Financial instability in the Anthropocene: Criticisms and suggestions of regulatory responses – Part II

Alexander C Reay

So far, the response to climate risk by regulators across jurisdictions has primarily revolved around the development of a mandatory climate risk disclosure framework (explored in the first article in this series). However, such an approach suffers from several flaws. Most importantly, it relies on the notion that markets are inherently efficient and capable of pricing climate risk, a belief which fails to consider the radically uncertain nature of climate change. It also fails to account for the presence of moral hazard, empirical evidence of known risks not being accounted for in asset pricing, or several practical issues with its implementation. This article explains each of these issues in turn and concludes by arguing that regulators should not place all of their eggs into one basket. Instead, regulators should pursue a wider range of targeted regulatory interventions as a way of minimising climate risk across the international financial system.