The financial climate threat is real, but for whom?

I’m constantly on the lookout for evidence of an association between climate change and financial stability. A couple of weeks ago, I was sent a recently published article with the promising title “Impact of Climate Risk on Financial Stability: Cross-Country Evidence.” You can refer to the article as Liu et al (2024).

The authors used panel data on 53 countries observed annually over the period 2007-2019, making 689 observations in total. This includes the period of the Global Financial Crisis but stops short of the even stranger COVID era, which may confound a lot of future empirical studies.

The variable of interest to the study is referred to as the Zscore, a measure of the likelihood of bank bankruptcy.* The key climate variable is sourced from Germanwatch and is an objective index of the effect of weather events and the associated human and economic costs each country faces. The authors use a range of additional variables as controls.