Climate Finance and Economic Stability

The stability of the global economy in the face of climate change relies on the mobilization and allocation of capital to support mitigation and adaptation efforts. Climate finance encompasses public and private flows, instruments and policies designed to direct resources towards low-carbon technologies, resilience building and the phase-out of high-emission activities. Effective deployment of this finance must balance the need for rapid decarbonisation with the maintenance of financial stability, as abrupt shifts in asset valuations or credit conditions can trigger systemic risks. The interplay between regulatory frameworks, market incentives and the governance of public institutions shapes how transition and physical climate risks are absorbed by banks, investors and national economies. Recent advances in modelling and empirical analysis have deepened our understanding of tipping points, regulatory biases and the distribution of climate-related risks among different stakeholders, highlighting pathways for coherent policy design and sustainable investment strategies with global implications.

Research from Nature Portfolio

Recent studies have applied a systems lens to large-scale syndicated debt markets, revealing that uncoordinated withdrawal of financing from fossil fuel projects may prolong exposure to climate risks unless supported by stringent regulatory limits. These analyses identify a tipping point in which banks can sequentially phase-out high-carbon lending most efficiently, provided regulators enforce consistent rules across jurisdictions. Complementary research has uncovered unintended biases in existing financial accounting frameworks, showing that banks hold disproportionately larger loan loss provisions against low-carbon assets compared with high-carbon sectors. This finding suggests that historical risk models can penalise green investments and that reform of capital requirements could unlock greater funding for renewable energy. Further work has traced the ownership of stranded-asset risks in the oil and gas sector, quantifying the potential losses endured by private investors in advanced economies and emphasising the critical role of pension funds and institutional portfolios in the transition to net zero.

Climate Finance and Economic Stability publication trend

The graph below shows the total number of articles in climate finance and economic stability across all publications each year (not limited to Nature Index journals).

Technical terms

Transition risk: Financial and economic risks arising from the shift to a low-carbon economy, including asset revaluations and credit losses.

Stranded assets: Investments or reserves that lose value prematurely due to changes in climate policy, technology or market preferences.

Macroprudential regulation: Supervisory measures aimed at securing the stability of the financial system by addressing systemic risks.

Green bonds: Debt instruments designated to finance projects with environmental benefits, such as renewable energy or climate resilience.

Climate finance: Funding mechanisms, instruments and policies that channel capital towards initiatives reducing greenhouse gas emissions or enhancing climate resilience.

References

1. The challenge of phasing-out fossil fuel finance in the banking sector. Nature Communications (2024).
2. Model-based financial regulations impair the transition to net-zero carbon emissions. Nature Climate Change (2024).
3. Stranded fossil-fuel assets translate to major losses for investors in advanced economies. Nature Climate Change (2022).
4. Exploring the interdependence of climate, finance, energy, and geopolitics: A conceptual framework for systemic risks amidst multiple crises. Applied Energy (2024).
5. Low‐carbon transition risks for finance. Wiley Interdisciplinary Reviews Climate Change (2020).
6. Central bank mandates, sustainability objectives and the promotion of green finance. Ecological Economics (2021).