In its first report, the Network of Central Banks and Financial Supervisors for Greening the Financial System (NGFS) sets out an ambitious scope of work to make central banks take a major role in supporting the transition towards a sustainable economy.

There is no doubt that climate change is not only endangering our environment and natural ecosystems, but will also profoundly affect the overall economy – and therefore the entire financial system. Climate change will make the next financial crisis even worse.

Central banks are slowly realizing the amplitude of those risks, and some are now seriously trying to think of how they can not only mitigate them, but also support the transition towards a low-carbon economy.

To do so, one year ago a group of eight central banks and supervisors established a Network of Central Banks and Supervisors for Greening the Financial System (NGFS). Led by prominent central banks such as the Bank of England, the Dutch National Bank and the Bank of France, the network’s aim is to “help strengthen the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development.”

The NGFS has only started its work, but signs confirm it could provide a significant contribution towards aligning central banks’ activities with sustainability. In its first report, the NGFS indeed acknowledges that “there is a growing pressure from the public and industry for Central Banks and Supervisors to act.” This admission indicates that the work of NGOs like Positive Money Europe is paying off.

“Climate change will affect the global economy and so the financial system that supports it”

“NGFS Members acknowledge that climate-related risks are a source of financial risk. It is therefore within the mandates of Central Banks and Supervisors to ensure the financial system is resilient to these risks.” the report reads.

More importantly, the report flags key gaps in the current policy framework of central banks and supervisors. Notably, the NGFS points to the fact that “Climate or environmental-related criteria are not yet sufficiently accounted for in internal credit assessments or in the models of credit agencies […] which many Central Banks rely on for their operations.”

“So far the integration of climate and environment-related factors into prudential supervision has been limited.” the report acknowledges further on, before listing an important number of difficulties such as the lack of data and of a taxonomy, and the fact that climate-related risks are not currently factored in the macroeconomic models used by financial regulators.

The report also refers to our own criticism of the European Central Bank, by acknowledging that “most NGFS Central Banks do not take into account climate-related risk in the conduct of their monetary policy.” This is notably the case of the ECB’s corporate quantitative easing programme, which currently subsidizes many of the most polluting multinationals in Europe, to the tune of 170 billion euros.

Those shortcomings do call for urgent action in adjusting financial regulators’ approach to risk measurement – which the NGFS does not shy away from.

The report elaborates a comprehensive work plan towards enabling central banks to incorporate climate-related risks into supervisory models and the establishment of a robust approach in assessing the level of climate-risks for each financial asset.

Beyond supervisory activities, the NGFS wants to pursue a more ambitious goal, namely to make Central Banks and Supervisors ‘lead by example’ in integrating climate-related criteria in their operations. However, the report’s conclusion does not explicitly mention whether the NGFS’ future work will include research into greening monetary policy tools such as collateral requirements and asset purchases. We hope this will be the case.

In any case, Positive Money Europe reiterates its support for the establishment of the NGFS network and will continue to monitor its progress.

Ultimately, we hope the NGFS will inspire the European Central Bank to align its quantitative easing programme and other policy instruments to the EU’s ambitious sustainable finance agenda. The ECB, which joined the NGFS in May, has made some verbal statements in this direction, but no concrete steps have been taken until now.



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