Central banks must step up to the urgency of climate change

Leading central bankers have warned that climate change – combined with a poorly managed low carbon transition – has the potential to trigger a ​“sudden collapse in asset prices” that could devastate the financial system. Their comments accompany a new report from the Network for Greening the Financial System (NGFS), a growing international group of central banks and financial regulators, published today.

Financial institutions need to adjust to the new world of climate change, or ​“they will fail to exist” cautioned Governor’s Mark Carney of the Bank of England and Villeroy de Galhau of the Banque de France.

The report has four main recommendations for the financial sector and central banking community:

• Supervisors are encouraged to set expectations for financial institutions to begin integrating and monitoring climate risks in day-to-day operations (including at the board level).
• Central banks are encouraged to incorporate climate-related financial risk into their own portfolios (e.g. their pension funds).
• Increase collaboration to enhance the management, collection, and assessment of data related to finance and climate change.
• Share lessons and experiences with other stakeholders on how to manage the financial risks posed by climate change.

Frank Van Lerven, Senior Economist at New Economics Foundation said:

“The world’s leading central banks are doing an excellent job of ringing the alarm bells and raising awareness around the risks climate change could pose to our financial system. Nevertheless, there remains a disconnect between words and action. Central banks need to do a better job of leading by example, and incorporating climate risks into their own day-to-day monetary policy operations.

“But we also need central banks to step up to the urgency of climate change. For example, the Bank of England should be looking to deploy macroprudential policy in a way that curbs the flow of lending to polluting economic activities. The Bank should also be looking to shape monetary policy tools – such as the £100 billion term funding scheme – to effectively offer lower interest rates for green lending.”