While politicians in Canada and around the globe deny or waffle over climate change, the world’s central bankers are taking the climate crisis seriously.
“Climate change continues to pose risks to both the economy and the financial system,” said Bank of Canada Governor Stephen Poloz with the release of the bank’s first-ever report on climate risks earlier this month. The bank announced that it’s undertaking a multi-year research plan to better assess the climate risks facing Canada’s financial system, including looking at bank loans to carbon-intensive sectors.
In December 2017, more than 30 central bankers from France, the U.K., Germany, Japan, Singapore, Mexico, Australia and other countries formed a new organization, the Central Banks and Supervisors Network for Greening the Financial System (NGFS), to ensure that someone takes action following the Paris climate agreement, which entered into force in 2016.
“Climate change continues to pose
risks to both the economy and the financial system.”
– Bank of Canada Governor Stephen Poloz
Climate-related risks are a source of financial risk. The central bankers’ job is to ensure financial stability, and therefore the central bankers got involved. NGFS encourages best practices in climate-risk management for the financial sector and promotes green finance policies to help fund the low-carbon economy.
The United States and Canada were notably absent from the founding group. But this spring, just as NGFS was preparing its first full report, Canada signed on along with a dozen other countries including Norway, Ireland, Hungary, Thailand and Malaysia.
Poloz said his institution was proud to be accepted into NGFS. “Joining this network is part of the bank’s broader efforts to understand climate-related risks for the Canadian economy and financial system.”
In its first report, issued in April, NGFS called itself “the coalition of the willing.” This also explains why the current U.S. administration is sitting out. The report acknowledges that climate change will have a “far-reaching impact” on households, businesses and governments. “While the exact outcomes, time horizon and future pathway are uncertain, there is a high degree of certainty that some combination of physical and transition risks will materialize in the future.”
The report offers six recommendations for central banks and policymakers:
- integrate climate risks into financial-stability monitoring; lead by example by practising sustainability in their own operations;
- share climate-risk data;
- improve their understanding of climate risks and share that knowledge with emerging economies;
- strive for globally consistent environment-related disclosure; encourage green capital by developing bodies of knowledge around those economic activities that create environmental risks and those that aid the transition to a sustainable economy.
With its long coastlines, extensive forests and water scarce farmland, Canada is especially vulnerable to climate change. According to a Bank of Canada spokesperson, as the bank intensified its own study of climate risks, “it saw value in joining the NGFS network to coordinate efforts with central banks and regulators in other countries.”
The bank expects to contribute to two key parts of the NGFS mandate: developing an analytical framework for assessing climate risks, and scaling up green finance.
Green projects will need all the help they can get: NGSF estimates that shifting the world economy from brown to green in line with the Paris goals will require investments of more than US$90 trillion.
A version of this story appears in the upcoming Summer Issue of Corporate Knights magazine.