Central banks are planning radical regulatory changes to respond to the climate crisis - it's time for banks to get ready
70% of central banks and regulators see climate change as a 'serious threat' to financial stability
The inclusion of climate considerations in stress tests will increase exponentially
Central banks are divided on the responsibility for the actions to be taken
February 2020: Mazars, the international auditing and consulting firm, and OMFIF, the think tank independent for central banks, economic policy and public investment, reveal how central banks and regulators are responding to the climate crisis.
'Four years after the signing of the Paris Agreement, the debate around climate change continues to proliferate. Climate change will impact all financial institutions and the issue is high on the agenda of supervisors and regulators globally'Rudi Lang, head of Financial Institutions at the Mazars Group and promoter of the Mazars-OMFIF report, 'Fighting climate change: The role of regulation and supervision in Banking'.
A threat to stability
The report, based on a survey and questionnaire of 33 central banks and supervisory authorities, concluded that 70% of the participants consider climate change a 'serious threat' to financial stability.
Recognition - but what response?
More than half of the central banks (55%) say they are monitoring climate risks. However, there is disagreement over responsibilities in this area, with 12% arguing that, although they see climate change as a serious risk, action should come from other institutions, such as government bodies.
Regulatory approaches to climate risks
Central banks and supervisory authorities are progressively integrating climate risks into their activities. In the future, the main measures expected are:
- Assess climate risk as a financial risk in stress tests;
- Encouraging or requesting climate-related financial disclosures;
- Establish sustainability standards for 'green' financing by supervised banks.
As market smoothing initiatives - which involve correcting financial market failures - are gaining traction, central banks admit they are wary of restrictive, interventionist monetary tools designed to shape the market for climate purposes.
Almost all the participants in the report highlight the lack of appropriate analysis tools, methodologies and information as considerable problems. The availability and quality of information are key concerns for 84% of the participants.
The fragmentation of frameworks on climate risks is also seen as a key challenge, with 31% of participants saying they are concerned about the compatibility and consistency of supervisory frameworks.
More climate-related stress tests
The inclusion of climate-related considerations in stress tests is still at an early stage, with only a minority (15%) of participants including them in their routine stress tests of financial institutions. But this number is expected to skyrocket, as more than ¾ (79%) say they intend to do so in the future.
Facing the future
"The success of any measure will depend on the commitment of the market players, who will have to assess, disclose and mitigate the risks associated with climate change and continue to change some of their practices," he said. Leila Kamdem-Fotso, Financial Services Partner at Mazars, who contributed to this report. 'Encouragingly, collaboration has already begun between regulators and the private sector through various initiatives'.
About the research
The Mazars-OMFIF report 'Fighting climate change: The role of regulation and supervision in Banking' was drawn up on the basis of a survey and questionnaire carried out at 33 central banks in six regions, representing 77% of global GDP. Most of the participants are members of the Network for Greening the Financial System (NGFS). The questionnaire was carried out by OMFIF between August and December 2019.
About the report
The full report is available at https://www.mazars.pt/Home/Noticias/Publicacoes/Estudos-e-Pesquisas/Combater-as-mudancas-climaticas-Mazars-OMFIF. Visit www.mazars.com/TacklingClimateChange to find out more about the speakers in the report: Rudi Lang from Mazars, Danae Kyriakopoulou from OMFIF and Leila Kamdem-Fotso from Mazars.
About Mazars Group
Mazars is an international, integrated partnership specializing in auditing, accounting, consulting, tax and legal services. It operates in 91 countries and territories worldwide, relying on the expertise of 40,400 professionals - 24,400 in the Mazars integrated partnership and 16,000 through the Mazars North America Alliance - to support clients of any size at every stage of their development.
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