Regulations – cooperation with other authorities The Riksbank’s work to promote financial stability includes the consideration of climate-related risks.26 The Riksbank also participates via international organisations, including NGFS, the Basel Committee, EFC and others, in the drafting of recommendations on a well-balanced policy. I would like to comment on three areas where work is already under way: stress testing, the reporting of climate-related risks and banks’ capital requirements. Stress testing is an important tool for assessing banks’ resilience to financial and economic unease. Stress testing is normally based on scenarios that reflect a severe economic recession or a financial crisis. However, climate-related risks are not captured by traditional stress tests and risk models. The Riksbank cooperates with NGFS to develop stress tests that include forward-looking scenarios with different rates of transition and different climate outcomes. Better reporting of companies’ climate-related risks is needed in order to develop successful forward-looking stress tests of the financial sector. Banks’ stress tests require greater disclosure and better access to data. Finansinspektionen recently announced that it intends to examine the scope on both the national and international level for urging companies to report an internal price for carbon emissions to a greater extent.27 Such reporting can pinpoint transition risks in their business models, which in turn can increase the scope for companies to consider such risks and the scope of investors for assessing them.28 On the European level, the European Commission has presented an action plan for the funding of sustainable growth.

Sources: RCP Database (Version 2.0.5), SMHI scenario data and SMHI Klimatologi [Climatology] report series, no. 41  Second, we know that climate change has economic consequences, but their magnitude is uncertain. Climate change affects the economy via physical risks and transition risks. This is illustrated in Figure 2. The physical risks include different types of extreme weather and gradual warming. Storms, heatwaves and cloudbursts will probably become both more common and more serious in a warmer climate. The gradual warming will lead to smaller harvests, changes in ecosystems, melting glaciers and rising sea levels. Such things affect both households and companies. We have already seen serious examples of how the economy can be affected in connection with the drought in Sweden in 2018, the forest fires in California in 2019 and the bushfires in Australia at the beginning of this year. Transition risks are linked to the effects that arise when adapting the economic system to a less fossil-based economy. The effects may be gradual in that policy instruments, such as carbon taxes, lead to structural transformation when carbonintensive sectors lose competitiveness to greener sectors. The effects can also be more abrupt and create unexpectedly rapid movements in asset prices, such as in the value of coal and oil deposits. 3 [18]  To limit global warming to 2 degrees, the IPCC estimates that only around 20–35 per cent of the world’s known reserves of oil, gas and coal can be utilised.