What is a Green Swan?
And what does it have to do with green finance?
The year 2020 will be remembered by many for Covid-19. But if we look beyond that, 2020 was a landmark year for a slightly less obvious, but perhaps even more pivotal reason. It was the year that, as a recent op-ed puts it, “strong statements on climate change became de rigueur for the financial sector".1
This development could not have come a moment too soon. It has been widely documented that humanity faces the existential threat of climate change, with the ability to act coming at ever steeper timelines. The finance sector is deeply implicated in this crisis, as the capital channeled through financial markets has for far too long continued to support and uphold the dirtiest, most carbon intensive firms.
But how can we take stock of these ongoing efforts? Is enough being done? What are the main obstacles for more progress being made? Who are the key actors, and what tools and instruments do they have at their disposal? Those questions are precisely why we founded the Green Swan Initiative, and what we will aim to answer.
But what exactly is a green swan? And what do green swans have to do with green finance?
The term originates from the “black swan", made popular by the writer and philosopher Nassim Nicholas Taleb in his book The Black Swan: The Impact of the Highly Improbable. The black swan didn't refer to a “thing", certainly not a swan, but an event. This event had three main characteristics: first, it was extremely rare, lying outside of normal expectations (the term “black swan" originates from the Latin phrase rara avis in terries nigroque simillima cygno – “bird as rare as the black swan"). Second, it has an extreme, disproportionate impact. And thirdly, even though it could not be seen before the fact, us humans still come up with ways to rationalize it, thereby making it explainable and predictable. But this can only come after the fact.
The concept of the black swan therefore significantly reshapes how we think about risk. As Taleb tells us, history is driven by these black swans. But at the same time, we can't possibly see into the future. How can we prepare for events for which we can't even foresee? How can we alter our actions and behaviour accordingly in view of this?
Here we can see how the climate crisis looks very much like a black swan event. The consequences of climate change will undoubtedly be severe and extreme, but how that will look still remains largely uncertain. But there are also important differences, which led the Bank of International Settlements (BIS), in a groundbreaking report published in January 2020, to outline the concept of a green swan instead.2
Unlike a black swan event, the onset of the climate crisis could be seen before the event, as demonstrated by the reams of research accumulated by the field of climate science thus far.
"If we fail to respond to a green swan, it won't be because we didn't see it coming, but because we failed to prepare for it."
And compared with black swan events, the impacts from the climate crisis – green swan events – may even be far greater. As the environmental is deeply interconnected with the social, the political and the economic, the impacts of the climate crisis will create a far wider chain of cascading effects, which will then have ramifications on our lives and livelihoods.
These features of a green swan event were on full display in April 2020, at the peak of the coronavirus pandemic, when the oil industry crashed. For years scholars, regulators, journalists and activists, notably those in the fossil fuel divestment movement, have been raising the alarm on the risk of stranded assets for the fossil fuel industry. Those risks finally materialized, and those assets made stranded, when the global economy entered a recession as the pandemic unfolded. In the remainder of 2020, Shell, Exxonmobil and BP each wrote down approximately $20 billion of assets. The retrenchments that followed were massive, and for many people's livelihoods, extremely painful.
As the historian Adam Tooze points out, ultimately it was not climate change as such that caused the crash, but the economic fallout from a global pandemic that made real a threat that was always forthcoming with climate change.3 In other words, in 2020 a global pandemic, economic shutdowns created by government lockdowns, climate change and an economic system still over-dependent on fossil fuels ramified to give us the oil shocks that the finance industry should have seen coming.
In this regard, and given that Covid-19 is itself linked with human-induced changes to the environment4, the Covid-19 pandemic, and the enormous fallout that followed, can also be called a green swan event.5
Indeed, according to the authors of the green swan report, with the magnitude of the climate threat only growing larger, climate risks will also be unhedgeable. They cannot be eradicated, only managed.
This will present challenges to existing mandates that policymakers already have, such as a central bank's role to maintain financial stability. In Singapore, the Guidelines on Environmental Risk Management for banks and asset managers recently announced by the Monetary Authority of Singapore (MAS) represents early steps by Singapore's policymakers.
But it will also mean that new, forward-looking models of risk will have to be developed. It will also undoubtedly require a significant transformation of the financial industry as we currently know it. Only through such comprehensive efforts can we truly prepare ourselves for the green swans that the future has in store.
footnotes
1 Kate Mackenzie (2020), The Finance Industry Passed a Climate Turning Point This Year, https://www.bloomberg.com/news/articles/2020-12-11/the-finance-industry-passed-a-climate-turning-point-this-year
2 Patrick Bolton, Morgan Després, Luiz Awazu Pereira da Silva, Frédéric Samama and Romain Svartzman (2020) The green swan: Central banking and financial stability in the age of climate change, https://www.bis.org/publ/othp31.htm
3 Adam Tooze (2020), The world to come: The imminent shocks, https://www.newstatesman.com/politics/economy/2020/08/world-come-imminent-shocks
4 Inger Anderson and Johan Rockström (2020), COVID-19 Is a Symptom of a Bigger Problem: Our Planetʼs Ailing Health, https://time.com/5848681/covid-19-world-environment-day/
5 Luiz A Pereira da Silva (2020), Green Swan 2 - Climate change and Covid-19: reflections on efficiency versus resilience, https://www.bis.org/speeches/sp200514.htm