Observing the Green Swans
The risks associated with climate change, biodiversity loss, and our responses to those problems are poorly understood, because there are no historical comparisons. But with the right tools, central banks and other macro-prudential authorities can stay ahead of the curve.
LONDON – The statistician Nassim Nicholas Taleb coined the term “black swan” to describe improbable, hard-to-predict events that can have a massive impact on the economy. The authors of a recent report have now introduced into the taxonomy of finance the phrase “green swans”: events caused by climate change and biodiversity loss.
The appearance of green swans is arguably more predictable than that of black swans, as climate change makes them unavoidable. But there are no historical comparisons to help us understand how climate and ecological risks such as cyclones, wildfires, droughts, and floods might affect the banking system, the insurance industry, or any number of other economic activities.
As economic activity is reallocated from fossil fuels to clean energy sources, some activities will disappear, others will emerge, and the value of “stranded assets” will plummet. Although this process is necessary, it must be managed in a way that does not create instability in the financial system.