Financial Stability in a Planetary Emergency: The Role of Banking Regulators in a Burning World

This report, written by James Vaccaro, Executive Director of the Climate Safe Lending Network, and David Barmes, Economist at Positive Money, details a series of cutting-edge policy proposals that financial regulators and policy makers could take if they were given the responsibility of regulating the financial system in line with the needs of society and the planet.

This report was based on an extensive literature review on climate risks and financial policymaking, and on interviews with leading thinkers on sustainable finance and policy. The policy proposals were then assessed according to feasibility and potential impact by 50 sustainable finance experts from across academia, civil society, commercial banks, central banks and the investor community, finding a consensus across the financial system for climate finance proposals not currently being implemented.

Operating from the premise that financial stability is “100% conditional on planetary stability,” the report recommends ten specific policies to manage systemic climate risk:

1. Expand system-wide climate stress-testing to include a scenario for the physical risks beyond 2050 and a scenario for a transition by 2030.
2. Adjust capital instruments to account for climate-related financial risks.
3. Develop polluter-pays mechanisms for the financial sector, allocating proceeds to deposit guarantee schemes or green projects.
4. Set out a clear framework for what Paris and net-zero alignment mean in practice, and the consequences of falling short of expectations.
5. Introduce mandatory KYCO2 rules based on ID verification processes to ensure banks are collecting sufficient climate and environmental impact data from clients.
6. A financial non-proliferation treaty on fossil fuel and deforestation finance, signed by central banks and all regulated banking institutions.
7. The creation of a ‘bad bank’ to manage the legacy exposures to assets at high risk of being stranded due to transition policies.
8. Incentivised green wholesale lending, refinancing or credit enhancement facilities, to accelerate the transition to net-zero.
9. Redirect capital towards supporting community resilience and climate action through diverse networks of local and specialist financial institutions.
10. A global reset on the definition of ‘fiduciary responsibility’ based on a legal framework for environmental impact

The report concludes with the survey results and the finding of wide agreement on many of the policies proposed. The adjustment of capital instruments to reflect climate-related financial risks and the development of a clear Paris-aligned framework were ranked as the two most impactful of the policy proposals, with green lending seen as most feasible.

This report is part of the Thought Leadership Series: Aligning Finance for the Net-Zero Economy, organised by the United Nations Environment Programme Finance Initiative and EIT Climate KIC.