Published on 19 April 2018

SUSTAINABLE FINANCE

The central banks of France and England call for more regulation against climate change

According to the Banque de France Governor, François Villeroy de Galhau, it is time to penalise brown assets, which are harmful to the climate, rather than just favour the financial sector’s green initiatives. He has even offered carbon stress tests for banks. Bank of England Governor, Mark Carney, called for action before the financial system is destabilised.

Francois Villeroy de Galhau, Governer of the Banque de France.
@EricPiermont/AFP

On 6 April, the Central Banks and Supervisors Network for Greening the Financial System (NGFS), met in Amsterdam for the first time. Initiated by the Banque de France, this platform was launched at the Paris One Planet Summit on 12 December. During this meeting, governors of the Banque de France and the Bank of England called for strong measures to ensure the banking and insurance sectors’ resiliency against climate risks.

"We should develop forward-looking carbon stress tests for both insurance companies and banks – what I call ‘the video of risks’ - it's obviously a complex and difficult task, but it's essential," said François Villeroy de Galhau, Governor of the Banque de France, in his inaugural address. In addition to these tests, he suggests climate risk reporting requirements for European banks and insurers. He also discussed the introduction of penalties for holding carbon intensive assets.

Penalising Factors

Rather than a "green supporting factor", the senior official wants to target “brown assets” (ed. those harmful to the climate) with a “brown penalising factor", as climate risks will eventually materialise. He recalled that the French Prudential Supervisory and Resolution Authority (ACPR) estimates that 13% of French banks’ total net credit exposure belongs to sectors vulnerable to transition risks.

Mark Carney, Governor of the Bank of England, also supported this urgent need for greening finance. "Once climate change becomes a defining issue for financial stability, it may already be too late", he said. "Our responsibility is to work to position the financial system as a whole so that it can adapt in a harmonious, efficient and orderly manner to the evolution of climate policies".

Even if Carney fears climate change’s "catastrophic impacts," he also has reasons to be optimistic. For this discourse highlights "a transition to action" that is emerging amongst governments, insurers, banks and policy makers. In this sense, the two governors have also detailed the European Union’s Action Plan on Sustainable Finance, which was unveiled on 22 March.

TCFD leading the way for financial institutions

Carney is also pleased that the largest financial institutions, managing $80 trillion in assets, are already in support of the Climate Financial Reporting Working Group (TCFD). "A virtuous circle is being built with better understanding of tomorrow's risks, better pricing for investors, better decisions by policymakers and a smooth transition to a low-carbon economy", Carney said.

Even if the thirty financial supervisors present at this meeting did not agree on the actions to be implemented, all accepted the fact that regulations must be adapted to the banking sector’s climate change risks, as reported by the Financial Times.

Ludovic Dupin, @LudovicDupin


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