How Central Banks Tackle Climate Change Risks – The European Sting – Critical News & Insights on European Politics, Economy, Foreign Affairs, Business & Technology
This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.
Author: Silvia Anna Ainio, Policy Officer, European Commission
- Central banks are playing an increasingly critical role in tackling climate change policy goals.
- Integrating climate-related risks into regulatory frameworks remains difficult, but central banks are starting to show the way.
The case for integrating climate change into macroeconomic modeling and investment decisions has never been stronger. Extreme weather events such as floods and storms have now become more frequent, and their impact on growth and inflation is increasingly visible and felt around the world. Recent research showed how climate change can have a significant impact on the stability of the global banking system by increasing the frequency of banking crises in the medium and long term.
The banking sector has a critical role to play in aligning the real economy with the Paris Agreement goals of limiting global warming to well below 2 ° C and achieving neutrality by 2050. However, even with this global awareness, funding for fossil fuels is still ongoing. A recent report discovered how, despite political pressure for greener investments and greater investment transparency, 60 of the world’s largest commercial and investment banks have committed more than $ 3.8 trillion to the fossil fuel industry .
This is all the more alarming as it has direct repercussions on financial systems. In fact, climate change has had an impact on financial market players through two main channels: via physical risks, such as damage to infrastructure and land, and as a transition risk, resulting from changes in climate policy, technology and consumer preferences when adjusting to a weak economy. carbon emission. These two trends have macroeconomic and financial implications and important consequences for the main objectives of central banks in terms of prices and overall financial stability.
For this reason, central banks increasingly recognize their important role in tackling the risks of climate change, and some important innovations have already been made. The European Central Bank (ECB) has launched a new center on climate change, demonstrating its commitment to climate change policy and indicating a potential change in its mandate and, with regard to banking supervision, foresees climate stress test in order to assess the impact on the European banking sector over a 30-year horizon.
What is the World Economic Forum doing about climate change?
Climate change is an urgent threat requiring decisive action. Communities around the world are already experiencing increased climate impacts, from droughts and floods to rising seas. The World Economic Forum’s Global Risks Report continues to rank these environmental threats at the top of the list.
To limit the rise in global temperature to well below 2 ° C and as close as possible to 1.5 ° C above pre-industrial levels, it is essential that businesses, policymakers and civil society implement global climate actions in the short and long term. in line with the objectives of the Paris agreement on climate change.Global warming can be defeated with this simple plan
The World Economic Forum Climate initiative supports the scaling up and acceleration of global climate action through collaboration between the public and private sectors. The Initiative works across multiple lines of work to develop and implement inclusive and ambitious solutions.
This includes the Alliance of CEO Climate Leaders, a global network of business leaders from various industries developing cost-effective solutions for the transition to a low-carbon, climate-resilient economy. CEOs use their position and influence with policymakers and corporate partners to accelerate the transition and realize the economic benefits of creating a safer climate.
In addition, the Bank of England of the United Kingdom recently became the first central bank to include climate change in its political mission, signaling a historic change in the mandate of central banks. In January 2021, the The US Federal Reserve has launched two committees set up to deal with climate impacts: the Climate Financial Stability Committee and the Climate Supervision Committee, to deal respectively with macro and micro climate-related risks. And in early April 2021, the Basel Committee published two analytical reports on climate-related financial risks, by discussing transmission channels and climate measurement methodologies.
Nonetheless, major challenges currently remain in linking climate risk factors to bank exposures and in reliably estimating and integrating climate-related risks into regulatory frameworks. Despite the existing range of methodologies developed, disputes arise mainly from the estimation process and the need to collect reliable data associated with the long-term nature of climate change.
A number of central banks are now explicitly communicating the need for improved and harmonized techniques for pricing climate risk and transparency of climate risk in financial assets and balance sheets.
Currently the Climate-Related Financial Disclosures Working Group, a body created by the G20 Financial Stability Board to examine climate change in the context of financial stability, encourages financial market players to use its recommendations as a framework for disclosing climate-related risks. In addition, this year G20 Study Group on Sustainable Finance established among its deliverables the need to take stock of existing initiatives in terms of sustainable development reporting and of the different approaches to identify sustainable investments.
Standardizing climate-related disclosures and making them mandatory could provide a major boost to better pricing of climate risks. This trend towards standardization could in turn promote the use of harmonized tools and innovative instruments in various policy areas.
In addition, the Network of central banks and supervisors for greening the financial system (NGFS), an expanding group of central banks and supervisors that currently includes 89 members and 13 observers from around the world, has embarked on the task of integrating climate-related risks into surveillance and stability monitoring. financial. In March 2021, he released a set of indicators this would allow monitoring and understanding of how national financial systems could become greener.
Some central banks, especially emerging countries, are already considering more sophisticated policy measures such as green disclosure and reserve bonds. the Bank of Lebanon has already used differential reserve requirements, with the aim of influencing credit allocation in favor of investments in renewable energy and energy efficiency.
Likewise, central banks could actively promote green differentiated capital requirements and countercyclical capital buffers that price carbon risks correctly. the Central Bank of Brazil was among the first central banks to publish binding amendments to its macroprudential regulatory framework taking into account exposure to environmental damage and risks.
Although more work is needed and national commitments may differ, central bankers are increasingly aware of their role in mitigating climate change risks and now is a key moment to pass. to a step-by-step implementation.
The opinions expressed here are those of the author and do not necessarily represent those of the institution with which it is affiliated.