2024-10-16 22:33:00
Banking and insurance supervisors are now taking climate-related issues into consideration to a greater extent than four years ago. Indeed, monitoring measures increased by 18% and 17% respectively in 2021 and 2024. However, efforts to include nature-related risks (deforestation, water management, etc.) remain “insufficient” and the its integration into monetary policy and central banking activities is poor.
These are the conclusions reached by the report Monitoring sustainable financial regulations and central bank activities 2024 Global Wildlife Fund (WWFfor its acronym in English) with which the NGO urges the financial regulatory sector to adopt “urgent” collective measures in the face of the growing loss of nature that can trigger irreversible “tipping points”, which would cause “sudden and irreversible changes” in the planet, according to WWF’s latest Living Planet Report 2024, published last week.
In this context, the organization highlighted that the insurance sector’s vigilance regarding the climate crisis is “systematically lagging behind” compared to the banking sector. On this side he spoke about how the European Union (EU), Singapore, Malaysia, Hong Kong, the United Kingdom and Brazil impose “strict regulations” and supervisory measures on the financial sector regarding climate-related risks.
In turn, the NGO indicated that a growing number of supervisors and regulators are requiring financial institutions to make their climate goals and transition plans public. Furthermore, financial supervisors such as the European Central Bank (ECB) are setting “strict” deadlines for financial institutions to align with their supervisory expectations in this regard by the end of 2024.
Central banks and monetary policy do not integrate climate risks
On the other hand, WWF highlighted that central banks and monetary policy still do not incorporate climate risks and “much less” environmental risks in most jurisdictions. Indeed, he highlighted that compared to the latter, this year’s assessment concludes that seven of the ten countries with the greatest biodiversity are lagging behind in banking supervision of these risks, and that all ten are failing to integrate them into the supervision of the sector insurance.
In general terms, environmentalists estimate investments harmful to the environment at seven trillion dollars (6,412,620,674,600 euros), including direct payments, tax incentives and subsidies that aggravate the climate crisis, the loss of biodiversity and the degradation of ecosystems. Instead, they underline that positive financial flows for nature-based solutions amount to “only” 200 billion dollars (183,217,733,560 euros).
Despite this, they reported that some central banks, such as the Bank of England, the Bank of France, the Monetary Authority of Singapore and the Bank of Slovenia, have started to progressively withdraw harmful assets from their investments in companies whose activities economics contribute significantly to the climate crisis, including those associated with coal and fossil fuels.
Risk management and control, additional capital requirements
In the document, WWF advised that regulatory frameworks take a precautionary approach and incorporate nature-related risks into all prudential supervision measures. In his opinion, these should focus on risk management and control, on additional capital requirements to take these risks into account and on stress test models that include natural risks and ensure their resilience to adverse scenarios.
Furthermore, he believes that it is important to improve qualitative and quantitative information for the financial sector to be accountable. To this end, the NGO recommends improving financial disclosure rules to include natural crisis-related risks and adopting good practice frameworks such as those developed by the Task Force on Nature-based Financial Disclosures (TNFD in English).
Finally, the organization argues that a crucial part of the mandate of central banks and financial supervisors is to set climate and environmental goals with a concrete and measurable roadmap or action plan detailing how those goals will be achieved . This roadmap should prioritize the key milestones of halving greenhouse gas emissions from 2019 levels and reversing nature loss by 2030, as well as limiting global warming to 1.5°C and achieving full recovery of biodiversity in 2050.
“The next five years are crucial to putting the world back on a sustainable path. The cost of inaction is too high and the consequences are unthinkable,” warned the head of WWF’s SUSREG, Siti Kholifatul Rizkiah.
The report studies 52 jurisdictions in the Americas, Europe, the Middle East, Africa and Asia Pacific that account for more than 89% of global gross domestic product (GDP), 75% of global greenhouse gas emissions and 13 of the 17 most biodiverse countries .
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