Following Mark Carney’s “breaking the tragedy of the horizon” speech in 2015, it became apparent central banks and regulators needed to sit up and take responsibility for risks emerging as a result of climate change.
Two years later, in December 2017, eight central banks and supervisors established the Central Banks and Supervisors Network for Greening the Financial System (NGFS). The goal of this network is to contribute to the analysis and management of risks in the financial sector and to mobilise mainstream finance to support the transition toward a sustainable economy. Seventeen months from its founding, the NGFS has 36 members drawn from five continents, and six multinational organisations as observers.
The NGFS published its first progress report at the end of 2018, concluding that climate-related risks are a source of financial risk and, as such, fall within the supervisory and financial stability mandates of central banks and financial supervisors.
To implement appropriate supervision, the first step for central banks and regulators is to better understand the possible financial impacts – which can only be done if data governance is improved and appropriate monitoring frameworks put in place.
The NGFS has conducted its own assessment of climate risks for financial institutions, but the tools and methodologies are still at an early stage, and there are several analytical challenges, including limited quality and availability of data, developing taxonomies and definitions, and a need to build intellectual capacities in translating the scientific understanding of climate change into financial risk assessments.
A discussion around actionable policies, however, has not been stalled by these setbacks, and central banks worldwide have already begun implementing regulation geared towards transitioning to a low-carbon global economy. In March, the Netherlands Bank became the first in the world to sign up to the principles for responsible investment, a set of environmental, social and governance criteria for investors.
It appears Carney’s call to arms was heard, but there remains an abundance of work to be undertaken, and Central Banking hopes this report will provide some guidance on issues that so desperately need to be discussed.