Climate change is one of the defining challenges of our times. It is a classic example of a ‘collective action problem’ – one requiring collaborative action between individuals, groups and nations, but where such coordinated action is difficult on account of misaligned incentives. Climate change is likely to result in physical and transition risks that could have implications on stability of the overall financial system as well as the physical safety and financial soundness of banks, financial institutions. Given the potential implications of climate change on monetary policy as well as financial stability, addressing it should be part of the mandate of central banks and financial regulators.
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