No longer is climate change a debatable problematic with some research models suggesting up to a quarter of global GDP - currently around $80tn - could be lost if no action is taken to reduce carbon dioxide emissions.
Across the world, central banks, policymakers, and investors are waking up to the compelling reality.
For sure, central banks are the most powerful financial institutions in the world.
Now they’re increasingly looking to play a key role in mitigating the impact of rising sea levels, more wildfires, and bigger storms that could cause shortages leading to a rise in inflation.
Central banks have responded to Covid-19 with record stimulus.
Qatar Central Bank Governor HE Sheikh Abdullah bin Saoud al-Thani on Monday said the policy response to the pandemic should turn out to be the blueprint for climate protection policies as well.
Central banks are increasingly interested in environmental, social, and governance (ESG) principles, with 43% of respondents to an HSBC survey saying they’d bought green bonds.
The survey carried out between February and April found that officials at 57 central banks, with assets worth $3.8tn, were either already factoring ESG criteria into decision-making or were considering doing so.
European Central Bank president Christine Lagarde has made work on climate change a priority, making it a key element of the strategic review currently underway at the bank.
The Swiss National Bank last year excluded coal miners from its equities portfolio, while earlier this month the Bank of Japan gave one of its strongest hints yet that the need to take action on climate change was on its radar.
The widening focus of central banks to factor in the climate in policy formulation has brought about differing views that the regulators are overstepping their conventional mandates.
But last December, the US Federal Reserve joined the Central Banks and Supervisors Network for Greening the Financial System. The group includes central banks and regulators of major European countries as well as China, Russia and Japan.
Now, with 90 central banks and regulators as members, the group says regulators who don’t consider climate risks are failing in their jobs.
Some members are adjusting policy based on climate considerations, potentially including higher capital charges for lending to fossil-fuel companies and bank stress tests that focus on the risk of rising temperatures to loan portfolios.
The ECB, which oversees monetary policy and bank regulation in the eurozone, says climate already is covered by its mandate.
The Bank for International Settlements, known as the central bank for central banks, has a programme to finance renewable energy production. The ECB is helping to fund that project.
Globally, more than $40.5tn is now estimated to be invested using ESG metrics. And the past five years have seen an unprecedented increase in investors’ ESG awareness.
Governments, corporations, and other groups raised a record $490bn last year selling green, social, and sustainability bonds. A further $347bn poured into ESG-focused investment funds: An all-time high.
In a wider sense, central banks can’t be expected to save the world from climate change, says the BIS. It, for sure, calls for broader co-ordination in the financial world.
