Central banks now really seem to ‘get’ climate change risk and the formation of the new green network is profoundly welcome.
The momentum kick-started by Mark Carney’s Tragedy of the Horizon speech in 2015 that led to the TCFD has clearly been maintained – though we must stress that it is not only the Bank of England that has picked up the issue.
But the TCFD has been a game-changer for sustainable investment and the new Network can build on this.
The new group is formally called the Central Bank and Supervisors Network for Greening the Financial System, the CBSNGFS (?!). It may not trip off the tongue but it could prove to be a pivotal development in sustainable finance.
Carney took soundings from ESG figures like Mark Campanale, Nick Robins and Saker Nusseibeh and we’d like to think some of the others in the new network, such as the Dutch central bank, have been listening to the pension funds it oversees. On top of this, French leadership in this area is clear and it’s also great to have authorities from Germany, Singapore and China on board too.
Given the presence of three Eurozone institutions, the ‘Eurosystem’ headed by the European Central Bank is well represented and we know the ECB has held meetings with HSBC and Amundi on portfolio decarbonisation.
Though, in an economic bulletin in July, it said that while it “shares the view that an awareness of environmental issues, together with ethical and socially responsible behaviour, are important for society, it is nevertheless up to political decision-makers (in the first instance) to agree on, define and promote appropriate policies and measures”.
Notable by their absence among the founding institutions are the US Federal Reserve and the Bank of Japan. As far as we know, the Fed has never mentioned climate change and it is difficult to see that happening at the moment.The Bank of Japan may be a more likely candidate, especially given Abenomics and the progress coming out of the Government Pension Investment Fund.
In February, the Australian Prudential Regulation Authority (APRA) identified climate change and prudential risk, so APRA is perhaps another potential member. And Norges Bank, as the ultimate manager of the Government Pension Fund Global, is as plugged into these issues as any central bank given the fund has floated the idea of fossil fuel divestment.
The new network reflects a lot of unheralded work at central banks on climate change.
Last year, the European Systemic Risk Board (ESRB), which coordinates procedures such as stress testing for supervisors and central banks in the EU, released a report on the systemic risks linked to a transition to a low-carbon economy. Following on from its findings, RI understands the board convened a meeting with central banks to discuss the possibility of developing stress tests or scenario analysis to address these risks, which could be added to the existing stress tests undertaken as part of EU-wide rules.
And earlier this year, the Bank of England ramped up its work on climate change, turning its attention from the insurance sector to the country’s banks. More recently, the head of the Dutch central bank called for stronger carbon pricing as part of its wider efforts on the subject, which also include plans to “take additional steps to embed climate-related risks more firmly into the supervisory approach”.
We also understand that other central banks, such as the Banco de España, are increasingly looking at these issues, so the central bank climate change ‘movement’ is deeper and broader than it appears.
If we might be so bold as to speak for the entire ESG sector: welcome to the fold!
With reporting by Sophie Robinson-Tillett.