The climate transition needs more bank failures

Suppose for a moment that the central banks and supervisors that make up the Network for Greening the Financial System (NGFS) get most of what they want.

Banks in high-emitting countries like the US adopt net zero as more than just a greenwashing mantra. They coax their clients to reduce emissions and actively support projects they deem to be both creditworthy and likely to engender a sustainable economy. They opt to starve fossil fuel producers of debt finance, further accelerating decarbonization.

Further, suppose these efforts are broadly successful. By 2027, we are running neck-and-neck or slightly ahead of Paris Agreement targets.

In making this progress, using the language that’s very familiar to climate stress testers, banks are rebalancing their portfolios away from physical risks and opting instead to take on a considerable amount of transition risk.