A coalition of 36 central banks and regulators, including the Bank of England and the World Bank, have issued a rallying cry urging all stakeholders across the global sector to address climate challenges by “greening” the financial system.
The call to action forms the basis of a new report from the Network for Greening the Financial System (NGFS), which unites of 36 central banks in leveraging the financial sector’s collective power to spur the transition to a low-carbon and climate-resilient economy.
Founded in 2017 and convened by Banque De France, the Network collectively accounts for around 44% of global GDP and serves almost one-third (31%) of the world’s population, with members including the likes of the Bank of England, People’s Bank of China, the World Bank and the European Central Bank.
Published on Wednesday evening (17 April), the NGFS’s claims that its first annual progress report will serve as a “loud wake-up call” for both financiers without strong climate frameworks and policymakers who have failed to encourage a greener finance system in their regional or national domains.
It urges banks and their supervisors to integrate climate risks and opportunities into their financial stability monitoring and micro-supervision processes, translating potential and past climate impacts directly into financial terms, and to manage their portfolios in a way that champions investment in low-carbon assets over those associated with high carbon and deforestation risks.
The 12-page document additionally recommends that such organisations should publicly disclose any climate risk assessment-related data in order to help the sector bridge existing data “gaps” while sharing green finance expertise with their peers and other interested stakeholders.
As for policymakers, the report calls for Ministers to implement legislation frameworks which prioritise economic activity within the green economy over that in high-carbon projects, products and services, and to set requirements for consistent climate-related disclosure from financiers.
“The financial risks we face through climate change are analytically difficult, unprecedented and yet very urgent,” NGFS’s chairman Frank Elderson said.
“By issuing these recommendations, the NGFS members demonstrate collective leadership which will result in action to foster a greener financial system across countries and continents.”
Elderson, who also serves as supervisory director at De Nederlandsche Bank and sits on the European Central Bank’s supervisory board, added: “As long as the temperatures and sea levels continue to rise and with them the climate-related financial risks, central banks, supervisors and financial institutions will continue to raise the bar to address these risks and to green the financial system.”
Carney’s call to action
The publication of the report comes shortly after the Bank of England’s governor Mark Carney and the Banque De France’s governor Villeroy de Galhau warned stakeholders across the finance sector that the global financial system will collapse without urgent, climate-focused reform.
In an article published in the Guardian on Wednesday, the duo wrote: “As financial policymakers and prudential supervisors we cannot ignore the obvious physical risks before our eyes.
“Climate change is a global problem, which requires global solutions, in which the whole financial sector has a central role to play.”
Specifically, the governors concluded that a “massive reallocation of capital” was necessary to prevent global warming rising above the 2°C maximum target set by the Paris climate agreement.
These comments built on previous warnings that the next financial crash is likely to be climate-related and came amid a string of Extinction Rebellion protests and school climate strikes across the UK.
The good news is that the transition to green finance is now underway, with the sub-sector having undergone exponential growth in recent years. Banking and insurance giants are increasingly announcing plans to make their portfolios more sustainable by divesting from coal companies and those in other carbon-intensive sectors, while boosting their investments in initiatives which boost anti-deforestation efforts and the renewables sector.
Indeed, a recent study by the Global Sustainable Investment Alliance (GSIA) concluded that investments in sustainable assets – including those made through designated ESG and impact investment schemes – have increased by 34% since 2016, surpassing $30trn worldwide during 2018. Similarly, Legal & General Investment Management (LGIM) last week stated that it is more concerned about the climate approach of companies it invests in than any other factor, building on its decision to divest from a host of companies it believes are showing “persistent inaction” on addressing climate risks.