By Lise Alves, Contributing Reporter
MIAMI BEACH, FLORIDA – With the impact already created by climate change on national economies, central banks around the world decided to unite and discuss how to account for these risks when forecasting macroeconomic scenarios.
This week, the coalition, dubbed the Network for Greening the Financial System (NGFS), released its first technical report detailing approaches suggested in its April 2019 guidelines.
“The prime responsibility for climate policy will continue to sit with governments. But as financial policymakers and prudential supervisors, we cannot ignore the obvious risks before our eyes,” stated the group in an open letter on April 17, 2019.
The open letter was signed by the governors of the Bank of England (BoE) and Banque de France, and co-signed the chairman of the NGFS, who is also an executive director of De Nederlandsche Bank, some of the first members of the NGFS.
With weather-related disasters registering billion dollar losses around the globe, the April guidelines as well as this week’s technical report provide an overview of existing approaches for quantitatively assessing climate-related risks, identifies key areas for further research and provides a number of options for central banks and supervisors to assess risks.
“The catastrophic effects of climate change are already visible around the world. From blistering heatwaves in North America to typhoons in south-east Asia and droughts in Africa and Australia, no country or community is immune,” stated these central bank supervisors.
Among the guideline issued by the NGFS’ comprehensive report are four recommendations of goals that ‘will help to ensure a smooth transition to a low-carbon economy’.
The first recommendation calls for the integration of the monitoring of climate-related financial risks into day-to-day supervisory work, financial stability monitoring and board risk management.
The second asks for central banks to ‘lead by example’, encouraging the entities to integrate sustainability into their own portfolio management.
The third and fourth call for collaborating to enhance the assessment of climate-related risks and, if possible, make publicly available climate-risk data; as well as building in-house capacity and sharing knowledge with other stakeholders on management of climate-related financial risks.
With these four recommendations, the coalition hopes to aid central banks around the world in forecasting with more precision the risks of climate change on individual as well as interdependent economies.
“We need collective leadership and action across countries and we need to be ambitious. The NGFS is the core of the response of central banks and supervisors. But climate change is a global problem, which requires global solutions, in which the whole financial sector has a crucial role to play,” stated NGFS members.
According to the NGFS, the entity plans in the future to publish additional technical documents ‘to better equip central banks and supervisors with appropriate tools and methodologies to identify, quantify and mitigate climate risks in the financial system’.
“These events damage infrastructure and private property, negatively affect health, decrease productivity and destroy wealth. And they are extremely costly: insured losses have risen five-fold in the past three decades. The enormous human and financial costs of climate change are having a devastating effect on our collective wellbeing,” notes the NGFS.
Created in December 2017 by eight leading central banks the coalition now encompasses forty-two central banks from five continents, representing countries which are responsible for half of global greenhouse gas emissions and which supervise two-thirds of the world’s most important banks and insurers.
The NGFS also counts on the help of eight observers, including the OECD (Organization for Economic Co-operation and Development), the World Bank and the Bank for International Settlements.
Noticeably absent from the NGFS coalition is the United States.