Central banks call to action against the financial risks of climate change

Date: 29 April 2019

On behalf of 34 central banks, the heads of two major central banks have written a harsh warning about the financial risks of climate change. Constructively, they also provide six recommendations for central banks, supervisors, policymakers and financial institutions to enhance their role in the greening of the financial system.

Bank of England governor Mark Carney and Governor of Banque de France François Villeroy de Galhau set out the dangers to the global economy in an open letter published on 17 April, reports the BBC.

“If some companies and industries fail to adjust to this new world, they will fail to exist,” they wrote.

The letter was co-signed by the chair of the climate-focused Network for Greening the Financial System (NGFS). The NGFS is a coalition of 34 central banks, which was formed in 2017, with the Bank of England as a founding member. According to the NGFS, the network represents five continents, half of global greenhouse gas emissions and the supervision of two-thirds of the global systemically important banks and insurers.

In the open letter that was published in connection with the release of released the NGFS’s first major report into climate-related financial risks, Carney and Villeroy de Galhau describe “the catastrophic effects of climate change” already having an impact on the planet, such as “blistering heatwaves in North America to typhoons in south-east Asia and droughts in Africa and Australia”. Further, they say that “these events damage infrastructure and private property, negatively affect health, decrease productivity and destroy wealth”.

The NGFS elaborates in its “call to action” report, saying that climate change will lead to “disruptive events such as mass migration, political instability and conflict”.

Three financial risks
The NGFS sets out three climate-related financial risks that companies, banks and governments need to fight against.

Physical: These are the immediate problems caused by increasingly frequent climate and weather-related events – such as severe droughts or cyclones that affect crops

Transition: For example, when a business moves away from carbon-intensive industries and technologies in a “sudden or disorderly” way, their business models and asset valuations can end up taking a hit

Liability: When people or businesses claim compensation for losses suffered from either the physical or transition risks, which can have a huge impact on insurers

Six recommendations
The NGFS provides six recommendations for central banks, supervisors, policymakers and financial institutions to enhance their role in the greening of the financial system and the managing of environment and climate-related risks:

  • Integrating climate-related risks into financial stability monitoring and micro-supervision
  • Integrating sustainability factors into own-portfolio management
  • Bridging the data gaps
  • Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing
  • Achieving robust and internationally consistent climate and environmentrelated disclosure
  • Supporting the development of a taxonomy of economic activities

Read more about each recommendation in the NGFS report.

Concluding the open letter, Carney and Villeroy de Galhau write: “As long as temperatures and sea levels continue to rise and with them climate-related financial risks, central banks, supervisors and financial institutions will continue to raise the bar to address these climate-related risks and to “green” the financial system. We need collective leadership and action across countries and we need to be ambitious. The NGFS is the core of the response of central banks and supervisors. But climate change is a global problem, which requires global solutions, in which the whole financial sector has a crucial role to play.”

The Danish perspective: an international response to a global challenge
The Danish central bank, Danmarks Nationalbank, joined the NGFS earlier this month. Announcing the membership, Governor Lars Rohde commented:

“Climate changes are global and transnational and therefore it is natural that we cooperate internationally. It is not the role of central banks to supply the solutions to climate challenges but because of our objective to ensure financial stability in Denmark, we also have to respond to the risks from climate changes that can impact the financial system and the economy as a whole.”

Source: State of Green