The G7 must take the lead on climate-based financial regulation

May 21, 2024|Written by Daniela Finamore|Bank of Italy
Head and shoulders shot of Fabio Panetta in mid-speech
Fabio Panetta, governor of the Bank of Italy. © Deutsche Bundesbank

It’s all about money. This is the case even when we talk about fighting the climate crisis.

But it’s also, if not primarily, about rules, especially fair rules. This means that financial regulation can be of crucial importance, because it can massively influence the allocation of capital and investments towards more sustainable and equitable outcomes.

By integrating climate considerations into financial decision-making, regulators can help address the systemic inequalities exacerbated by climate change, promoting greater equity and resilience in society. The costs of the climate crisis are now plain for all to see: extreme events causing death and devastation in the four corners of the world increasingly require ex post public finance interventions to rebuild homes and infrastructure.

It is therefore essential to intervene ex ante to prevent or limit what is already happening. There is no shortage of opportunities though; it is up to the governments and global institutions to seize them.

In our imperfect world, there are international fora such as the G7 and G20 that increasingly are recognising the importance of integrating climate considerations into financial regulation and prudential standards to address the systemic risks posed by climate change. A climate prudential framework would involve incorporating climate-related risks into the assessment and supervision of financial institutions to ensure their resilience to climate change impacts.

Admittedly, under Brazil’s presidency the G20 – at the urging of President Lula, a proud multilateralist – is moving in the right direction, setting up a very ambitious agenda specifically on financial regulation for climate. This is a preparatory step for another major event that Brazil will host in 2025: Cop30.

It is significant that this push does not come from one of the so-called great economies, but perhaps not surprising given that the G7’s level of ambition on the issue is far from high. And it is not a matter of competence. Too often, G7 countries complain they can’t move forward on climate commitments if emerging economies do not follow.

However, work being done by Brazil and other countries demolishes that argument and the club of the largest industrialised countries no longer has any alibi. It must act, and without any delay, because a plethora of scientific reports on climate change now says that we are heading for the abyss.

This year, the presidency of the G7 falls to Italy, which therefore has the responsibility to set the agenda for the meetings and prioritise topics relevant to the current global context, like financial regulation for climate. The rightwing Italian government led by Giorgia Meloni has so far not made any particularly ambitious proposals on a rapid and just transition, nor do the other G7 finance ministers seem really interested.

Unfortunately, the recent G7 environment meeting in Venaria Reale, near Turin, also confirmed that all too often ministers, whatever their role, produce few concrete or ambitious results. But within the framework of the finance meeting, a virtuous path could be set in motion by central bank governors. Many of them are focused on this matter, calling for more coordination and international standard setting. By proactively addressing climate-related risks, central banks could enhance the resilience of the financial system and support the transition to a more sustainable economy.

Bank of Italy governor can set the tone for G7 and beyond

This becomes clear looking at the new report published by ReCommon, which shows that the biggest banks in G7 countries are responsible for more greenhouse gas emissions than those of Germany, Italy, France and the UK combined. As if that wasn’t enough, this assessment is an underestimate because of a lack of transparency and poor disclosure practices mean comprehensive data on financed emissions is not publicly available.

It’s crucial then for key decision makers to use their influence and put in place international safeguards for a both stable climate and a stable financial system.

And so here comes the governor of the Bank of Italy (BoI), Fabio Panetta, who could play a pivotal role in the whole story. Mr Panetta will co-chair the G7 finance meeting in Stresa this week and will deliver his first keynote programmatic speech at the end of May, an event of great national importance to which the political world pays much attention.

The governor should take some leadership at this crucial junction and send a clear message about the importance of urgently addressing the challenges posed by climate change through a climate prudential framework, setting the basis for corporate climate resilience and transition plans. Getting such a commitment at the G7 level would also send a clear signal for further boosting G20 negotiations. Above all it is a matter of paving the way for a just transition and building credibility for the whole G7 in terms of international climate diplomacy.

Mr Panetta could really make the difference setting the tone. Former Italian president Carlo Azeglio Ciampi and former prime minister Mario Draghi were Panetta’s predecessors and their authority gave strength to a role of fundamental importance in the institutional life of Italy.

Politicians listen carefully to a leading figure such as the governor of the BoI, who must therefore be courageous and take an initiative that goes in the right direction not only for his country, but for the entire planet.

This page was last updated May 21, 2024

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