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Bank of Japan says climate now a financial stability issue as it joins Network for Greening the Financial System

Governor Kuroda calls climate-related risk a “new issue for financial stability”

The Bank of Japan has become the latest central bank to join the Network for Greening the Financial System (NGFS), the green finance focused association of central banks and supervisors.

The Governor of the Bank of Japan, Haruhiko Kuroda, a former President of the Asian Development Bank, made the announcement in a speech on financial regulation and supervision at the Paris Europlace Financial forum in Tokyo in which he described climate-related risk as a “new issue for financial stability”.

The joining of the central bank of the world’s third largest economy is a boost for the NGFS, whose membership has grown from eight to 51 members and 12 observers across five continents since it was launched in 2017. 

Earlier this month, positive signs also came out of the US when Lael Brainard, who sits on the Board of Governors of the US Federal Reserve and who chairs the Committee on Financial Stability, said the Fed was in “discussions” about how it might participate in the NGFS “to learn from our international colleagues’ approaches to measuring and managing climate risks in the financial system”. 

Kuroda highlighted the increase in “severe natural disasters” Japan has faced in recent years, and alluded, cautiously, to the fact that “some that have pointed to global warming as a cause of the increase in catastrophic natural disasters”.

The “wealth of previous discussions” between regulators following the global financial crisis could “provide some valuable insights” in “addressing the environmental risks as a new issue in financial stability” – Haruhiko Kuroda

Such disasters, he continued, may lead to a “decrease in asset value and collateral value” and could become a “significant challenge for financial institutions”.

Kuroda said the decision to join the NGFS was “greatly encouraged’ by dialogues with the Governor of the Banque de France, François Villeroy de Galhau. 

France’s central bank was one of the eight founding members of the NGFS when it launched at the One Planet Summit hosted in Paris by President Emanuel Macron. 

The initiative was created to “strengthen” the global response to the Paris climate agreement by encouraging the financial system to manage climate risks better and to mobilize capital for green and low-carbon investments. 

Kuroda also added in his speech that the “wealth of previous discussions” between regulators following the global financial crisis could “provide some valuable insights” in “addressing the environmental risks as a new issue in financial stability”. 

Yesterday, the Dutch central bank, the DNB – which is also an NGFS member – announced it was launching a consultation on banking best practice when it comes to integrating climate-related risks in risk management. The consultation runs until 10 January. 

It comes as new European Central Bank President Christine Lagarde is pushing for climate change to be part of a strategic review of the ECB, according to a report in the Financial Times.

Meanwhile, a letter coordinated by NGO Positive Money Europe urged Lagarde to do more on climate: “Without any further delay, the ECB should commit to gradually eliminating carbon-intensive assets from its portfolios, starting with immediate divestment from coal-related assets.” It comes as the European Parliament has today declared a “climate emergency”.