Climate change may spark ‘green swan’ disasters that trigger systemic financial crisis unless authorities take action, BIS warns

Climate change threatens to provoke “green swan” events that could trigger a systemic financial crisis unless authorities act against such risks, according to the Bank for International Settlements.

The analysis by officials at the Basel-based institution – often described as the central bank for central banks – adapts the “black swan” concept devised by Nassim Nicholas Taleb to describe adverse events outside the scope of regular expectations with wide-ranging or extreme impacts.

“Green swans or ‘climate black swans’ present many features of typical black swans,” said the authors, who include BIS Deputy General Manager Luiz Pereira da Silva. “Traditional approaches to risk management consisting in extrapolating historical data and on assumptions of normal distributions are largely irrelevant to assess future climate-related risks.”

Green swans are different from black swans because there is some certainty that climate change risks will one day materialise, which could endanger humanity more than financial crises, and they threaten even more complex and unpredictable chain reactions, the authors wrote.

The paper, published just after the world’s warmest decade on record, adds to a growing body of central bank-related analysis calling for authorities to better prepare for finance-related risks stemming from climate change.

Bank of France Governor Francois Villeroy de Galhau, in an introduction to the paper, argued that “to navigate these troubled waters, more holistic perspectives become essential.”