Central banks warn on climate change risks

April 17, 2019

Their letter coincides with the launch of a report from the Network for Greening the Financial System (NGFS), a group of 34 international central banks, which sets out the actions required to address the issue of climate change.

Together, Mr Carney and Mr Villeroy de Galhau encouraged other financial regulators around the world to carry out climate change stress tests, so that any potential risks and dangers could be spotted and actions taken to prevent future financial disasters. The banking system needed to reallocate huge amounts of capital to ensure that global average temperatures did not rise beyond the 2C target set by the Paris climate agreement.

The rising costs of weather-related events like droughts, heat waves, floods etc. pose a major risk to banks and insurers. In their letter they state that "these events damage infrastructure and private property, negatively affect health, decrease productivity and destroy wealth". The Bank of England estimates that £20 trillion of assets could be rendered worthless if banks fail to make the necessary changes to their investments in carbon-intensive industries in the future.

The NGFS report suggests that the timing of companies' transition away from carbon-intensive industries is crucial. Climate change planning should become a day-to-day activity for all large businesses.

According to the NGFS, allowing adequate time for a smooth transition would mean that existing infrastructure could be replaced while advances in new technologies kept energy costs at a reasonable level. A sudden transition on the other hand would cause considerable disruption and additional cost. But change, according to Mr Carney and Mr Villeroy de Galhau is both essential and inevitable. They wrote “If some companies and industries fail to adjust to this new world, they will fail to exist.”

Photo: chrisdorney/depositphotos.com

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