The Network for Greening the Financial System: Summer is Coming

Vibeka Mair reports on the recent central bank climate event

“Summer is coming,” was the Games of Thrones-esque message from central bankers at the recent launch of the first report from the Central Banks and Supervisors Network for Greening the Financial System (NGFS).
The NGFS was formed just 16 months ago by eight central banks to address climate change, and has since grown to 34 members and five observers globally, representing 45% of global greenhouse gas emissions and 44% of global GDP. It released its first report at the offices of its secretariat, the Banque de France, just days after another momentous event – the final series of the fantasy drama.

“The Financial Stability Board has become the Financial Sustainability Board” – central bankers describe their 2040 nirvana

And the NGFS inspires a similar level of fandom from the audience, with people taking selfies with Bank of England Governor Mark Carney and one speaker saying the report “made him weep with joy”. Banque de France Governor François Villeroy de Galhau opened the standing-room-only conference with a short tribute to the Notre Dame fire, followed by a quote from English-born American political philosopher Thomas Paine: “If there must be trouble let it be in my day that my child may have peace.”
“This is probably the best sentence against short-termism,” said Villeroy de Galhau, a former BNP Paribas banker. “Climate change is real. It is global. And it is irreversible…. finance cannot replace policymakers. But finance can help and as a central banker and supervisor, the Banque de France is determined to help.”
Along with Villeroy de Galhau, the event featured speeches from Carney, Frank Elderson, board member of the Dutch central bank DNB, Sabine Lautenschläger, member of the executive board of the European Central Bank and deputy governors from the Reserve Bank of Australia, Banco de España and Banque de France.

A call for action
Villeroy de Galhau highlighted that the NGFS’s interim report last October concluded that climate-related risks were a source of financial risk, and therefore fit within the mandate of central banks.
“It was simple. But it was new and extremely important,” he said.
Building on this, the first NGFS report, A call for action Climate change as source of financial risk, makes six recommendations. Four recommendations are addressed to central banks, including integrating climate-related risks into supervision of banks, bridging data gaps and integrating sustainability into own-portfolio management.
Concrete action is expected to follow, with the NGFS planning to launch a supervisory handbook by 2020 as a start.
The final two recommendations from the NGFS focus on policymakers, urging robust climate-related disclosures and the development of a sustainable taxonomy.
On this, Villeroy de Galhau acknowledged, “disclosures and taxonomies are two faces of the same coin”.
“We know we are currently facing a chicken and egg dilemma in order to bridge the data gaps. We must rely on enhanced disclosures which need to be built on sound taxonomies. But we need some data to set out a proper taxonomy. It is time to follow the path of the TCFD on one side and by the European Commission on the other,” he said, referring to the current development of an EU green taxonomy.
Thomas Vellacott, CEO at WWF Switzerland, said there needed to be a broader focus on nature arguing for a “taskforce on nature-related risks”. The Climate Works Foundation spoke about its new initiative, INSPIRE, which aims to mobilise the academic, research and think tank community to support the work of the NGFS.
The highlight of the event was a ‘rockstar panel’ of central bankers: Carney, Elderson and Villeroy de Galhau. They were asked to look ahead to 2040 and describe what a world that has reached a sustainable nirvana would look like.
Carney envisaged climate risk management and climate-related return management being mainstream, with mandatory climate-related disclosure being comprehensive, consistent and decision-useful.Scenario analysis, stress testing and board engagement on climate risks, he added, would “be just a regular occurrence”, and companies acting on climate change would see outperformance because of policy developments. He also said central banks with balance sheets and membership of the NGFS would follow the Banque de France’s lead in applying TCFD principles, and announced the Bank of England would start soon.
In 2040, Elderson saw banks and supervisors realising the leverage they have over the financial sector. He also saw a broadening of focus beyond climate risk, including addressing the financial risks posed by water and resource scarcity, biodiversity issues and human rights violations.
Villeroy de Galhau predicted in 2040 the NGFS would disappear and be integrated into various standard setting bodies including the BASEL Committee “under the umbrella of the former Financial Stability Board, which has become the Financial Sustainability Board”.
During the Q&A audience members highlighted the importance of artificial intelligence and fintech to the debate. The issue was also a formal focus at the event. On this Carney revealed that in an upcoming progress report from the TCFD, there would be a machine-learning screen of 18,200 companies across the G20 to assess the quality of their disclosures, with a deep dive into 200 firms.
Carney was also pressed on the absence of the US Federal Reserve from the NGFS. “There’s space for the world’s largest economy,” he said.
Elderson said: “I’m personally aware that US is not just the biggest economy. It is the biggest pool of intellectual energy and delivery power… One day they will understand it is not a political issue in terms of climate risk.”
Speaking later in the day, former California Insurance Commissioner Dave Jones, one of the first supervisors to mandate climate change disclosure, said: “In the US climate change has become very politicised and unfortunately that politicisation has been used by some sectors of the economy as a basis to refrain from thinking about engaging on those issues.”
As well as the absence of the US, Guy Debelle, Deputy Governor of the Reserve Bank of Australia, highlighted the lack of emerging market economies from the NGFS, arguing that for many of them climate risk was not a financial risk, but potentially sovereign risk. The Banque de France said it was working on engagement.

“There’s space for the world’s largest economy” – Mark Carney on the absence of the US from NGFS

ECB moving on climate risk

Sabine Lautenschläger, member of the Executive Board at the European Central Bank, said for the first time this year it would formerly acknowledge climate change related risks in its Single Supervisory Mechanism (SSM), which sets out its high-level priority areas for supervising banks.
She also disclosed preliminary details on a survey it conducted with banks on climate change risks. “It shows quite clearly that almost every bank is aware of climate change related risks and they do look into their exposures. But I think they mostly see it as a kind of social responsibility of the companies and not sufficiently what we expect them to do in a risk management framework.”
Lautenschläger sat on the last panel of the day, alongside Debelle who highlighted that the event, and the NGFS debate hadn’t talked much about monetary policy. “That’s what central banks do a lot of, and it’s useful to think about how climate effects monetary policy. It is to some extent setting the example for all these financial institutions and asking them how climate is going to affect your business mode. We can at least start by saying how climate change affects our business model.”