On April 30th, the new High-level Task Force on Climate-related Financial Risks (TFCR) of the Bale Committee published its first document, a survey of its members’ initiatives regarding climate-related risks. This survey shows that climate-related risks are now widely recognized and accepted as a part of central banks and supervisors’ mandates. Yet, it also reveals how far we still are from a real integration of climate-related risks. However, our knowledge of the economic and financial impacts of climate change and the example of an exogenous crisis provided by the Covid stress the necessity to speed up this process. Central banks and financial supervisors should adopt a precautionary approach, one that starts by reducing financial flows directed toward the most polluting activities.
The TFCR gathered answers from 27 members and observers – representing 23 financial jurisdictions – of the Bale Committee, including several of the most powerful central banks and financial supervisors. Their answers show that they recognize climate change as a source of financial risks and believe that it is within their mandates to integrate these risks.
If the Bale Committee’s members and observers seem to be fully aware of the importance of climate-related risks, the initiatives they took do not allow them to integrate these risks, far from it. They are still in the process of “building knowledge” and “raising awareness”:
- 24 respondents are conducting researches on the topic.
- 23 respondents are trying to raise awareness with conferences, speeches, or publications.
- 16 have issued supervisory guidelines.
Thus, the level of preparedness of financial actors is low and rules vary from one financial jurisdiction to another. On the 23 financial jurisdictions surveyed:
- 18 jurisdictions have surveyed banks on climate-related risks, a work that shows that management of climate-related risks is “at an early stage of development”.
- 20 jurisdictions are disclosing some information on climate risks, most of them on a voluntary basis.
More importantly, the majority of respondents have not yet factored, or considered factoring, the mitigation of climate-related financial risks into the prudential capital framework. In a word, for central banks and supervisors, climate remains an area of “potential future work”.
While central banks and supervisors see no legal obstacles to integrate climate-related risks, the slowness of the process could be explained by a few technical challenges (data availability, methodology, time horizon…) but these technical challenges shouldn’t block all action.
The need to build knowledge and awareness doesn’t mean that the Bale Committee members and observers can’t immediately start integrating climate-related risks: they need to adopt a precautionary approach that reduces financial flows directed toward the most polluting assets using the information they already have.
In order to reduce climate-related risks, a progressive phase-out of fossil fuels is needed: central banks must exclude fossil fuel assets from refinancing operations and quantitative easing and financial supervisors must take them into account to adjust prudential requirements.
Coal, unconventional oil and gas and all fossil fuels development are especially incompatible with climate goals and raise climate risks, including the risk of “stranded assets”, and should be the first assets to be targeted. It is worth mentioning that coal is already becoming a “stranded asset”, with many power plants shutting down during the Covid crisis and higher-than-ever operating costs.
Additionally, when the current crisis comes to pass, central banks and supervisors could adjust countercyclical buffers to reflect the risk of climate-related systemic shocks.
The Covid crisis shouldn’t further delay action but should be taken as an opportunity to better understand how a climate-related crisis could hit finance. Inaction would be a great mistake for central banks and supervisors, a mistake that will be paid ten times over in the coming years and decades.
For further detail, see the TFCR survey.