Embracing the Brave New World: A Response to Demekas and Grippa

Abstract

ABSTRACT In the article ‘Walking a Tightrope: Financial Regulation, Climate Change, and the Transition to a Low-Carbon Economy’ in the Journal of Financial Regulation, Demekas and Grippa (2022) argue that it is dangerous to give central banks and financial regulators a ‘promotional’ role in the transition to a low-carbon economy. In this article we argue that both climate change and the transition to a low-carbon economy are clear and present dangers for financial stability. Accelerating the transition through proper risk management, both of micro and macro risks, should therefore be what regulators should do. Regulators should accept that they need to act with incomplete information. We agree with Demekas and Grippa that financial supervisors should not be the only, or even first, game in town. Nevertheless, we disagree that the effect of their action will be negligible. Financial supervisors should embrace the brave new world and play their role in addressing climate and environmental risks within the financial system.