Abstract

This chapter aims to clarify the contributions of complexity-based approaches to the analysis of climate financial risk, in its physical and transition dimensions. First, it discusses the defining characteristics of climate risk—deep uncertainty, nonlinearity, and endogeneity—and why they pose challenges to standard economic and finance modeling approaches. Second, it critically presents the limits of standard approaches in macroeconomics and financial economics used in research, as well as by central banks and financial institutions, to analyze climate financial risks. Third, it discusses an approach to climate finance that is able to capture these key aspects of complexity and is increasingly used by financial authorities. The chapter concludes by discussing new avenues for research in climate finance based on complexity, and the conditions for complexity-based approaches to support and strengthen decision-making in the context of climate risk.

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