Central banks are planning radical regulatory changes due to climate crisis - commercial banks have to prepare themselves
About 70% of central banks and regulators see the climate changes as major threat to financial stability. Climate factors will soon be compulsorily included in stress tests.
Mazars in cooperation with OMFIF (an independent think tank dealing with central banking, economic policy and public investments) have published the report "Tackling climate change: the role of banking regulation and supervision".
The report was based on comprehensive research and surveys with 33 central banks and regulatory authorities, representing the economies that make up 77% of global GDP.
About 70% of central banks and regulators consider climate change a ‘major threat’ to financial stability. Covering climate factors by stress testing will be soon a mandatory practice.
The international audit and advisory company Mazars, in cooperation with OMFIF (an independent think tank dealing with central banking, economic policy and public investments) has published the report "Tackling climate change: the role of banking regulation and supervision".
The report was based on comprehensive research and surveys with 33 central banks and regulators representing the economies that make up 77% of the global GDP.
Threat to stability
According to the report, the majority of respondents (70%) consider climate change a major threat to financial stability, through possible sudden changes in asset valuations and destruction of economic infrastructure.
More stress tests
Including climate issues in stress testing is still at an early stage of implementation, and currently only a small part (15%) of respondents include them in routine stress testing performed by financial institutions. This is expected to change soon, as almost 80% of respondents say they intend to carry out such implementation in the future.
More disclosures related to the climate
Although central banks and regulators usually are not authorized to impose specific additional disclosures in commercial bank reports, they can influence them through their recommendations.
Since 2015, there has been existing a global warming disclosure standard, developed by TCFD (task force working on disclosure of climate-related financial information, set up by the G20 group). Recommended disclosures include, but are not limited to, areas such as climate risk assessment and management, integration of climate risks in management, and CO2 emission factors.
These disclosures are not mandatory, but their importance in the global market is growing.
Promoting green financing
A natural expectation regarding central banks and regulatory authorities is to regulate the allocation of funding for so-called green projects of an ecological nature at the cost of the so-called brown projects that have a significant negative impact on the natural environment through an appropriate system of allocation limits or thresholds. However, the first challenge some regulatory institutions are already facing is defining which project is green and which is brown.
Polish banks are beginning to promote themselves as pro-ecological institutions, financing green industries and projects, and limiting funding for high-carbon energy sectors. Some banks have even announced that they will completely withdraw from financing coal energy in a few years' perspective.
Mazars, as a global company whose strategy is based on advisory services for financial institutions, has appointed a dedicated team of specialists to support the financial sector in addressing regulatory expectations in the area of climate change and in compliance with the principles of sustainable development. We have developed a set of tools for implementing framework solutions which aim is to increase the financial sector's contribution in achieving sustainable development goals.
Examples of framework solutions include responsible banking principles and green investment rules under the “Belt and Road” initiative.
The article was published in Miesięcznik Bank 2020/03 and on AleBank.pl
Want to know more?
Tackling climate change: Mazars – OMFIF report
Mazars and the Official Monetary and Financial Institutions Forum (OMFIF) are proud to have come together to produce a global report providing unique insight on current and upcoming financial regulatory evolutions aimed at tackling climate change. What policy adjustments are being undertaken in different jurisdictions around the world to assess and control climate risks? How are these actions likely to develop in future? Find out in our new research and get ready for radical regulatory change.
The banking sector is currently undergoing some of the most significant changes in its history. Recent events are creating market conditions in which financial institutions will have to focus on both fundamental balance sheet management and innovative approaches to capturing funding and ensuring profitability. An already complex regulatory environment will almost certainly become even more demanding.