A new report reveals a consensus among financial system actors for climate finance policies not currently being implemented.
These are the findings presented in Financial Stability in a Planetary Emergency by James Vaccaro, Executive Director of the Climate Safe Lending Network (CLSN), and David Barmes, Lead Research Economist at Positive Money UK.
Recognising that there may be as few as six years left at current emission levels before climate change above 1.5C is locked in, the authors outline practical policies financial regulators could adopt “if given the responsibility of regulating the financial system in line with the needs of society and the planet.”
Operating from the premise that financial stability is “100% conditional on planetary stability,” the report outlines 10 specific policy proposals to manage climate risk to financial system stability. These proposals are then assessed for feasibility and potential impact by 50 sustainable finance experts from across academia, civil society, commercial banks, central banks, and the investor community. Substantial agreement was found on both the feasibility and effectiveness of seven of the policies considered.
Policy proposals covered in the report include expanding the time horizon of climate stress tests, adjusting capital instruments to account for climate-related risks, and developing ‘polluter pays’ mechanisms for the financial sector.
The report shows that regulators should set out a clear framework for what Paris and net-zero alignment mean in practice, and they should require KYCO2 rules to ensure banks collect sufficient climate and environmental impact data from their customers.
On financing, a non-proliferation treaty on fossil fuel and deforestation finance is proposed, along with a ‘bad bank’ to manage legacy exposures to potentially stranded assets. The authors suggest that green wholesale lending, refinancing or credit enhancement facilities should be incentivised to accelerate the transition to net-zero, calling for the redirection of capital towards supporting community resilience, and for a global and legally backed reset on the definition of ‘fiduciary responsibility’ to incorporate climatic, ecological and social imperatives.
The report was launched at an online event including a keynote speech by Ali Zaidi, deputy national climate advisor for the White House and a discussion moderated by Claire Kramer Mills, assistant vice president of the Federal Reserve Bank of New York. It is part of Thought Leadership Series: Aligning Finance for the Net-Zero Economy, organised by the UNEP FI and EIT Climate KIC.
The CSLN intends to build on its findings to broaden the debate in the climate finance community, refine and improve the policy proposals discussed, and engage bodies such as the Network for Greening the Financial System and the COP26 Finance Hub.
This page was last updated April 27, 2021
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