A new report by international audit and advisory firm Mazars and independent think tank OMFIF reveals that central banks are now planning to make radical regulatory changes to tackle the climate crisis. From introducing climate stress tests to setting sustainability criteria, the sector now recognises the multitude of risks posed by climate change – including on financial stability – and are ramping up measures to tackle the challenges to come. While some central banks remain conservative on responsibility for action, it is clear that the financial world as a whole can no longer stay silent on the biggest threat to our planet today.
In a new Mazars-OMFIF report titled “Tackling climate change: The role of banking regulation and supervision”, researchers find that the majority of central banks and regulators now see climate change as a “major threat” to stability and are currently planning radical changes to tackle climate risks. The report, which draws on survey data and research involving 33 central banks and regulatory authorities across six regions, representing 77% of global GDP.
In addition to finding that the recognition of the threat posed by environmental issues is at an all time high, the report predicts that action in the form of inclusion of climate concerns in stress tests will increase dramatically in the near future.
“Climate change will impact all financial institutions and the topic is high on the agenda of supervisors and regulators around the globe,” said partner at Leader Financial Institutions Group at Mazars Rudi Lang.
Among the key approaches to be integrated in procedures regulating climate risks, says the report, include assessing climate risks in stress tests, mandating climate-related financial disclosures and setting sustainability standards for green finance. Of these approaches, stress testing for climate-related considerations will likely be the most popular action, with 79% of respondents saying they intend to do so in the short-term.
However, while 70% of the institutions surveyed indicated that climate change is a major risk, only 55% are actively monitoring these concerns and 12% saying that responsibility for action lies elsewhere, such as from the government. According to the report, some of the conservation amongst financial players to take more radical action lies in the lack of data availability and low consistency between different supervisory frameworks. The authors call for these obstacles to be tackled for institutions to sufficiently prepare themselves for the inevitable instabilities to be brought about due to the climate emergency.
“The success of any policy response will rely on the engagement of market participants who will be expected to assess, disclose and mitigate their climate change risk and continue to change some of their practices,” explained Mazars financial services partner and report contributor Leila Kamdem-Fotso.
The report’s findings parallel that of the World Economic Forum (WEF) annual risks report released earlier in January. For the first time in its 15-year history, the WEF report saw environmental issues dominate the top 5 spaces in the index of issues that will majorly impact world business and financial institutions over the next decade. These included damage incurred from extreme weather events, failure of climate mitigation and adaptation, human-caused disasters, mass biodiversity loss and major natural disasters – all of which banks and firms around the world must react to now.
With public concern and global focus zoning in on the climate crisis, it has also become clear that institutions that do not adhere to climate adaptation calls and are continuing planet-damaging projects are now experiencing significant downturn. For instance, sustained reporting, activism and scientific consensus about the fossil fuel industry’s role in driving the climate crisis has crippled energy companies’ profits.
According to the Times, dirty energy companies grew at a slower rate of 2% in the past decade, while the broader market picture experienced a tripling in returns in the same period. Analysts at BNP Paribas estimate that this trend will only continue, with increased funding into the clean energy sector bringing about the demise of big oil in a few years time.
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