Financial Times/Leslie Hook: Central bank chiefs sound warning on climate change

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Central bank chiefs sound warning on climate change
Call for more regulatory oversight to address risks to financial system
© Bloomberg

Leslie Hook in Amsterdam 7 hours ago
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Central bank governors from the UK, France and the Netherlands are considering increasing regulatory oversight to address climate-related risks to the financial system, including carbon stress tests for banks.

Speaking at a meeting of financial supervisors in Amsterdam, Bank of England governor Mark Carney warned of the “catastrophic impacts” of climate change and the dangers that could result from an abrupt transition to a low-carbon economy.

François Villeroy de Galhau, head of the French central bank, at the same gathering lobbied for compulsory disclosure of EU banks’ and insurers’ climate-related risks, penalties for investing in assets linked to high emissions, as well as carbon stress tests for all financial institutions — a measure that would be unprecedented for the banking sector.

“What we will need are forward-looking stress tests assessing the comprehensive interaction between climate change and assets and liabilities,” Mr Villeroy de Galhau told the FT. “So this is our first technical challenge: how can we elaborate on the link between climate scenarios and economic scenarios?”

While the gathering of central bankers did not agree on the specifics of what should be done, they accepted that regulation needed to adapt to the risks posed by climate change.

“Once climate change becomes a clear and present danger to financial stability, it may already be too late,” Mr Carney said. “Our responsibility is to work in a way that puts the financial system as a whole in a position so it can adjust in a smooth and effective and orderly fashion as climate policies adapt.”

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Following the Paris climate agreement in 2015, European financial supervisors have been increasingly scrutinising the banking and insurance sectors to understand their exposure to climate risks and their preparedness for a transition to a low-carbon energy system.

More than 230 companies, including financial institutions with $80tn in assets under management, have signed up for voluntary disclosures recommended by the Task Force on Climate-Related Financial Disclosure, a network set up by the Financial Stability Board.

Mr Villeroy de Galhau said a carbon stress test for financial institutions could assess “the probability of default over a much longer horizon than the usual one of one year”. He also said climate-related disclosures could “gradually evolve” to become compulsory, along with a “comply or explain” option that would allow companies to issue an explanation if they decided not to disclose.

However, the idea of penalising investments in brown assets is contentious, with critics arguing this could create distortion in the market. Others say it is premature to consider compulsory climate-related disclosure requirements and that carbon stress tests are still some time away.

Mr Carney said the Bank of England would consider carbon stress tests of banks after its review of the sector’s exposure to climate-related risk is competed this year. He also said: “I do not expect a carbon stress test in the next year or two . . . I think it develops over time.”

The BoE governor noted that insurers already assessed climate-related risks such as extreme weather events, pointing out that Lloyds of London underwriters were required to consider climate change in their models.

Klaas Knot, Dutch central bank governor, also attended the gathering along with Frank Elderson, the institution’s executive director. Mr Elderson said it was too soon to talk about mandatory climate disclosures but praised the progress regulators had made in understanding climate-related risks, drawing a parallel with the way the rise of the internet had changed regulators’ thinking.

“There was a day that no regulator thought about cyber crime, and now we all do,” he said. “So we have a record of being able to incorporate — in our thinking, our procedures and our ways of engaging with the sector — a new risk.”
Copyright The Financial Times Limited 2018. All rights reserved.
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