A Call for Action - Climate Change as a Source of Financial Risk

This report by the NGFS sets out climate change-related risks as a source of financial risk and outlines six recommendations, particularly for central banks and financial supervisors to take initial steps to ensure the stability of the financial system. The report aims to build knowledge in the main gaps of identifying, measuring and managing climate risks in the financial system.

A Call for Action - Climate Change as a Source of Financial Risk

Network of Central Banks and Supervisors for Greening the Financial System (NGFS)

29 April 2019

This report by the NGFS sets out climate change-related risks as a source of financial risk and outlines six recommendations, particularly for central banks and financial supervisors to take initial steps to ensure the stability of the financial system. The report aims to build knowledge in the main gaps of identifying, measuring and managing climate risks in the financial system.

The recommendations are:

  1. Integrate climate-related risks into financial stability monitoring and micro-supervision
  2. Integrate sustainability factors into own-portfolio management
  3. Bridge the data gaps
  4. Build awareness and intellectual capacity and encouraging technical assistance and knowledge sharing
  5. Achieve robust and internationally consistent climate and environment-related disclosure
  6. Support the development of a taxonomy of economic activities

INTRODUCTION TO THE REPORT

The NGFS was set up in December 2017 by eight central banks and supervisors to boost the climate resilience of the financial system and enhance members' understanding of environmental risks more broadly. By April 2019 NGFS membership had expanded to 34 banks and financial supervisors.

The collectively face the effects of climate change, as it reaches beyond economies, borders, cultures, and languages.

In 2017, air pollution was a cause of almost 5 million deaths worldwide while 62 million people in 2018 were affected by natural hazards, with 2 million needing to move elsewhere due to climate events. A transition to a green and low-carbon economy is not a niche nor is it a "nice to have" for the happy few. It is crucial for our own survival. There is no alternative. Therefore, we need to come together and take action to create a bright, sustainable future.

Understanding what the magnitude of climate change heralds for financial stability, at the initiative of Banque de France, eight central banks and supervisors established a Network of Central Banks and Supervisors for Greening the Financial System (NGFS) at the Paris “One Planet Summit” in December 2017. Since then, the NGFS has grown to 34 Members and 5 Observers from all over the globe.

Climate-related risks are a source of financial risk and it therefore falls squarely within the mandates of central banks and supervisors to ensure the financial system is resilient to these risks. This significant breakthrough was already acknowledged in the NGFS progress report, published in October 2018. With this first NGFS comprehensive report, we build upon this insight to issue six recommendations: the first four apply to the work of central banks and supervisors while the last two address policymakers. However, all six call for collective action and draw a focus to integrating and implementing previously identified needs and best practices for a smooth transition towards a low-carbon economy. These recommendations are aimed at inspiring central banks and supervisors– NGFS members and non-members – to take the necessary measures to foster a greener financial system. We need to take action and we cannot and will not do this alone. We will globally cooperate with policy makers, the financial sector, academia and other stakeholders to distill best practices in addressing climate-related risks.

The achievements of the NGFS and the rapid expansion of its membership within a year have exceeded my expectations.

However, we are not there yet. These recommendations represent only the Network’s beginnings, as there is much work to be done in order to equip these aforementioned actors with appropriate tools and methodologies to identify, quantify and mitigate climate risks in the financial system. Future deliverables include a handbook on climate and environmental risk management, voluntary guidelines on scenario-based risk analysis and best practices for incorporating sustainability criteria into central banks’ portfolio management. Going forward, the NGFS also expects to dedicate more resources to the analysis of environmental risks.

I am confident that the brain trust of the NGFS will continue to grow and evolve, keeping in mind the aim of having the financial sector worldwide contribute toward a greener future. As chair, I am very proud of what the NGFS has accomplished in only 16 months since its creation, and I look forward to consolidating our work during the coming years.

Finally, I would like to extend my thanks to the tremendous amount of work done by everyone involved in this endeavour, the chairs and members of the three working groups and my team at De Nederlandsche Bank. In particular I would like to thank the secretariat at the Banque de France, without whom we would not have stood where we stand today.

Read the Report in PDF format English, PDF, 2654KB

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