central banks

Central banks offer climate risk guidance

Tuesday, April 23, 2019

A coalition of central banks and supervisors is urging governments and financial institutions to identify and prepare to respond to the economic risks of climate change. The Bank of Canada is one of the newest members of the Network for Greening the Financial System (NGFS), which released global recommendations on climate related risk assessment, monitoring, and data sharing and standardization at a conference in France last week.

“We recognize that the challenges we face are unprecedented, urgent and analytically difficult,” states an accompanying letter from the governors of the Bank of England and Banque de France and executive director of the Netherlands Bank. “The stakes are undoubtedly high, but the commitment of all actors in the financial system to act on these recommendations will help avoid a climate-driven Minsky moment — the term we use to refer to a sudden collapse in asset prices.”

Ultimately, all players in the economy will need guidance and tools to identify climate-related risks, gauge their risk exposure and plot a course for moving to low-carbon alternatives. In line with their obligation to support financial stability through the oversight of financial institutions, NGFS members have pledged to develop and apply key risk indicators “to size the risks across the financial system, using a consistent and comparable set of data-driven scenarios encompassing a range of different plausible future states of the world.” They will also clarify how that is to be passed through to governance and transparency within financial firms.

For their part, governments are called on to support “a robust and internationally consistent climate and environmental disclosure framework” such as the one developed under the auspices of the Financial Stability Board and its Task Force on Climate-related Financial Disclosures. The NGFS suggests governments could play a leading role in defining green and brown assets, and economic activities that are aligned with a transition to a low-carbon economy or are more exposed to climate-related risks.

The NGFS has promised to follow up with a handbook to advise financial supervisors and institutions, and guidelines for voluntary scenario-based risk analysis. It will continue to press forward with its mandate to build awareness, develop technical support and share knowledge — an approach that has already seen the network’s membership grow from eight founders in 2017 to a current roster of 36 central banks and six observer bodies.

“The prime responsibility for climate policy will continue to sit with governments, and the private sector will determine the success of the adjustment. But as financial policymakers and prudential supervisors, we cannot ignore the obvious risks before our eyes,” asserts the joint letter from Mark Carney, François Villeroy de Galhau and Frank Elderson. “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.”

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