28 October 2021
Ulrich Volz, Professor of Economics and Director of the Centre for Sustainable Finance at SOAS, wrote a foreword to World Wide Fund for Nature’s (WWF) inaugural annual report on Sustainable Financial Regulations and Central Bank Activities (SUSREG).
The report looks into the findings of the assessment of measures taken and progress made by central banks, banking regulators and supervisors to integrate environmental and social considerations in their mandates and activities. It covers 38 countries across the Americas, Europe, Middle East, Africa and Asia-Pacific regions, incl. most members and observers of the Basel Committee on Banking Supervision. Together, they account for more than 90% of global GDP, 80% of total GHG emissions and 11 of the 17 most biodiversity-rich countries.
In his foreword, Prof Volz writes: “The climate and ecological crises are escalating rapidly. Decisive policy action is needed to limit global warming and protect our natural habitat, which is the very foundation of our existence. The financial system sits at the heart of our economies. Aligning financial flows with sustainability goals hence ought to be a policy priority. As guardians of the financial system, central banks and supervisors need to ensure that all lending and investment is compliant with climate and environmental goals and that financial institutions account for sustainability risks and impacts. While action by banks and investors is primarily driven by their fiduciary duties and aims to deliver returns, central banks and supervisors ought to take a systemic perspective, addressing both micro- and macroprudential risks, and, by implication, working to ensure that all financial flows become aligned with sustainability goals.
Over the last years, we have seen a new consensus emerging among central banks and supervisors that addressing climate and other environmental risks falls firmly into their mandates. This is epitomised by the fact that the Network of Central Banks and Financial Supervisors for Greening the Financial System, which was established in 2017 by eight members, now has a membership of almost 100 institutions, including central banks and supervisors from all major economies.
As shown in the 2021 SUSREG Annual Report, a growing number of central banks and supervisors are now starting to roll out and implement regulations, supervisory expectations or guidelines to address sustainability-related risks. This is commendable. But the report also shows that current efforts are still falling short of what is needed to seriously align the financial system with sustainability. Within their mandates, central banks and supervisors need to take a strategic stance on supporting the transition to a low-carbon and environmentally sustainable economy and adjust their prudential, monetary and other policies to this end.
Enhancing market practices and transparency through standards, taxonomies and disclosure can be only a starting point. As recommended in this report, regulations and supervisory expectations should require financial institutions to develop a portfolio-level approach to the management of environmental and social risks and minimise the negative impacts associated with their lending or investment. Importantly, the report highlights that in addition to micro-prudential supervisory tools, central banks and financial supervisors should make full use of their macro-prudential toolkit to limit exposures to activities that are deemed incompatible with sustainable development objectives and subject to higher risks. Last but not least, central banks ought to adjust their monetary operations to account for sustainability impacts and integrate sustainability factors into their own-portfolio management.”