Climate risk is getting the right kind of oversight. A group of 34 central banks and multilateral organizations, including monetary authorities from the United Kingdom, Germany and China, on Wednesday outlined plans to treat global warming as a threat to financial stability and factor it into how they oversee their charges. It adds a powerful bully pulpit to the cause.
The Network for Greening the Financial System, as the group is called, says it's acting because the impact of climate change "could be much larger, and more widespread and diverse than those of other structural changes." Its recommendations are similar to what climate-activist investors demand of companies, including better ways to assess the chance of individual loans, or the assets pledged as collateral, going sour. The central banks also want better data, education, awareness and cooperation - as well as a handle on global warming's broader economic impacts.
Norway's $1 trillion sovereign-wealth fund is already working with 55 banks to get borrowers to disclose more information on carbon emissions and the like, but it can do only so much. It typically holds just a percent or two of a bank's stock. Similarly, many asset managers are boosting their climate nous, and the UN-supported Principles on Responsible Investing will soon boot out any members that don't provide details on climate-risk exposure. But the PRI cannot enforce disclosure.
What the members of the 16-month-old NGFS bring to the table is real clout with allocators of capital. The central banks preside over almost half the planet's economic output and oversee two-thirds of its biggest lenders and insurers. They can mandate that financial institutions understand and properly monitor climate risks. Lenders should then require the same details from customers and factor it into how much they charge for credit and other services - or whether to do business with a company at all. That process could even foster more lending to and investment in more-sustainable businesses and projects.
Granted, a push for better knowledge and data won't necessarily turn every lender into a sustainability champion. That may require regulators and policymakers to come up with real incentives and punishments. But acknowledging that the financial system doesn't operate in a climate of its own is a big step forward. A group of 34 central banks and multilateral organizations on April 17 published recommendations for how financial institutions and policymakers can better manage environmental and climate-related risks.
In its first comprehensive report since being founded in December 2017, the Network for Greening the Financial System suggested central banks integrate climate-related risks into financial-stability monitoring and micro-supervision; integrate sustainability into managing their own portfolios; bridge data gaps on climate-related issues; and build awareness of and intellectual capacity on climate risks, and encourage technical assistance and sharing knowledge.
The group's two other recommendations encourage policymakers to push for robust, internationally consistent climate- and environment-related disclosures, and to support the development of a "taxonomy of economic activities." Mark Carney and Francois Villeroy, governors of the Bank of England and the Banque de France, and NGFS Chair Frank Elderson summarized the group's thinking in an open letter also published on April 17. Also on April 17, the Bank of England, a member of the NGFS steering committee, said it would disclose how it manages financial risks from climate change. It will publish its first assessment next year as part of its 2019/2020 annual report.
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