Network for Greening the Financial System sets out key recommendations for world's central banks to address climate risk and spur green investment
More than 35 central banks and financial regulators around the world have issued a "loud wake-up call" for the global economy to act on climate change, releasing a major new report yesterday setting out steps for financiers to minimise escalating climate risk and spur investment in the green economy.
Coming together as part of the Network for Greening the Financial System (NGFS), an initiative launched at the Paris One Planet Summit in 2017, the 36 central banks - which cover 44 per cent of global GDP and 45 per cent of greenhouse gas emissions - urged central banks, supervisors, policymakers, and financial institutions to enhance their role in greening the economy.
Their inaugural report, released yesterday, sets out six key recommendations for central banks and policy makers to better manage environmental and climate-related risk, bridge gaps in data, build awareness, integrate sustainability factors into portfolios and enhance risk disclosure.
It marks a significant intervention, with members of the NGFS - including the Bank of England, People's Bank of China, Banque de France, the World Bank and the European Central Bank - covering jurisdiction across 31 per cent of the world's population, and in total supervising two thirds of the world's most important banks and insurers.
The report came alongside warnings yesterday from the heads of two of the world's most influential central banks - Mark Carney, governor of the Bank of England, and Banque de France governor Villeroy de Galhau - that climate change and poor management of the transition to a low carbon economy have the potential to trigger a "sudden collapse" in asset prices that could devastate the global financial system.
NGFS's 42-page report explains how climate change is a source of structural change in the economy and financial system, and therefore falls within the mandate of central banks and supervisors.
The report points out that human activity is "extremely likely" to have been the cause of global warming since the industrial revolution, and explains that the physical and transitional impacts of climate change are different from other sources of economic change, as they are further reaching in breadth and magnitude, irreversible, and determined by short term actions, but also foreseeable.
It adds that without action to drastically reduce emissions, the physical impacts of climate change on the global economy in the second half of this century "will be substantial", resulting in a reduction in global incomes, mass migration, political instability, and a drastically increased risk of conflict.
Such future impacts should provide a "loud wake-up call" to the financial sector and prompt urgent action across the board. But it also argues the costs of decarbonisation are likely to be small compared to the costs of not taking action, adding that "some argue that the economic costs of the transition to a low-carbon economy would be offset by a positive 'green growth' effect".
The report therefore calls on central banks to improve their understanding and oversight of climate risk. It recommends climate risk is mapped, monitored, and integrated into prudential supervision, and that sustainability factors are integrated into central banks' own portfolio management.
Moreover, it stresses the importance of achieving "robust and internationally consistent" corporate climate risk disclosure aligned with the Task Force on Climate-related Financial Disclosures (TCFDs), and recommends policymakers develop a taxonomy that enhances economic transparency to boost understanding of risk and mobilise capital towards the green economy.
Several green and financial groups welcomed the report. Alex Barkawi, founder and director of the Council on Economic Policies, praised the NGFS's intervention for demonstrating a "clear sense of urgency" on climate change.
"What is needed now is consistent action and speed - in particular, as the report alludes to, for central banks to 'walk the talk' and to account for climate-related risks in their own operations, including the ones implementing monetary policy," he said.
Frank Van Lerven, senior economist at New Economics Foundation, praised the 36 central banks for doing an "excellent job of ringing the alarm bells", although he warned there was a "disconnect between words and action".
"Central banks need to do a better job of leading by example, and incorporating climate risks into their own day-to-day monetary policy operations," Van Lerven said.
Not all campaign groups were happy with the report, however. Christian Aid's global climate advisor, Dr Kat Kramer, said the NGFS recommendations were just "woolly window dressing", arguing sufficient action would involve setting a clear policy for banks to end all lending to fossil fuel projects.
"Global emissions are rising, climate impacts are getting worse and the financial sector continues to pour money into fossil fuel companies so they can find, sell and burn more fossil fuels," she said. "Vague incrementalism from the financial sector is too little too late. We need rapid and radical action on climate, not financial risk assessments."
The intervention follows the launch of sweeping green finance strategy from the European Commission last year, which set out plans to develop a new green finance taxonomy and improve risk disclosure to help drive the €180bn of additional annual investment needed to meet the EU's climate targets.
It also comes in the same week as Finance Ministers from 23 countries, including the UK, France, and Germany, signed up to a new initiative, dubbed the Helsinki Principles, and pledged to bring fiscal policies into line the Paris Agreement, step up international climate finance, and establish a blueprint for climate budgeting, green infrastructure investment, and public procurement.
Four years on from the Paris Agreement climate risk and the implications of deep decarbonisation have evidently pushed their way into the corridors of the central banks and finance ministries that guide the global economy. The intention to act is increasingly there, the big question remains how quickly can policymakers and bankers turn those good intentions into the tangible measures needed to drive a huge increase in global green investment?
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