It’s time to fully mobilize central banks and financial supervisors on climate and nature risks
By Maud Abdelli, Lead WWF’s Greening Financial Regulation Initiative, and Sylvain Augoyard, Vice President, Asia Sustainable Finance, WWF Singapore
In the wake of the Kunming Declaration on Biodiversity, and as world’s leaders prepare to meet for the UNFCCC COP26 in Glasgow, WWF delves deeper into the practices of central banks and financial supervisors across the world with the publication of its first Sustainable Financial Regulations and Central Bank Activities (SUSREG) report and online tracker. This new tool assesses the measures taken and progress made by those institutions to integrate environmental and social considerations in their mandates and activities.
Despite growing awareness about the financial impacts of climate change and biodiversity loss and the increasing efforts by central banks, regulators and supervisors to create a sustainable financial system, existing monetary, regulatory and prudential tools are not yet fully used to transition to a resilient, low-carbon economy.
Overall, 2021 has been an eventful year for sustainable finance. In April 2021, the Glasgow Financial Alliance for Net Zero (GFANZ) platform was launched to accelerate the alignment of financial portfolios with science-based net zero targets. Today its members include 250 financial institutions among which global leading banks, insurers, asset managers and asset owners that are responsible together for assets in excess of $88 trillion.
Following the 4th meeting of the G20 Finance Ministers and Central Bank Governors earlier this month, the G20 reinstated its Sustainable Finance Working Group with the aim to coordinate international efforts to mobilize sustainable finance. The G20 Sustainable Finance Roadmap was published, a multi-year action plan to scale up sustainable finance to support the objectives of the UN 2030 Agenda for Sustainable Development and the goals of the Paris Agreement.
On October 15, the first part of the Convention on Biological Diversity COP15 concluded with the Kunming Declaration, paving the way for the adoption of a post-2020 global biodiversity framework when the conference resumes in 2022. A specific commitment was made to work to “mobilize additional financial resources, and align all financial flows in support of the conservation and sustainable use of biodiversity”.
As encouraging as these commitments may be, there is still a long road ahead.
The climate and environmental crisis is intensifying. Recent reports from the international scientific community — and notably from the IPCC and the IPBES — show clear evidence that climate change and biodiversity loss are accelerating, reaching unprecedented levels in their scale and pace.
A profound transformation of our socio-economic development model will be required to avert the most catastrophic impacts, calling for the full mobilization of all actors. Financial institutions play a central role by channelling financial flows and providing the capital needed to transition towards a more sustainable future.
And while industry-led initiatives such as the GFANZ are motivating, regulators also need to step in. Only they can set common rules that apply to all financial institutions, ensuring a level playing field and limiting the risk of greenwashing. Central banks, financial regulators and supervisors also assess risks and work to ensure the stability of the financial system, while their actions can contribute to creating an enabling environment for sustainable finance.
And whilst the Network for Greening the Financial System (NGFS) has rapidly grown into a global network of 95 members and 16 observers since its launch in December 2017, producing guides to support the integration of climate and environmental considerations in prudential supervision, portfolio management or monetary policy practices, concrete measures to ensure a more sustainable and resilient financial system are still not being systematically rolled out. This is a worrying trend, in particular as further climate change and biodiversity loss pose serious systemic risks to the financial system.
To further evidence this, WWF´s Sustainable Financial Regulations and Central Bank Activities (SUSREG) report and online Tracker shed more light on progress made to date, highlighting good practices but also gaps and areas where further work is needed across the 38 countries covered.
Despite significant progress made in the issuance of new regulations or supervisory expectations mandating banks to integrate sustainability considerations in their strategy and practices, two thirds of the assessed countries still lack these frameworks, leaving significant loopholes in the management of environmental and social risks in the global financial system.
And while there are undeniable efforts to better understand, quantify and mitigate the exposure of banks to climate risks, nature loss is not yet properly accounted for. Existing supervisory tools need to be activated in a preventive way to ensure that financial institutions do not continue to support activities that are incompatible with sustainable development objectives. Similarly, central banks need to better use monetary policy tools to contain environmental and social risks and not slow down the sustainable transition.
Given the need for urgent global action, success will largely depend on whether central banks and banking supervisors can accelerate their efforts to address climate and nature risks, and use their leadership role to call for more ambitious national policies and better international coordination.