Assessing COVID impacts, sustainable finance, current and future implications for banks and monetary policy: “Breaking the tragedy of the horizon, climate change and financial stability"

Ojo, Marianne (2021): Assessing COVID impacts, sustainable finance, current and future implications for banks and monetary policy: “Breaking the tragedy of the horizon, climate change and financial stability". Forthcoming in: Elsevier Journals (November 2021)

Abstract

As well as considering the current implications of measures that have been instigated to address the impacts of the pandemic, drawing from past and current lessons from selected jurisdictions, this paper also considers why the transition to a net zero carbon economy may prove more challenging than may first appear. However, jurisdictional differences and historical developments will play a part in determining how sustainable certain implemented policies and measures are – as well as in facilitating a transition to normality. The paper also aims to highlight not only the growing importance of the roles of central banks in financial stability, in particular with reference to the management of risks associated with climate risks, in managing financial stability risks, but also place an emphasis on longer term perspectives and a need to incorporate greater uncertainty elements, particularly consequential of COVID impacts, in monetary policy setting instruments. In respect of longer term perspectives, the relevance and importance of other financial sector regulators, namely the insurance and securities sectors, in managing other forms of risks, namely, liability risks, will be considered.

The paper adopts a predominantly qualitative based and interdisciplinary approach to the study. Reasons for adopting this approach will be highlighted later in the paper. As a result, the literature review section will focus on conceptual and theoretical aspects – as opposed to predominantly empirical related data. In consolidating on those conceptual aspects of the framework already introduced under the literature review section, namely definitions ascribed to physical and transition risks, the next section illustrates how the above primary source related categories extend to a far reaching third category which presents fundamental relevance, not only in terms of climate risks, but also in respect of uncertainty, third party liability – and particularly for non common law jurisdictions which do not recognize principles of tort law which deals exclusively with related principles and concepts of remoteness of damage, foreseeability and the neighbor principle introduced through the leading case of Donoghue v Stevenson. These principles are linked to liability risks whereby the insurance sector will increasingly have an important role to play, in respect of addressing climate risks, in years to come.

In highlighting and illustrating the issues and arguments, particularly those relating to sustainable finance, monetary policies and climate risks, as well as the links between monetary policy responsibilities and the need to mitigate financial stability risks attributed to climate risks, reference will be made to evidence and discussions, as well as analyses and results obtained from the “Climate Risk Europe Virtual Week”, September 2021, as well as other reports and analyses documented in the manuscript and highlighted in the references section of this paper.

This paper is also unique because it highlights the need for interaction with legal disciplines, as well as an interdisciplinary approach to addressing economic issues. The pandemic is indeed also unique since it is not merely a financial and economic pandemic, but also a medical pandemic. As such, a mere economic perspective, cannot resolve all issues at hand.

It will demonstrate that depending on the structure of financial regulation which operates in different jurisdictions, as well as whether common law principles of tort law apply in these jurisdictions in addressing liability risks, it will be feasible, realistic and possible to break the tragedy of the horizon.

• Item Type: MPRA Paper
• Language: English
• Keywords: EU Green Deal; sustainable finance; interest rates; inflation; pandemic asset purchase program (PEPP); APP asset purchase program; longer term financing operations; transition risks; financial stability; CBDCs
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F1 - Trade > F18 - Trade and Environment; F - International Economics > F6 - Economic Impacts of Globalization > F64 - Environment; K - Law and Economics > K2 - Regulation and Business Law

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