Climate scenarios need updating, says new NGFS vice-chair Tshazibana

May 30, 2024|Written by |Network for Greening the Financial System

Updating the Network for Greening the Financial System’s scenarios to better reflect the real risks of climate change is a key priority for the new NGFS leadership, according to its vice-chair Fundi Tshazibana.

In her first interview about her work at the NGFS since her appointment in January, Tshazibana tells Green Central Banking that goals for her two-year term include building up the range of tools available for central banks that are seeking a more active role in the green transition.

“We’ve got our hands full,” Tshazibana says of herself and new NGFS chair Sabine Mauderer, an executive board member of the Deutsche Bundesbank. “Sabine and I spent quite a bit of time discussing the things we want to focus on. And I wish I could say it was one or three, but there’s actually quite a few.”

As a deputy governor of the South African Reserve Bank (Sarb), Tshazibana’s appointment to a key leadership role in the NGFS is a reflection of the network’s shift towards better representation of the global south, with membership now standing at more than 130 central banks and supervisors worldwide.

We have managed to achieve a broader membership among emerging market countries,” Tshazibana says. “This is a concern that we’ve had in the past: whether the NGFS is just a network that’s made up of western countries, if it’s relevant for everyone else.”

She cautions that NGFS membership cannot become a greenwashing opportunity for central banks that simply want to appear to be proactive on climate change.

“We want to see more engagement among the new joiners and active participation in the network,” Tshazibana says. “We started the NGFS as a network of the willing, but we are moving more and more to having a network of the committed.”

‘We had to start somewhere’

Tshazibana is quick to recognise the criticism that the NGFS has received in the past over its climate change scenarios, which are widely used by central banks and supervisors to plan for the future impact of climate change on the economy.

Critics from the worlds of academia, finance and environmental activism alike argue that the scenarios seriously underestimate the risks because they are based on old data and do not incorporate key elements of climate science such as tipping points. The upshot is that central banks worldwide are adopting overly complacent predictions.

“For climate risk, the past is not a good predictor of the future,” Tshazibana acknowledges.

“One of the things that the scenarios have been criticised for was, well, they’re not severe enough. So we are doing additional work within that working group, looking at different damage functions and what is it that can be done in that space.”

Tshazibana defends the NGFS’s work on scenarios to date. “We went out on a limb, and we had to start somewhere. One of the things that we are realising and we are focusing a lot on is the amount of learning that happens as you are doing model-based work.”

Recognising differences

As the NGFS grows, Tshazibana is passionate about providing tools and guidance that are useful in central banks’ national contexts, particularly in developing countries where transition plans may require a broader focus on objectives such as poverty reduction or economic diversification.

In many African economies, “macroeconomic stability is proving to be a big obstacle to growth and economic development. Central banks and financial supervisors have to operate in difficult fiscal conditions and this is challenging the delivery of their core mandates,” she says.

“So in these economies, many of the actions that are required to encourage green transition are probably the same as what’s required to ensure macroeconomic stability and sustainable growth.”

She adds: “There is a role that we’ve got to think about as central banks in emerging market countries in terms of ensuring that our financial markets have the right information that is required in order for them to enable transition finance to come into our economies.”

This makes the role of the NGFS and central banks in helping to improve the infrastructure and provision of climate data, disclosure requirements and market transparency “very important”, Tshazibana says.

‘Central banks can’t replace governments’

Activists who would like central banks to take on a more vigorous role in the fight against climate change often argue that global heating has major implications for their key mandate of ensuring price stability, as extreme weather is increasingly contributing to inflation.

Tshazibana points out that price stability will in turn affect our ability to transition to net zero in the least disruptive way possible.

“Without macroeconomic stability, the cost of green transition will be multiples larger than what it is, and the pace of green transition can be slower. So when we think about the role of central banks in the fight of climate change, we need to recognise that the most important role that we play relates to price and financial stability,” she says.

“In the current context, I do not think central bank mandates need to be adjusted for any specific risk, other than us considering the way in which the risk affects our existing mandate as a start.” She stresses: “Central banks cannot replace the role of governments, and central banks are not the leaders in terms of climate policy.”

As for the role of the NGFS, Tshazibana says its contribution is plain to see, for example, “in feeding into the work of standard setting-bodies like the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors”.

“We don’t want to create a network that’s just there for its own sake, but a network that is useful,” she says. “And you be the judge, in terms of what you are seeing.”

This page was last updated May 30, 2024

Share this article