Central banks plan radical regulatory changes to tackle climate crisis – time for banks to get ready
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:
- Assessing climate risk as a financial risk in stress tests
- Encouraging or mandating climate-related financial disclosures
- 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.’
Media contact
Olivia Collins, Marketing Manager, Mazars USA LLP, olivia.collins@mazarsusa.com
About Mazars USA LLP
Mazars USA LLP is an independent member firm of Mazars Group, an international audit, tax and advisory organization with operations in 100+ countries and territories. With roots going back to 1921 in the US, the firm has significant national presence in strategic geographies, providing seamless access to 33,000+ professionals around the world. Our industry specialists deliver tailored services to a wide range of clients across sectors, including individuals, high-growth emerging companies, privately-owned businesses and large enterprises.
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 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. www.omfif.org