It is a framework of thinking about risks associated with the Biosphere, terming them ‘green swans’ (or environmental black swans) (Bank of International Settlements, 2020a). Green Swan Risks are potentially extremely financially disruptive events that could be behind the next systemic financial crisis. Green swan events may force (for example) central banks to intervene as “climate rescuers of last resort” and buy large sets of devalued assets (Stranded Assets)
The underlying concept posits that from a Risk Management perspective Climate Change introduces (besides other changes and risks) a new type of Systemic Risk that involves interacting, nonlinear, fundamentally unpredictable, environmental, social, economic and geopolitical dynamics, which are irreversibly transformed by the growing concentration of greenhouse gases in the atmosphere.
Climate-related risks are not simply black swans, ie Tail Risk events. With the complex chain reactions between degraded ecological conditions and unpredictable social, economic and political responses, with the risk of triggering tipping points, climate change represent a colossal and potentially irreversible risk of staggering complexity.
Green Swans versus Black Swans
Green swans present many features of typical black swans in that:
- they are unexpected when they occur by most agents (who regard the past as a good proxy of the future);
- they feature non-linear propagation;
- their impacts are significant in magnitude and intensity; and
- they entail large negative externalities at a global level
However, despite several common features, ‘black swans’ and ‘green swans’ differ in several key aspects:
- A key difference is their likelihood of occurrence. ‘Green swans’ are either likely or quite certain to occur (e.g. increased droughts, water stress, flooding, and heat waves), but their timing and form of occurrence are uncertain. By contrast, ‘black swans’ do not manifest themselves with high likelihood or quasi-certainty.
- Another key difference between green swan and historical financial black swan events: the accumulation of atmospheric CO2 beyond certain thresholds can lead to irreversible impacts, the biophysical causes of the crisis will be difficult, if not impossible, to undo at a later stage.
- Bank of International Settlements (2020a), The Green Swan: Central Banking and Financial Stability in The Age of Climate Change.
- The Economics of Biodiversity: The Dasgupta Review
- Bingler, J.A., Colesanti Senna, C. (2020). Taming the Green Swan: How to improve climate-related financial risk assessments