Central banks plan radical regulatory changes to tackle climate crisis
- 70% of central banks and regulators see climate change as ‘major threat’ to financial stability
- Inclusion of climate considerations in stress tests set to soar
- Central banks split on where responsibility for action lies
Mazars, the international audit and advisory firm, and OMFIF, the independent think tank for central banking, economic policy and public investment, reveal how central banks and regulators are responding to the climate crisis.
A threat to stability
The report, based on research and surveys with 33 central banks and regulatory authorities, finds that 70% of respondents consider climate change a ‘major threat’ to financial stability.
Recognition – but what reaction?
Just over half of central banks (55%) say they are monitoring climate risks. But there is disagreement over responsibilities, with 12% overall saying that, while they see climate change as a major risk, action should come from other policy institutions, such as government departments.
Regulatory approaches to climate risks
Central banks and regulatory authorities are increasingly integrating climate risks into their activities. Moving ahead, top measures expected are:
- Assessing climate risk as a financial risk in stress tests
- Encouraging or mandating climate-related financial disclosures
- Setting sustainability criteria standards for green finance/lending by regulated banks
While ‘market-fixing’ initiatives – which involve correcting market failures in financial markets – are gaining traction, central banks report being wary of using more interventionist ‘market-shaping’ prudential and monetary tools for climate purposes.
Almost all respondents highlighted the lack of appropriate analytical tools, methodologies and data as major problems. Data availability and quality are the key concern for 84% of respondents.
Fragmentation of climate-risk frameworks is also deemed a key challenge, with 31% of respondents concerned about the comparability and consistency of supervisory frameworks.
More climate stress-testing expected
The inclusion of climate-related considerations in stress tests is still at an early stage with only a minority (15%) of respondents currently including them in their routine stress tests of financial institutions. But this is set to soar, as nearly four-fifths (79%) say they intend to do so in the future.
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