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Central bankers are mobilizing against climate risks, advocating for greater transparency, carbon stress tests and regulation of the financial system that integrates these risks.

On April 6, close to 200 employees of central banks and financial supervisors, at the initiative of the Dutch Central Bank (DNB), the Bank of England, the Banque de France and the ACPR, met under the auspices of the Central Banks and Supervisors Network for Greening the Financial System (NGFS).

After various pioneering works carried out at national level by the Dutch Central Bank [1], the Bank of England [2] and the Banque de France [3] on the exposure of their banking and insurance sectors to climate risks, central banks and financial supervisors have set up a network to exchange on methods and good practices to apprehend climate risks. This initiative, born at the One Planet Summit [4] last December, should lead to a first report in 2019.

The integrity of the financial system threatened by climate change according to the Dutch governor

The link between the central bank mission and climate change issues was not evident until recently. Yet, as Klaas Knot, Governor of the Central Bank of the Netherlands (DNB) explains, central bankers must guarantee the conditions for a prosperous and sustainable economy : ” If the way in which prosperity is created today results in significant ecological damage that prevents future generations from obtaining similar or higher levels of prosperity, today’s prosperity creation is not sustainable either, and runs thereby counter to our mission.[…] This means that we and the institutions we supervise need to take long term trends and risks into account. And that means paying attention to climate risks.”

In this context, the DNB is concerned about the effect that climate change and the energy transition could have on “the solidity and integrity of financial institutions or the financial system as a whole “.

François Villeroy de Galhau, in favor of greater regulation of the financial system

Like his Dutch counterpart, the governor of the Banque de France, François Villeroy de Galhau, also considers that “climate stability is, in the long term, one of the determinants of financial stability“. This makes climate change our “new frontier”, and a challenge comparable to the financing of growth and infrastructures in the 19th century or the management of financial crises in the 20th.

He sets two priorities for the coming years: measuring the long-term risks associated with climate change and developing the opportunities related to financing the transition.

“Physical risks are obviously the most visible and immediate source of risk for the financial sector. […] The insurance sector is at the forefront in dealing with physical risks. Yet, contrary to widespread belief, if not covered by insurance, physical risks could loom large for banks as well.” For François Villeroy de Galhau, the physical risks should “ at the very least, be carefully monitored.”

As for the transition risks, which concern about 13% of the assets according to the exercises conducted by the French and Dutch central banks, they are less visible and do not materialize yet. However the French governor alarms that “we need to be prepared” and adds that “it is delusional to think that when risks become perceptible, everyone will be able to cut their exposures at the same time and in an orderly fashion. “

The objective for the Banque de France and the Network’s supervisors is therefore to better assess and reduce the long-term risks associated with climate change.

In terms of regulation, the governor of the Banque de France pleaded for a penalization of brown assets, “because climate transition risks will materialize”.

For Mark Carney, it is urgent to move from a transition in thinking to action

Nearly three years after his historic speech on climate risks, Mark Carney took stock of the progress made since the Paris Agreement, distinguishing transitions in thinking and in action.

Since 2015, according to the governor of the Bank of England, there has been a transition in people’s minds. He recalled, for example, the importance of the commitment made during the One Planet Summit by financial institutions managing collectively $ 80 trillion of assets, to support the TCFD‘s recommendations by analyzing their exposure to climate risks and making public this analysis. “Those financial institutions know that for markets to do what they do best – allocate capital effectively and dynamically – they need the right information.”

Acknowledging the Paris Agreement as the moment “global leaders took political action “, Mark Carney nonetheless expressed his fears about “the national determined contributions towards meeting the Paris goals, summed to no more than 2.7°C, making it clear climate policy will need to tighten further if the Paris commitments are to be achieved.”

Now, let’s act !

I4CE welcomes the messages conveyed by these central bank governors, which demonstrate the willingness of the regulatory and supervisory authorities to mobilize to better analyze and take into account climate risks. We share the analysis that the financial sector crucially needs to better understand its exposures to climate risks, and then limit and manage these risks.

We are therefore looking forward to the results of the work of the Central Banks and Supervisors Network for Greening the Financial System (NGFS). And we are of course available to provide our expertise to central bankers and supervisors.

[1] https://www.dnb.nl/en/binaries/tt_tcm47-338545.pdf

[2] https://www.bankofengland.co.uk/climate-change

[3] https://www.tresor.economie.gouv.fr/Ressources/File/433386

[4] International conference to mobilize public and private finance for the fight against climate change

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