Measures to address systemic climate risks & aid shift in capital allocation: Expanded role for central banks to green global financial system
Photo provided by Climate Bonds Initiative
Responding to the risks
Developing a brown taxonomy, shifting purchasing towards green assets and reviewing the doctrine of market neutrality are amongst the measures central banks and financial regulators (CBFR) should apply to address the systemic risk climate impacts pose to the global financial system.
Produced by Climate Bonds Initiative in conjunction with the SOAS Centre for Sustainable Finance and WWF, Greening the Financial System: Tilting the playing field - The role of central banks is being released in the lead up to this year’s World Bank/IMF annual meetings in Washington D.C.
Shifting capital to support transition
Greening the Financial System analyses global progress by central banks in addressing climate issues. It advocates accelerated action by central banks and micro prudential regulators including greater use of prudential and regulatory powers, central bank asset purchases and credit guidance policy to:
Who’s saying what?
Ulrich Volz, Founding Director of the SOAS Centre for Sustainable Finance, SOAS University of London:
"Central banks and financial supervisors have a key role to play in ensuring that the financial sector addresses climate and other environmental risks and that financial flows are aligned with the Paris Agreement. Financial governance can be only part of a broader public policy response to addressing the climate crisis, however its role cannot be overstated.”
“This report provides an excellent overview of the current state of discussion and makes proposals that merit further scrutiny. While I don't agree with all of the report's recommendations, they will contribute to a much-needed discussion that will help central banks and supervisors develop adequate policies in response to the climate crisis."
Sebastien Godinot, Head Sustainable finance, WWF European Policy Office:
“Central banks and regulators have important powers to ensure that environmental risks are assessed, disclosed and mitigated by financial institutions. This new report is an excellent review of the actions central banks and supervisors should take forward: we hope that climate scenario testing will rapidly become a new normal and, with more environmental risk disclosure, will accelerate the discussion about how to adjust risk weightings, collateral frameworks and monetary policies with sustainability factors."
Prashant Vaze, Head of Policy and Government, Climate Bonds Initiative:
“There is increasing recognition by central banks of the growing structural and systemic risks that climate change poses to the financial system and the need for coordinated action. The establishmentof the NGFS has been a major step forward in that process. Developing and expanding response mechanisms using central banks prudential regulation & monetary policy toolkit to offset climate risk and support orderly transition is the next stage.”
The last word
From not so sotto voce warnings in the latest from the NGFS, to the PRI’s early 2020s scenario forecasts via the Inevitable Policy Response, to Bank of England's chief Mark Carney’s recent addresses to the UN General Assembly and the TCFD Summit in Tokyo, 'risk' flags are being waved from multiple quarters at every player in the financial system.
CBFR have an array of measures open to them to tilt the global playing field towards transition and rapid greening of capital deployment. As with every other aspect of climate action in the coming decade, it would be prudent to accelerate their implementation.