Luca Verzobio

Central banks and financial supervisors face the formidable challenge of safeguarding financial stability amid climate and environmental risks. Unlike conventional financial threats, these risks are non-linear, uncertain, and interconnected, affecting multiple sectors and propagating through both the financial system and the real economy. Traditional prudential frameworks, which largely rely on historical data and backward-looking tools, are ill-suited to capture the forward-looking, systemic nature of these risks. Scenario analysis and climate-risk stress testing have emerged as important instruments to address this gap, but they remain constrained by data limitations and modelling uncertainties. Prudential transition plans have been proposed as innovative tools to integrate climate-related financial risks into the prudential framework. This research investigates whether and how prudential transition plans can enhance the resilience of financial institutions and the financial system by serving as a bridge between regulatory oversight and sustainability objectives. Specifically, adopting a social-ecological systems perspective, it critically evaluates the current macroprudential approach to climate-related financial risks and proposes a complexity-informed design of climate transition plans as forward-looking instruments for systemic risk assessment.