financial Market Stability: From the Perspective of Stock Price Crash Risk," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(15), pages 4361-4374, December.
    40. Aisha Al-Sarihi & Michael Mason, 2020. "Challenges and opportunities for climate policy integration in oil-producing countries: the case of the UAE and Oman," Climate Policy, Taylor & Francis Journals, vol. 20(10), pages 1226-1241, November.
    41. Binswanger, Mathias, 2001. "Technological progress and sustainable development: what about the rebound effect?," Ecological Economics, Elsevier, vol. 36(1), pages 119-132, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yahya, Farzan & Lee, Chien-Chiang & Chen, Pei-Fen, 2025. "Is central bank resilience vulnerable to climate risks? The role of exchange rate stability and green policies," Journal of Asian Economics, Elsevier, vol. 99(C).
    2. Sun, Wujun & Zhai, Yujia & Li, Ruihai & Wang, Xuewu, 2025. "The extreme event of climate change: How digital transformation affects the performance of commercial banks?," Energy Economics, Elsevier, vol. 150(C).
    3. Ginn, William & Saadaoui, Jamel & Salachas, Evangelos, 2025. "Can Green Transition Only Thrive with Price Stability?," MPRA Paper 126542, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marcinkowska, Monika & Brzeszczyński, Janusz & Charteris, Ailie & Gajdka, Jerzy & Obojska, Lidia & Szczygielski, Jan Jakub, 2025. "Sustainability, energy finance and the role of central banks: A review of current insights and future research directions," Energy Economics, Elsevier, vol. 144(C).
    2. Li, Kaifeng & Devpura, Neluka & Cheng, Sijia, 2022. "How did the oil price affect Japanese yen and other currencies? Fresh insights from the COVID-19 pandemic," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    3. Chowdhury, Kushal Banik & Garg, Bhavesh, 2022. "Has COVID-19 intensified the oil price–exchange rate nexus?," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 280-298.
    4. Narayan, Paresh Kumar & Devpura, Neluka & Wang, Hua, 2020. "Japanese currency and stock market—What happened during the COVID-19 pandemic?," Economic Analysis and Policy, Elsevier, vol. 68(C), pages 191-198.
    5. Su, Chi-Wei & Huang, Shi-Wen & Qin, Meng & Umar, Muhammad, 2021. "Does crude oil price stimulate economic policy uncertainty in BRICS?," Pacific-Basin Finance Journal, Elsevier, vol. 66(C).
    6. Pradipta Kumar Sahoo, 2021. "COVID-19 pandemic and cryptocurrency markets: an empirical analysis from a linear and nonlinear causal relationship," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 38(2), pages 454-468, March.
    7. Di Tommaso, Caterina & Foglia, Matteo & Pacelli, Vincenzo, 2023. "The impact and the contagion effect of natural disasters on sovereign credit risk. An empirical investigation," International Review of Financial Analysis, Elsevier, vol. 87(C).
    8. Vinzenz Peters, 2025. "How Banks are Impacted by and Mediate the Economic Consequences of Natural Disasters and Climate Shocks: A Review," De Economist, Springer, vol. 173(1), pages 47-85, March.
    9. Niculaescu, Corina E. & Sangiorgi, Ivan & Bell, Adrian R., 2023. "Does personal experience with COVID-19 impact investment decisions? Evidence from a survey of US retail investors," International Review of Financial Analysis, Elsevier, vol. 88(C).
    10. Wenfeng Ge & Xiaodong Yang & Qiying Ran, 2024. "Does Infrastructure Investment Remain an Effective Expansionary Tool? Based On the Green Economy Growth Perspective," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 27(1), pages 99-112, March.
    11. Nguyen, Dat Thanh & Phan, Dinh Hoang Bach & Anglingkusumo, Reza & Sasongko, Aryo, 2021. "US government shutdowns and Indonesian stock market," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    12. Yang Xu & Xiaodong Yang & Qiying Ran, 2024. "The Impact of Fiscal Science and Technology Expenditure on Digital Economy: A New Path to Economic Recovery in The Post-Pandemic Era," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 27(1), pages 83-98, March.
    13. Shah, Sayar Ahmad & Garg, Bhavesh, 2023. "Testing policy effectiveness during COVID-19: An NK-DSGE analysis," Journal of Asian Economics, Elsevier, vol. 84(C).
    14. Siyu Ren & Mingyue Du, 2024. "Will Green Finance Become a New Driving Force for Environmental Governance in The Post-Covid-19 Era: Evidence from China," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 27(1), pages 151-166, March.
    15. Behera, Harendra & Gunadi, Iman & Rath, Badri Narayan, 2023. "COVID-19 uncertainty, financial markets and monetary policy effects in case of two emerging Asian countries," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 173-189.
    16. Gavalas, Dimitris & Syriopoulos, Theodoros & Tsatsaronis, Michael, 2022. "COVID–19 impact on the shipping industry: An event study approach," Transport Policy, Elsevier, vol. 116(C), pages 157-164.
    17. Abinzano, Isabel & Corredor, Pilar & Mansilla-Fernández, José Manuel, 2026. "Physical climate risk and banks’ credit risk: Worldwide evidence," The North American Journal of Economics and Finance, Elsevier, vol. 81(C).
    18. Ouyang, Zi-sheng & Liu, Meng-tian & Huang, Su-su & Yao, Ting, 2022. "Does the source of oil price shocks matter for the systemic risk?," Energy Economics, Elsevier, vol. 109(C).
    19. Chen, Xia & Fu, Qiang & Chang, Chun-Ping, 2021. "What are the shocks of climate change on clean energy investment: A diversified exploration," Energy Economics, Elsevier, vol. 95(C).
    20. Devi Prasad Dash & Narayan Sethi, 2022. "Pandemics, Lockdown and Economic Growth: A Region-Specific Perspective on Covid-19," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 25(Special I), pages 43-60, March.

    More about this item

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:144:y:2025:i:c:s0140988325001434. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.