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Central banks plan radical regulatory changes to tackle climate crisis – time for banks to get ready
February 19, 2020: Mazars, the international audit and advisory firm, and OMFIF, the independent think tank for central banking, economic policy and public investment, today reveal how central banks and regulators are responding to the climate crisis.
- 70% of central banks and regulators see climate change as ‘major threat’ to financial stability
- Inclusion of climate considerations in stress tests set to soar
- Central banks split on where responsibility for action lies
‘Four years after the Paris agreement the climate change debate continues to proliferate. Climate change will impact all financial institutions and the topic is high on the agenda of supervisors and regulators around the globe,’ says Rudi Lang, partner, Leader Financial Institutions Group at Mazars, and sponsor of the Mazars-OMFIF report, “Tackling climate change: The role of banking regulation and supervision.”
A threat to stability
The report, based on research and surveys with 33 central banks and regulatory authorities, finds that 70% of respondents consider climate change a ‘major threat’ to financial stability.
Recognition – but what reaction?
Just over half of central banks (55%) say they are monitoring climate risks. But there is disagreement over responsibilities, with 12% overall saying that, while they see climate change as a major risk, action should come from other policy institutions, such as government departments.
Regulatory approaches to climate risks
Central banks and regulatory authorities are increasingly integrating climate risks into their activities. Moving ahead, top measures expected are:
1. Assessing climate risk as a financial risk in stress tests
2. Encouraging or mandating climate-related financial disclosures
3. Setting sustainability criteria standards for green finance/lending by regulated banks
While ‘market-fixing’ initiatives – which involve correcting market failures in financial markets – are gaining traction, central banks report being wary of using more interventionist ‘market-shaping’ prudential and monetary tools for climate purposes.
Obstacles
Almost all respondents highlighted the lack of appropriate analytical tools, methodologies and data as major problems. Data availability and quality are the key concern for 84% of respondents.
Fragmentation of climate-risk frameworks is also deemed a key challenge, with 31% of respondents concerned about the comparability and consistency of supervisory frameworks.
More climate stress-testing expected
The inclusion of climate-related considerations in stress tests is still at an early stage with only a minority (15%) of respondents currently including them in their routine stress tests of financial institutions. But this is set to soar, as nearly four-fifths (79%) say they intend to do so in the future.
Facing the future
‘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,’ highlights Leila Kamdem-Fotso, partner, financial services, Mazars, and contributor to the report. ‘Encouragingly, collaboration has already started between regulators and the private sector through various initiatives.’
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About the research
The Mazars-OMFIF “Tackling climate change: The role of banking regulation and supervision” report is based on research and survey responses from 33 central banks from across six regions, representing 77% of global GDP. Most respondents are members of the Network for Greening the Financial System (NGFS). The survey was conducted by OMFIF between August and December 2019.
About the report
The full report can be downloaded on https://www.omfif.org/tacklingclimatechange/ . Visit www.mazars.com/TacklingClimateChange to hear more from report contributors Rudi Lang, Mazars, Danae Kyriakopoulou, OMFIF, and Leila Kamdem-Fotso, Mazars.
About Mazars Group
Mazars is an internationally integrated partnership, specialising in audit, accountancy, advisory, tax and legal services[1] . Operating in 91 countries and territories around the world, we draw on the expertise of 40,400 professionals – 24,400 in the Mazars integrated partnership and 16,000 via the Mazars North America Alliance - to assist clients of all sizes at every stage in their development.
About OMFIF
OMFIF is an independent think tank for central banking, economic policy and public investment, providing a neutral platform for public and private sector engagement worldwide. With teams in London, Singapore and the US, OMFIF focuses on global policy and investment themes relating to central banks, sovereign funds, pension funds, regulators and treasuries. Global Public Investors with investable assets of $37.8tn are at the heart of this network.
How can Mazars help?
In response to the major threat posed by the climate emergency to financial stability, central banks and supervisory authorities are increasingly focussing on incorporating climate risk criteria when assessing and stress testing financial institutions. In addition, several initiatives such as the UNEPFI Principles for Responsible Banking and the Task Force on Climate related Financial Disclosures (TCFD) are gaining momentum, encouraging the scaling up of green financing. At Mazars, we can support financial institutions in responding to regulatory expectations, adhering to sustainability principles, and more broadly, navigating the complex risks and make the most of opportunities emerging from sustainability and climate change.