Climate Change: Italian Research Supports Central Banks

The development of new models to assess the financial risks related to climate change and to define the role of central banks in managing such risks is the focus of a project, funded by the International Network for Sustainable Financial Policy Insights, Research and Exchange (Inspire) through a research grant, which involves researchers from the Institute of Economics of the Scuola Superiore Sant'Anna di Pisa, Rff-Cmcc European Institute on Economics (Milan), Bocconi University, and Politecnico di Milano.

Central banks' attention to climate change risks has increased exponentially in recent years. In December 2017, the Network for Greening the Financial System (NGFS) was created, an institution that includes the major central banks - such as those of France, Spain, Italy, Japan, Germany - and the most important financial regulatory institutions. It assists Inspire in financing the most promising research projects intended to engage the financial system in combating climate change.

Even the President of the European Central Bank, Christine Lagarde, in a speech in January 2021, urged central banks to contribute to the fight against climate change, to put themselves in a position to understand the risk and take advantage of the opportunities arising from it. With the contribution of Italian researchers, the project is supposed to contribute to this debate by studying how central banks and governments can co-manage the impact of climate change and the green transition on financial and macroeconomic dynamics.

"There are two main classes of risks that climate change poses on the financial system," explains Francesco Lamperti, Head of the project and researcher at the Institute of Economics and the Department of Excellence EMbeDS (Economics and management in the era of data science) of the Scuola Superiore Sant'Anna in Pisa and scientist at the Rff - Cmcc European Institute on Economics and the Environment in Milan. "One is linked to physical impacts: think of the loss of value of real estate due to floods or hurricanes; the other one concerns the instabilities that the transition itself may create, especially in highly financialized sectors, such as those still heavily dependent on coal. The main problem is the lack of models that can offer integrated assessments of both classes of risks and, more importantly, that can test which fiscal and monetary policy mechanisms are needed to manage them."

"The financial world," adds Valentina Bosetti, Professor of Climate Change Economics at Bocconi University, "is asking for scientific and accurate data to be able to assess these new risks and it is important that we create a bridge that transforms what we know about the energy transition from a technological point of view into useful information for the financial system."

In fact, the project aims to develop a new macroeconomic model, capable of analyzing both physical and transition risks, hitherto treated in a disjointed manner in the literature. "During the next year we will develop a new approach to climate risk modeling for macroeconomic dynamics," Lamperti concludes, "and in particular we will try to understand how fiscal policy, monetary policy, and macroprudential policy can interact synergistically to ensure a rapid and orderly transition to a zero-emissions economy by 2050."