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Need to take immediate, targeted action, tackle climate change

On 17 April, Governor of Bank of England Mark Carney and Governor of Banque de France François Villeroy de Galhau issued an open letter, warning about the financial risks of climate change  Tweet This! and the need to take immediate, targeted action.

The impact of climate change and the transition to a low-carbon economy

In the letter, published by the Bank of England and co-signed by the chair of the climate-focused Network for Greening the Financial System (NGFS), Mr Carney and Mr Villeroy de Galhau talk about the “catastrophic effects of climate change” and the extreme weather events around the globe that impact infrastructure, health and productivity, and destroy wealth. These massive human and financial costs of climate change forced governments to take action and, in accordance with the Paris Agreement, governments globally committed to limiting global warming to 2 degrees Celsius, preferably as close to 1.5 degrees Celsius as possible.

Actions taken cooperatively by governments and countries worldwide, will enable a collective transition to a low-carbon economy. Accordingly, during the next decade, carbon emissions will have to be reduced by 45%, compared to 2010 levels. To achieve this goal, a huge reallocation of capital will be required and, as the two heads of the major central banks emphasise, “if some companies and industries fail to adjust to this new world, they will fail to exist”. This is why – also considering the climate-related financial risks involved – the NGFS, a coalition of 34 central banks representing five continents and half of global greenhouse gas emissions, was formed. The coalition released its first comprehensive report about climate-related financial risks, on 17 April.

What does the NGFS propose?

Seeking to translate commitments into real action, the coalition made four recommendations, setting, for all central banks, policymakers and the financial community, specific goals that will enable a smooth, orderly transition to a low-carbon economy:

  • Integrating the monitoring of climate-related financial risks into daily supervisory work, financial stability monitoring and board risk management: The report encourages supervisors to make sure, by setting suitable expectations, that financial firms are effectively addressing climate-related financial risks. For example, by carrying out scenario analysis to assess their strategic resilience to climate change policy. The report also encourages firms to take a long-term, strategic approach to considering these risks, and to integrate them into their governance and risk-management frameworks. In other words, make climate change planning a daily priority.
  • Leading by example: Central banks are encouraged to incorporate sustainability into their portfolio management, making their own operations more sustainable.
  • Cooperating to bridge data gaps: The report calls for increased cooperation within the financial sector, with different companies and bodies sharing and, if possible, making publicly available climate risk information, to strengthen the assessment of climate-related risks.
  • Building in-house capacity and sharing knowledge with other stakeholders on managing climate-related financial risks: To achieve the adequate consideration of climate risks across the financial system, both internal and external collaboration is necessary.

For these recommendations to succeed, two key conditions have to be met:

  • To adequately assess climate change risks and opportunities, the market and regulators will have to be supported by robust and internationally reliable disclosures.
  • Regulators should develop a suitable classification system to identify the economic activities that will contribute to the transition to a green, low-carbon economy. In this way, financial actors will be better able to make sustainable investment and lending decisions.

 

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References:

This article is based on published information by the Bank of England. For the sake of readability, we did not use brackets or ellipses. However, we made sure that the extra or missing words did not change the publication’s meaning. If you would like to quote these written sources from the original please revert to the following link:

https://www.bankofengland.co.uk/news/2019/april/open-letter-on-climate-related-financial-risks

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