Entral Banks and Climate Change
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Global Public Investor 2019 MFF Special report entral 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 | GPI_2019_FinalBook.indb 145 22/05/2019 12:27 MFF Special report entral banks and climate change Addressing climate anae risks to economies riakopoulou Chief Economist Director of esearch, OMI 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 ank for International Settlements, the orld ank, by the birth of the tinction Rebellion movement the rganisation for conomic Co-operation and and the rise of 16-year old activist reta Thunberg. evelopment, and MFIF. In ctober, illiam ordhaus won the obel prie in Central bankers’ deepening interest in the subect economics for his work on the economic modelling is refl ected in the growing number of speeches of climate change. That same month, the United on issues related to climate change. These range ations Intergovernmental anel on Climate from its impact on the economy, fi nancial stability Change issued alarming warnings. And for the third and monetary policy, to the development of green consecutive year, the orld conomic Forum’s fi nance instruments and ratings. etween April annual report, presented in avos in anuary 21, 21-March 21, there were 21 central bank counted three environmental risks all associated speeches on these subects see Figure 2. f these, with climate change among the top fi ve global all but two were made by members of the FS, risks in terms of both likelihood and impact. In April with the maority of speeches coming from the 21, not-for-profi t organisation ositive Money urosystem 1, including three from the uropean launched a petition calling on the ank of ngland Central ank, and the remaining coming from Asia to step up its efforts to address climate change. three, the UK four, and Africa one. anque de Titled reentheo’, it gathered more than , France overnor Franois illeroy de alhau went signatures in a matter of hours. as far as calling climate risks the new frontier for central banks, comparable to the fi nancing of growth New frontier for central banks and maor infrastructures in the 1th century or the As these events indicate, climate change is a management of great fi nancial crises in the last 1 matter that etends 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 eplain 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 specifi cally, on fi nancial window-dressing. In ecember 21 during the ne stability and monetary policy. Central bankers lanet summit and at the initiative of the anque de must also assess the effects of climate change on France, eight institutions from four continents set the fi nancial sector, as the industry mi changes up the Central anks and Supervisors etwork for to facilitate the transition to a climate-resilient reening the Financial System. Chaired by Frank economy. lderson, eecutive director for supervision at e ntire industries, households and businesses ederlandsche ank, the group has since grown are likely to be affected as countries transition to 6 members from 2 urisdictions. Collectively, to low-carbon models. conomies will have to they cover around 1% of the world population and bear the cost of adaptation to a warmer climate, almost half of global 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 | omfif.org GPI_2019_FinalBook.indb 146 22/05/2019 12:27 Global Public Investor 2019 Figure 1: NGFS members’ jurisdiction jointly responsible for nearly half of global carbon emissions NFS members Members of the Central Banks’ and Supervisors’ Network for Greening the inancial 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% 2.0% 31% 1.5% of the global population Source United ations, 21 1.0% 0.5% 0.0% * * * * * y k s e y a a a a n d d d o m m li ai or Ital stri and* eece alan 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 Denmar therland itze Europe** Ge xe Si w Ze 45% Colombia** Ne Lu Sw Ne of global greenhouse United Kingdo gas emissions Source anque de France FS Secretariat, lobal Carbon Atlas, MFIF analysis Source lobal Carbon udget, These urisdictions are represented on the FS by both the central bank and the supervisory authority 2017 These urisdictions are represented on the FS by the supervisory authority only Three cross-border uropean institutions are members of the FS the uropean Central ank, the uropean anking Authority, and the uropean Insurance and ccupational ensions Authority productive capital accumulation. This suggests that Stournaras remarked, Financial stability without a 2/3 Supervision of the climate-related risks will be a source of fi nancial risk. sustainable growth model is simply inconceivable.’ global systemically These therefore fall within the mandates of central Refl ecting these concerns, the FS is structured important banks and insurers banks and supervisors to ensure the fi nancial system around three workstreams. The fi rst, chaired by the Source Financial Stability oard, remains resilient. As ank of reece overnor annis eople’s ank of China, centres on microprudential 2018 Figure 2: Central bankers’ speeches on sustainability in 2018-19* Name Position** Institution NGFS member? Date Sabine Lautenschläger Member of the ecutive oard European Central Bank es 121 44% Frank Elderson ecutive irector of Supervision De Nederlandsche Bank es 121 of the global GDP Source orld ank, 21 Sarah Breeden ecutive irector of International anks Supervision Bank of England es 121 Yannis Stournaras overnor Bank of Greece es 21 Guy Debelle eputy overnor Reserve Bank of Australia es 1221 Margarita Delgado eputy overnor Banco de España es 1221 Patrick Njoroge overnor Central Bank of Kenya No 2221 Philip Lane overnor Central Bank of Ireland es 221 François Villeroy de Galhau overnor Banque de France es 21121 Yves Mersch Member of the ecutive oard European Central Bank es 21121 Mark Carney overnor Bank of England es 211121 Benoît Cœuré Member of the ecutive oard European Central Bank es 1121 Yannis Stournaras overnor Bank of Greece es 1121 Frank Elderson ecutive irector of Supervision De Nederlandsche Bank es 21 Veerathai Santiprabhob overnor Bank of Thailand es 221 Norman Chan Chief ecutive Hong Kong Monetary Authority No 1621 Olli Rehn eputy overnor Bank of Finland es 1621 Klaas Knot resident De Nederlandsche Bank es 621 François Villeroy de Galhau overnor Banque de France es 621 Mark Carney overnor Bank of England es 621 Sarah Breeden ecutive irector of International anks Supervision Bank of England es 121 Speeches between March 21-April 21 Applies to position at the time the speech was given, may not necessarily be current position omfif.org | GPI_2019_FinalBook.indb 147 22/05/2019 12:27 MFF Special report entral banks and climate change least three ways. First, through the manifestation of Figure 3: Selected initiatives by international physical risks’, such as the increased frequency of fi nancial agencies linked to climate change If we are to etreme weather events that may damage property Actor nitiative fulfil our and infrastructure and disrupt trade and economic mission of G20 Sustainable inance Working Groups activity. radual temperature changes could safeguarding United Nations Principles for esponsible Investment affect the value of assets. For the banking sector, monetary inancial Stability Task orce on Climate-elated inancial these may be felt directly through the eposure of Board Disclosures and financial mortgage books to fl ood risk, or for globally active OECD Green inance and Investment Centre stability, it banks, through the impact of natural disasters on World Bank Sustainable Banking Network is a strategic sovereign bond ratings and country risk. EU Action Plan on Sustainable inance priority for Such costs are becoming visible as the frequency us to address Central Banks Network for Greening the inancial Supervisors System of natural disasters has increased dramatically. the challenges Supervisors Around natural loss events occurred in 21 Sustainable Insurance orum posed by egulators including fl oods, tropical cyclones, wildfi res and climate change Source arious sources earthquakes in the US, apan and elsewhere, for the financial incurring a total cost of 16bn, according to system. supervision. It aims to identify best practice MunichR’s atCatService. Philip Lane, in analysing climate-related risks to individual Second, there are liability risks for parties that Governor of the institutions, including the disclosure of such risks. have suffered losses from the effects of climate Central Bank of The second, chaired by the ank of ngland see change and seek compensation from those they hold Ireland Sarah reeden and Andrew auser’s contribution on responsible. eather-related insurance losses have p.1, focuses on quantifying climate-related risks increased almost fi ve-fold to an average of around at a macroeconomic level, including macro stress bn per annum so far this decade from an average tests and scenario analyses.