Global Public Investor 2019 OMFIF Special report Central banks and climate change The global central banking community spent the last decade repairing the financial system after the international banking crisis. Now, it is turning its attention increasingly to the longer-term challenge of improving the climate resilience of the financial system and the wider economy. omfif.org | 145 OMFIF Special report Central banks and climate change Addressing climate Danae risks to economies Kyriakopoulou Chief Economist & Director of Research, OMFIF he past year has seen unprecedented levels of banks and insurers. The network also includes Tpublic interest in the effects of climate change observer and stakeholder members such as the on our economies and societies. This was evidenced Bank for International Settlements, the World Bank, by the birth of the Extinction Rebellion movement the Organisation for Economic Co-operation and and the rise of 16-year old activist Greta Thunberg. Development, and OMFIF. In October, William Nordhaus won the Nobel prize in Central bankers’ deepening interest in the subject economics for his work on the economic modelling is reflected in the growing number of speeches of climate change. That same month, the United on issues related to climate change. These range Nations Intergovernmental Panel on Climate from its impact on the economy, financial stability Change issued alarming warnings. And for the third and monetary policy, to the development of green consecutive year, the World Economic Forum’s finance instruments and ratings. Between April annual report, presented in Davos in January 2019, 2018-March 2019, there were 23 central bank counted three environmental risks – all associated speeches on these subjects (see Figure 2). Of these, with climate change – among the top five global all but two were made by members of the NGFS, risks in terms of both likelihood and impact. In April with the majority of speeches coming from the 2019, not-for-profit organisation Positive Money Eurosystem (13, including three from the European launched a petition calling on the Bank of England Central Bank), and the remaining coming from Asia to step up its efforts to address climate change. (three), the UK (four), and Africa (one). Banque de Titled ‘#GreentheBoE’, it gathered more than 4,000 France Governor François Villeroy de Galhau went signatures in a matter of hours. as far as calling climate risks ‘the new frontier for central banks, comparable to the financing of growth New frontier for central banks and major infrastructures in the 19th century or the As these events indicate, climate change is a management of great financial crises in the last 100 matter that extends beyond activists, governments, years’. and private companies. Central banks, banks and The motivation for central banks is manifold, insurance companies are realising increasingly the stemming from the need to understand and explain need to take climate change into account in their the potential impact of climate change on the decision-making and the reasons go beyond mere macroeconomy and more specifically, on financial window-dressing. In December 2017 during the One stability and monetary policy. Central bankers Planet summit and at the initiative of the Banque de must also assess the effects of climate change on France, eight institutions from four continents set the financial sector, as the industry mix changes up the Central Banks and Supervisors Network for to facilitate the transition to a climate-resilient Greening the Financial System. Chaired by Frank economy. Elderson, executive director for supervision at De Entire industries, households and businesses Nederlandsche Bank, the group has since grown are likely to be affected as countries transition to 36 members from 29 jurisdictions. Collectively, to low-carbon models. Economies will have to they cover around 31% of the world population and bear the cost of adaptation to a warmer climate, almost half of global GDP and global greenhouse including increasing spending on equipment such emissions (see Figure 1). They supervise two as air conditioning and resilient infrastructure such thirds of the world’s global systemically important as seawalls, which would divert resources from 146 | omfif.org Global Public Investor 2019 Figure 1: NGFS members’ jurisdiction jointly responsible for nearly half of global carbon emissions NGFS members’ Members of the Central Banks’ and Supervisors’ Network for Greening the Financial System (as of April jurisdictions 2019), by central bank jurisdiction, % of global carbon emissions cover: 4.0% 28.3% 3.5% 3.0% 2.5% 31% 2.0% of the global population 1.5% Source: United Nations, 2017 1.0% 0.5% 0.0% * * * * * y k e a a a a d d o m m li ain or Italy stri and* eece aland nlan Sp Chin ance eden rl stra Irelan Gr Au rmany* Mexico Fi Canada mbourg Fr Japan* Belgiu ngap Hungar Portugal Norway Thailand Sw Au Morocc Malaysi 45% Denmar therlands itze Europe** Ge xe Si w Ze Colombia** of global greenhouse Ne Lu Sw Ne gas emissions United Kingdo Source: Global Carbon Budget, 2017 Source: Banque de France NGFS Secretariat, Global Carbon Atlas, OMFIF analysis *These jurisdictions are represented on the NGFS by both the central bank and the supervisory authority **These jurisdictions are represented on the NGFS by the supervisory authority only ***Three cross-border European institutions are members of the NGFS: the European Central Bank, the European Banking Authority, and the European Insurance and Occupational Pensions Authority 2/3 Supervision of the global systemically Figure 2: Central bankers’ speeches on sustainability in 2018-19* important banks and insurers Name Position** Institution NGFS member? Date Source: Financial Stability Board, 2018 Sabine Lautenschläger Member of the Executive Board European Central Bank Yes 17/04/2019 Frank Elderson Executive Director of Supervision De Nederlandsche Bank Yes 17/04/2019 Sarah Breeden Executive Director of International Banks Supervision Bank of England Yes 15/04/2019 Yannis Stournaras Governor Bank of Greece Yes 03/04/2019 Guy Debelle Deputy Governor Reserve Bank of Australia Yes 12/03/2019 44% Margarita Delgado Deputy Governor Banco de España Yes 12/03/2019 of the global GDP Patrick Njoroge Governor Central Bank of Kenya No 20/02/2019 Source: World Bank, 2017 Yannis Stournaras Governor Bank of Greece Yes 16/01/2019 Philip R Lane Governor Central Bank of Ireland Yes 05/02/2019 Yannis Stournaras Governor Bank of Greece Yes 18/12/2018 François Villeroy de Galhau Governor Banque de France Yes 28/11/2018 Yves Mersch Member of the Executive Board European Central Bank Yes 27/11/2018 Mark Carney Governor Bank of England Yes 21/11/2018 Benoît Cœuré Member of the Executive Board European Central Bank Yes 09/11/2018 Yannis Stournaras Governor Bank of Greece Yes 01/10/2018 Frank Elderson Executive Director of Supervision De Nederlandsche Bank Yes 04/09/2018 Veerathai Santiprabhob Governor Bank of Thailand Yes 23/07/2018 Norman Chan Chief Executive Hong Kong Monetary Authority No 14/06/2018 Olli Rehn Deputy Governor Bank of Finland Yes 13/06/2018 Klaas Knot President De Nederlandsche Bank Yes 06/04/2018 François Villeroy de Galhau Governor Banque de France Yes 06/04/2018 Mark Carney Governor Bank of England Yes 06/04/2018 Sarah Breeden Executive Director of International Banks Supervision Bank of England Yes 19/03/2018 *Speeches between March 2018-April 2019 ** Applies to position at the time the speech was given, may not necessarily be current position omfif.org | 147 OMFIF Special report Central banks and climate change greatest momentum, they are not the only financial Figure 3: Selected initiatives by international system players pursuing initiatives linked to climate financial agencies linked to climate change If we are to change. The Financial Stability Board, OECD, UN, Actor Initiative fulfil our World Bank and European Union are also leading the mission of G20 Sustainable Finance Working Groups charge with initiatives focused on disclosures, the safeguarding United Nations Principles for Responsible Investment development of green taxonomies, and principles for monetary Financial Stability Task Force on Climate-Related Financial responsible investment (see Figure 3). and financial Board Disclosures OECD Green Finance and Investment Centre stability, it Climate risks to the economy World Bank Sustainable Banking Network is a strategic Climate-related risks translate to financial risks in at EU Action Plan on Sustainable Finance priority for least three ways. First, through the manifestation of us to address Central Banks/ Network for Greening the Financial Supervisors System ‘physical risks’, such as the increased frequency of the challenges Supervisors/ extreme weather events that may damage property Sustainable Insurance Forum posed by Regulators and infrastructure and disrupt trade and economic climate change Source: Various sources activity. Gradual temperature changes could for the financial affect the value of assets. For the banking sector, system. productive capital accumulation. This suggests that these may be felt directly through the exposure of Philip Lane, climate-related risks will be a source of financial risk. mortgage books to flood risk, or for globally active Governor of the These therefore fall within the mandates of central banks, through the impact of natural disasters on Central Bank of banks and supervisors to ensure the financial system sovereign bond ratings and country risk. Ireland remains resilient. As Bank of Greece Governor Yannis Such costs are becoming visible as the frequency Stournaras remarked, ‘Financial stability without a of natural disasters has increased dramatically. sustainable growth model is simply inconceivable.’ Around 850 natural loss events occurred in 2018 Reflecting these concerns, the NGFS is structured including floods, tropical cyclones, wildfires and around three workstreams. The first, chaired by the earthquakes in the US, Japan and elsewhere, People’s Bank of China, centres on microprudential incurring a total cost of $160bn, according to supervision.