We have powerful tools to avert climate-based financial instability

Climate Voices

We have powerful tools to avert climate-based financial instability

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Central banks must be leveraged to avoid massive risk from climate change — and they’ve only just begun.

 

In case heat waves, raging fires and monster hurricanes were not enough, the latest IPCC Assessment Report reminds us in no uncertain terms that this decade is our last chance to avoid an utterly catastrophic climate breakdown. 

The headlines are stark, but the reality is that we have in hand the powerful financial tools we need to shift the global economy from its current high-volatility risk, carbon-fueled path to a lower-risk, sustainable and resilient future: and central banks are at the heart of that.

Central banks have the responsibility to examine and manage forward risks to the financial system and the economy underpinning that system. That includes ensuring material risks — like the impacts of climate change — are adequately disclosed, and that risk mitigation measures are taken wherever possible.

For many central banks that includes aligning their asset purchasing programs with supporting risk mitigation — investing in green bonds, for example. However, as modeling by the Network for Greening the Financial System (NGFS), an association of more than 90 central banks, has shown, shifting portfolio emissions requires more than green bond purchases; fossil exposures must also be severely limited.

The pressure is on. Climate forecasting group Inevitable Policy Response (IPR) cites regulator fears of climate-based financial instability as one of the underlying forces that will accelerate climate policymaking to 2025. 

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IPR also sees extreme weather events and civil society pressures, among other drivers, exerting continued pressure on policymakers to take rapid action in the lead up to the COP26 summit in November  — and that’s on top of the substantial 2030 emission reduction commitments major economies made at the Biden Climate Summit.

Reaction to the extreme weather events in the first half of 2021 bears out this assessment, and the growing discussions at G20 Finance and Central Bank Governors summits around sustainability and stability, are signals that sharper decisions on global financial regulation will emerge in the immediate years ahead.

Among the leaders is DNB, the Netherlands central bank, which has recently launched its Sustainable Finance Strategy covering risk management, research and data and monetary operations. The ECB’s new climate action plan promises alignment of monetary policy with the Paris Agreement, (For a deeper dive into those landmark commitments, here’s recent analysis from CBI). We hope that COP26 will see the launch of many more sustainability strategies by central banks.

At the end of the day, it’s about better management of risk, very substantial risks.

 

Written by

Sean Kidney

Sean Kidney is founder and CEO of Climate Bonds Initiative, an international investor-focused non-profit that is working to mobilize the $100 trillion bond market for climate change solutions.