A group that includes 30 central banks around the world has called for measures to spur green finance and better assessment of the risks from higher global temperatures in response to insurers seeing a record $160bn in climate-related losses in 2018.
Led by the Bank of France, Bank of England and People’s Bank of China, the group moved towards a controversial area of policy-making, advocating funding for alternatives to fossil fuels. It set out a road-map for authorities to use in prodding executives and investment funds to weigh up the impact global warming will have on portfolios.
The US Federal Reserve and Banco do Brasil were the most prominent institutions not involved in the initiative, reflecting doubt about climate science voiced by Presidents Donald Trump and Jair Bolsonaro. But for the central banks involved, which represent most of the world’s biggest monetary policy makers, the need for action is increasingly pressing.
“A transition to a green, low-carbon economy is not a niche nor is it a ‘nice to have’ for the happy few,” Dutch Central Bank executive director Frank Elderson wrote in a foreword to the paper released by the group. “There is no alternative.”
The report by the banks participating in the Central Banks and Supervisors Network for Greening the Financial System (NGFS) is built on the foundations laid out by Bank of England governor Mark Carney and Bank of France governor Francois Villeroy de Galhau. It makes recommendations for how central banks and financial services regulators should act. These include:
- Injecting climate-related risks into the monitoring of broader financial stability and threats to the banking system;
- Using sustainability criteria to shape the portfolios of assets maintained by central banks;
- Identifying areas where more data is needed to describe threats coming from environmental issues;
- Prodding financial market participants to better disclose climate-related risks, an effort that builds on the Group of 20 nations’ Task Force for Climate-related Financial Disclosure, known as TCFD; and
- Developing a ‘taxonomy’ of economic activities, or a common vocabulary for policymakers and companies to use in assessing climate-related impact on finance.
The measures are aimed at building awareness about the potential losses as global temperatures increase, making storms more powerful and weather less predictable. It is also seeking to encourage funding for greener projects that would reduce emissions and make renewables more affordable.
The group’s report is the first time a large group of central banks has confirmed the links between climate change and the risk to the global economy. It included research done by academics and other financial institutions that quantified the risk. One such is a Munich Re report that stated annual costs for natural disasters topped the 30-year average of $140bn in seven of the past 10 years – and that the number of extreme weather events since 1980 has tripled.
“These recommendations are aimed at inspiring central banks and supervisors to take the necessary measures to foster a greener financial system,” Mr Elderson said. “We need to take action, and we cannot and will not do this alone.”
The NGFS was formed at French President Emmanuel Macron’s ‘One Planet Summit’ in December 2017. China has been a key participant, with its institutions having issued more than $100bn in green bonds from 2016 to 2018, making it one of the biggest markets for the securities in the world.
The NGFS report said green loans held by the 21 largest commercial banks in China reached $1.2tn in 2018, accounting for 10% of their aggregate loan balance. Chinese authorities were first to set down definitions for green loans and green bonds, the report said. M