Major think tanks and advocacy groups working at the intersection of climate change and financial policy have called for changes to the Basel Accords on global banking regulation and for an approach to climate risk that includes active mitigation as well as disclosure and scenario analysis.
In a policy brief released on Tuesday, the campaigning organisations highlighted the vicious cycle of the financial sector funding the very climate change that threatens its own stability. To combat this, they proposed an action plan for financial regulators to break this climate finance ‘doom loop’.
- Adopt a precautionary approach to climate risk.
- Adapt Basel Accord Pillar 1 capital requirements to take into account the financial risks caused by fossil fuel exposures.
- Address systemic risk from climate change by expanding Basel Framework buffers.
- Require the inclusion of climate criteria in the decision-making of financial institutions.
The brief proposes that climate risk policies should move beyond scenario analysis and disclosure to actively mitigate climate change and its risks to the banking and financial system. It also points out that the radical uncertainty of climate risk makes full and efficient price discovery impossible.
The authors recommend that the Basel Accords which regulate global banking should be altered to incorporate the financial risks caused by fossil fuel exposures into capital requirements, as well as implementing buffers to mitigate the systemic risk.
Global financial regulators should also require banks to integrate climate criteria into their financing decisions by setting regulatory expectations that include Paris-aligned climate targets, five-year transition plans, and a mechanism to integrate climate criteria into financing decisions.
“Climate-related risks are a significant threat for the financial system and can only truly be integrated by adopting a precautionary approach, namely to mitigate climate change to mitigate the related risks,” said brief author Paul Schreiber of Reclaim Finance. “Building on this initial assessment, the Green Swan Toolkit provides regulators, central bankers and financial institutions with three key measures to address climate risks while contributing to the fight against climate change.”
Jointly organised by the Bank for International Settlements, the Bank of France, the International Monetary Fund and the Network for Greening the Financial System, the Green Swan Conference is an unprecedented gathering of central bankers and financial supervisors focused on the question of “How in practice can the financial sector take immediate action against climate change-related risks?”.
The conference, which begins on Wednesday and runs for three days, comes just a week before a UK-hosted G7 summit on creating a “greener, more prosperous future” in the aftermath of the Covid-19 pandemic. The UK, a pioneer in climate-related financial regulation, will also host November’s pivotal UN COP26 conference.
The civil society groups which contributed to the Green Swan Toolkit are an international collaboration of some of the leading voices on climate-related financial regulation. They include Reclaim Finance, Positive Money, the Climate Safe Lending Network, the New Economics Foundation, Re:Common, Greenpeace, BankTrack and Public Citizen.
This page was last updated June 8, 2021
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