Global financial stability report: Markets in the time of COVID-19: Chapter 5: Climate change: Physical risk and equity prices

Disasters as a result of climate change are projected to be more frequent and more severe, which could threaten financial stability. Chapter 5 looks at the impact of climate change physical risk on global equity valuations to assess this threat. The chapter shows that the impact of large disasters on equity markets, bank stocks, and non–life insurance stocks has generally been modest over the past 50 years. High levels of insurance penetration and sovereign financial strength can help preserve financial stability in the face of climatic disasters the chapter suggests.

The chapter does not find that aggregate equity valuation -as of 2019- reflect the predicted changes in physical risk under various climate change scenarios, which suggests that investors do not pay sufficient attention to climate change risks. Better disclosure of exposures to climatic disasters and stress testing for financial firms can help preserve financial stability and should complement policy measures to mitigate and adapt to climate change.