Climate risk: Central banks call for action on disclosure, taxonomies

An international group of central banks and financial supervisors has called for a global standardised framework on climate disclosures, urging action from policymakers or supervisory authorities.

It threw its weight behind the work of the Task Force on Climate-related Financial Disclosures (TCFD), saying its recommendations were “an obvious avenue of convergence” for such a framework and that its members collectively backed them.

In a new report, the group said the lack of a global standardised framework on climate disclosures impeded “the proper and global consistent assessment of climate risks at a firm level as well as the analysis of financial stability risks”.

Although there was “a significant level of awareness” of the TCFD recommendations and growing support from the private sector, intervention from policymakers or supervisors was necessary.

“The NGFS considers that disclosure of climate-related information and enhanced market discipline cannot emerge rapidly enough without action by policymakers or supervisory authorities,” it said.

Launched in December 2017, the Network for Greening the Financial System (NGFS) has grown rapidly and at present brings together 36 central banks and supervisors from across five continents. It represents two-thirds of global systemically important banks and insurers.

The call for action on a disclosure framework is one of six recommendations it discussed last week during a members’ plenary and a conference.

The financial risks we face through climate change are analytically difficult, unprecedented and yet very urgent

Frank Elderson, executive director at DNB and chair of the NGFS

Frank Elderson, an executive director of supervision at the Dutch central bank and chairman of the NGFS, said: “The financial risks we face through climate change are analytically difficult, unprecedented and yet very urgent. By issuing these recommendations, the NGFS members demonstrate collective leadership that will result in action to foster a greener financial system across countries and continents.” 

Taxonomy needed, from brown to green

The NGFS also called for the development of a clear system for classifying the environmental-friendliness of economic activities, saying it needed this to be able to deepen its analytical work on financial risks stemming from climate change.

Such a taxonomy should be of “green, non-green, brown and non-brown products,” it said. It would help assess the risk profile of these different types of assets and, “like any other investor, central banks will benefit from these taxonomies when implementing sustainable investment strategies”. Although the definition of a ‘brown’ product would depend on the taxonomies, in general ‘brown’ can be understood as referring to products or activities that are not environmentally-friendly or do not contribute to meeting certain environmental objectives. 

The NGFS stopped short of calling for global implementation of a regulatory taxonomy, saying the space for such a global system was “limited”, but said it supported “ensuring comparability and consistency across different taxonomies”.

According to the group, Chinese authorities are expected to release an updated version of the country’s green bond taxonomy this year. In the EU, the law-making institutions are gearing up to negotiate the final version of the taxonomy proposal put forward by the European Commission last year. The European Parliament voted on its negotiating position last month while within the EU Council work is going on at a technical level to help the member states reach a common position. 

The NGFS also issued recommendations for actions that central banks and supervisors could take to address climate-related risks within the remit of their mandates.

These included integrating climate-related risks into financial stability monitoring and micro-supervision, helping to bridge data gaps, and integrating sustainability factors into the management of some of central banks’ own portfolios.

The NGFS itself was planning to develop a handbook on climate and environmental-related risk management for supervisory authorities and financial institutions, voluntary guidelines on scenario-based risk analysis, and best practices for incorporating sustainability into central banks’ portfolio management.

It also indicated that it would consider extending the integration of sustainability factors beyond own-portfolio management, noting that “some voices have called for an extension of this approach to monetary policy”.