With just a few days left to go, 2023 is set to be the hottest year on record. Experts agree that, with rising temperatures, increasing extreme weather patterns, and concerns about climate change impacting biodiversity, more needs to be done to ensure the world transitions to a greener economy.
Will 2024 be the year that more urgent steps are taken in that direction? And more importantly, what role can central banks take to help with the transition? Green Central Banking asked leading climate scientists, economists, and nonprofits about their hopes for what central bankers and financial regulators across the world should focus on in the coming year.
More accurate climate damage estimates
One area where central bankers can improve is to revise their damage estimates from climate change, said Steven Keen, a distinguished research fellow at University College London. He says many of the estimates that regulators use are based on papers that come from economists, not scientists, and are lacking in accuracy.
“They themselves don’t know much about climate change. They therefore accepted statements about climate change, and any scientist who saw it would probably reject the papers for publication,” he said.
Instead, he recommended that central bankers work with scientists to make sure their climate damage estimates and scenarios are scientifically accurate.
“We would like central banks to work with us to do that research to develop a set of damage functions for economists, designed by scientists,” he said.
More data and research
Several experts spoke about the need for more data and research, including continued efforts to understand climate scenarios.
Saliem Fakir, executive director at the African Climate Foundation, said central bankers should make more of an effort to share information and experience among themselves, for example through the Network for Greening the Financial System.
“More initiatives with focus on knowledge sharing and capacity building between the public and private sectors with regards to climate change risk management, such as the Climate Financial Risk Forum in the UK, will be particularly important,” he said.
It is also vital that climate scenario analysis is accompanied by open dialogues between regulators and financial institutions, he added.
“This can help put pressure on financial institutions to improve their own risk management capacities and hold them accountable for meeting their decarbonisation targets,” he said.
Anne Perrault, senior climate finance policy counsel at Public Citizen, also highlighted the need for more research, especially in regard to how increasingly high insurance policies are impacting low-income communities and people of colour.
“Research is urgently needed to understand the implications of this growing climate risk-related inequality for financial stability. And measures must be taken to address this risk,” she said.
Better understanding of climate adaptation
Climate change is already here and countries are already responding by passing climate adaptation plans, said Fakir. However, climate adaptation is a topic that is not discussed in an international context between central banks, he said. In 2024, would like to see central bankers to become more aware of national adoption plans and related international debates.
Understanding climate adaptation, Fakir said, would help central bankers with the technical advice they could give to governments, as well as understand the role of their own objectives.
“Such considerations should also help inform the development and design of climate change financial policies, such as with regards to the disclosure of climate-related financial risks,” he said.
Independent regulations that include Indigenous People and local communities
Shona Hawkes, senior advisor at the Rainforest Action Network, said it was vital that central banks and regulators don’t “copy and paste” policies written by financial institutions, as she says was done with the Taskforce on Nature-related Financial Disclosures.
“We want independent, evidence-based regulations that are based on research and expert advice of what actually works to change financier behaviour,” she said.
That means including Indigenous Peoples and local communities in discussions, especially in areas where “nature and climate are at threat”.
“In many, if not most, jurisdictions it is perfectly legal for financial institutions to finance and profit from companies involved in environmental crime. We want regulators to close that door – in the same way they did on corruption,” she said.
Encourage financial institutions to reduce their lending to the fossil fuel industry
Perrault said she would like bank regulators to provide incentives for financial institutions to reduce their lending and underwriting of the fossil fuel industry.
Similarly, central banks should “ensure a more just allocation of financial costs and risks related to climate risk”.
Larger financial institutions are financially benefiting from their support of”‘dirty” energy, while smaller institutions like community banks and consumers are disproportionately impacted by fossil fuel emissions.
Integrate climate risk into insurance supervision
One of the biggest issues that Jordan Haedtler, climate financial policy consultant, says he’ll be focused on in 2024 is whether US state lawmakers will implement Treasury recommendations to integrate climate risk into insurance regulation.
Insurance in the US is regulated on a state level, which means the federal government can only make recommendations. The increase in wildfires and flooding due to climate change has caused some insurance companies in states like California and Florida to stop issuing new policies and increase premiums.
“State insurance supervisors, by and large, don’t have the resources or capacity to fully account for all of the regulatory problems that insurance companies pose, particularly to the overall financial system,” said Haedtler.
While it is uncertain if state insurance regulators will heed the Treasury’s recommendations, some such as including wildfire risk in capital requirements are surely needed, said Haedtler.
The impact of these physical climate risks on the insurance sector could have broader risks on the housing sector, potentially threatening financial stability, Perrault said.
“As insurance becomes inaccessible, areas become uninhabitable, prompting migrations to new areas with a host of challenges for which the economic and, in turn, financial implications are unclear,” she said.
Fakir from the African Climate Foundation also noted the importance of considering the insurance sector when it comes to climate adaptation. He noted that regulators need to strike a balance between using insurance as a tool for managing climate risks and making sure it is not used as a substitute for more effective solutions.
“The role of the insurance sector in helping manage climate change-related risks needs to be considered strategically alongside national-level climate adaptation plans,” Fakir said.
Put in place monetary policy tools to respond to climate change volatility
The high interest rate environment over the past few years has put a damper on green energy investments. Many of these renewable and clean energy startups need substantially more capital than fossil fuel energy, so financing these projects is more expensive.
One way to circumvent this problem is to look at the monetary policy tools that central bankers can use to make financing the transition to a green economy cheaper.
For example, Haedtler said one possible way that could be done in the US is for Congress to create a national investment authority that could establish a permanent municipal liquidity facility. This would “guarantee a more affordable financing for clean energy deployment and for climate resilient investments by state and local governments”.
Others, like French president Emmanuel Macron, have called for a dual interest rate environment where interest rates for clean energy projects are cheaper. Paul Schreiber, a senior policy analyst at French nonprofit Reclaim Finance, said the European Central Bank should “green” its rate setting policy, to help fund sustainable energy projects and “avoid a slowdown of the EU transition and manage inflation”.
“It would also contribute to solving the absurdity – noted by Macron – of much-needed renewables being financed at the same rate as climate-destructive fossil fuels projects,” he said.
This page was last updated December 21, 2023
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