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The Emergence of Green Swan Events

The world is familiar with “black swans”: rare, system-level shocks that arrive suddenly and only later seem predictable. Yet financial regulators and central banks are increasingly focused on a related idea. In a 2020 report, the Bank for International Settlements popularised the term “green swan” to describe climate-related financial shocks that share the black swan’s traits, rarity, extreme impact, and hindsight clarity, while differing in one key way: they are driven less by statistical surprise than by climate pressures that are already visible. Green swans are therefore less about “whether” than “when,” and they highlight how limited traditional risk tools can be when climate change introduces deep uncertainty.

Green swans are hard to model because they do not follow neat historical patterns. Climate risk is shaped by nonlinear dynamics and feedback loops that can turn slow stress into sudden disruption. Imagine a rapid shift in policy or technology that forces large volumes of fossil-fuel reserves to be reclassified as stranded assets. A sharp repricing could trigger forced selling and liquidity strains that spread across sectors, moving through linked balance sheets in ways that standard stress tests, built around past crises such as 2008, may not capture. The pathways are also broad: physical risks (storms, floods, droughts, heat) that damage infrastructure and output, and transition risks (regulation, innovation, litigation, consumer shifts) that can weaken business models faster than firms expect.

For central banks, the challenge is real but bounded by their mandates. [I] They can integrate climate scenarios into supervision and financial stability monitoring. [II] But they cannot, on their own, solve the underlying drivers of climate risk. Reducing green swan exposure requires coordinated action across governments (carbon pricing and standards), firms (capital allocation and reporting), civil society (behaviour change), and international bodies (cross-border commitments). [III] This places central banks in a supporting role: not climate policymakers, but conveners who encourage forward-looking scenarios and test the system’s resilience. [IV] Climate change threatens the stability they are tasked with protecting, yet many of the tools they rely on were designed for a world where tomorrow looked much like yesterday.

[Adapted from https://www.bis.org/publ/othp31.htm]