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27 February 2020

BIS's Lagarde: Climate change and the financial sector

ECB president Christine Lagarde said that central banks need to devote greater attention to understanding the impact of climate change, including its implications for inflation dynamics.

Ms Christine Lagarde  focuses on climate change-related risks for the financial sector. Broadly speaking, the main risks fall into three categories: risks stemming from disregard, from delay and from deficiency.

Risks from disregarding climate change

Disregarding the implications of climate change can generate significant risks for the financial sector.

As a result, insurance and economic losses caused by climate-related events are likely to start trending upwards as a share of GDP. Insurance and reinsurance companies need to continue to ensure that risk pricing remains appropriate and that reserves are adequate to cover expected losses. Banks also need to consider the risks such events create for their credit exposures. Losses can arise from both direct damage and from the effects that potentially higher maintenance costs, disruption and lower labour productivity could have on profitability and hence default risk.

Risks from delaying the response to climate change

The Eurosystem is now reviewing the extent to which climate-related risks are understood and priced by the market and is paying close attention to how credit-rating agencies incorporate such risks into their assessments of creditworthiness. We will continue to evaluate the implications for our own management of risk, in particular through our collateral framework. ECB Banking Supervision is assessing banks’ approaches to climate risks and developing supervisory expectations on those risks. Preparatory work is also under way for a macroprudential stress test to assess climate-related risks, with the first results expected by the end of the year. The stress test framework aims to assess how climate-related risks propagate through the real economy and the financial system.

Risks from deficiency in the provision of finance

The financial sector will be pivotal in mobilising the necessary financial resources for the transition and in helping our economies to cope through adaptation and mitigation. It is vital that it provides finance of sufficient quantity and quality for the task.

In December 2019, the European Commission proposed a European Green Deal. Another field where the European Union has taken the lead internationally is on the issuance of green bonds. The European Union also launched a comprehensive action plan in 2018 to promote sustainable finance. That plan is already bearing fruit, including the recent agreement on the taxonomy framework for assessing the sustainability of economic activities. The taxonomy represents an important step towards categorising green investments on a sound and consistent basis and will help underpin further market developments in green finance. But a common approach is needed to mobilise global funding for the transition, while at the same time remaining vigilant against attempts to green wash. Unnecessary fragmentation in regulation will impair the sustainable growth of green finance.

Full press release on BIS

Full speech on BIS

© BIS - Bank for International Settlements

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