Mark Carney, governor of the Bank of England, is urging the financial sector and, in particular, central banks to play an increasing role in the transition to a low-carbon economy.
Writing in the Guardian in a piece co-authored by François Villeroy de Galhau, the governor of the Banque de France, he urged banks to find ways to protect their portfolios from the impact of climate change.
"As financial policymakers and prudential supervisors we cannot ignore the obvious physical risks before our eyes. Climate change is a global problem, which requires global solutions, in which the whole financial sector has a central role to play," they wrote.
Fires, drought, flooding and other damage caused by climate change "negatively affect health, decrease productivity and destroy wealth," they said, pointing to the five-fold increase in insured losses over the past three decades.
Banks also are at risk of holding assets that could drop in value catastrophically because they are overtaken in the transition to a lower-carbon economy.
Group of central banks make recommendations
The warning comes as Environment and Climate Change Canada warns that Canada is being disproportionately hit by the impact of climate change.
The Bank of Canada is a member, alongside the Bank of England, in the Network for Greening the Financial System (NGFS), a group of 18 central banks who have been studying what steps the financial system can take to provide leadership on climate change.
Its first policy report, just released, makes several recommendations:
- Acknowledge that climate-related risks are a source of financial risk.
- Develop new tools to analyze the long-term impact of climate change on investment.
- Improve the quality of data used to make financial decisions that will contribute to a lower-carbon economy.
- Scale up green finance and increase lending for low-carbon solutions.
"Carbon emissions have to decline by 45 per cent from 2010 levels over the next decade in order to reach net zero by 2050. This requires a massive reallocation of capital," Carney, a former governor of the Bank of Canada, warns in the Guardian.
Risk to portfolios
He says central banks have to take the lead in developing data and hinted that companies should be required to adhere to a set of standard disclosure requirements around climate risk.
"First, to support the market and regulators in adequately assessing the risks and opportunities from climate change, robust and internationally consistent disclosure is vital. The market and policymakers must continue to work together to determine the most decision-useful metrics for climate-related financial disclosures," he said.
Hedge funds such as BlackRock and large pension funds such as the Canada Pension Plan Investment Board already are pricing carbon risk into their portfolios. However the NGFS is urging all of the financial sector to start thinking about the risk to their portfolios.