Regulators urged to toughen climate rules

Central banks and financial regulators across the world have been told they need to increase the sustainability of their supervisory rulers and that major economies fall short on climate action.

The WWF´s Greening Financial Regulation Initiative (GFRi) has today published the results of its annual SUSREG Tracker. The assessment shows that whilst significant progress has been made by several central banks and financial supervisors to implement sustainable regulatory and supervisory measures, key gaps remain, particularly in major economies where broader environmental and social risks are still being neglected.

It found only 18% of central banks show exemplary progress in integrating climate-related risks into their monetary policy and central banking activities, whilst 68% of high-income countries have not yet adopted adequate climate and environmental banking supervision policies. Moreover, ambition and implementation of sustainable financial measures is unequal across countries.

Maud Abdelli, WWF’s Greening Financial Regulation Initiative lead, said: “Inaction or little action is fuelling the dual climate-nature crisis. At the COP28 UN climate summit last week, countries agreed to transition away from fossil fuels, but they failed to commit to a full phase-out and to prioritise protecting nature. Central banks and supervisors need to take up a prominent role in directing finance away from the most environmentally harmful sectors like coal, gas and oil, and set minimum ESG expectations in financial regulation and supervision.“

SUSREG Tracker is WWF´s interactive online assessment tool that evaluates progress on the integration of climate, environmental and social risks into central banking, financial regulation and supervision activities. This year’s analysis covers 47 jurisdictions, which together, represent over 88% of the global GDP, 72% of global GHG emissions and 11 of the 17 most biodiversity-rich countries in the world.

Some notable progress includes:

  • The integration of biodiversity indicators into central banks own portfolios and pension fund disclosure.
  • The development of supervision methodologies to tackle biodiversity loss.
  • The growing requirements for financial institutions and corporations to disclose their climate transition plans.
  • The set up of sector-specific lending guidelines for high-risk sectors to help financial institutions assess client’s E&S risks.

But the assessment also found:

  • The focus of central banking and insurance supervision activities remains primarily on climate.
  • Only 18% of central banks have shown exemplary progress in integrating climate risks into their monetary policy and central banking activities.
  • 68% of high-income countries have not yet adopted adequate climate and environmental banking supervision policies.
  • Some of the highest emitting countries have not put in place strong climate-related banking and insurance supervision policies.
  • More than half of the countries with net-zero targets (20 out of 37) that are covered in this assessment have considerably weak climate banking supervision policies.
  • Sustainable banking and insurance supervision policies are falling short in the most biodiverse countries of the Asia-Pacific and Latin America, leaving them highly exposed to nature-related risks.

Building on its Roadmap for a climate safe and nature positive economy that recommends new nominal anchors for central banking and financial supervision mandates (– 1.5ºC, full biodiversity recovery by 2050,  50% GHG emissions reduction, and nature positive by 2030), WWF has urged central banks, financial supervisors and regulators to:

  • Publish own transition plans for a low-carbon and nature-positive economy that are transparent and measurable, and encompass all central banking, financial regulation, and supervision activities.
  • Apply a precautionary approach using all micro and macro prudential supervision tools available. Instead of waiting for the perfect data and models, financial supervisors need to prioritise preventive and impactful measures in the face of uncertain and potentially catastrophic environmental threats.
  • Utilise their monetary policy toolkit to address environmental and social risks while phasing-out always environmentally harmful activities from their portfolios, i.e. those that do not adapt to business models that ensures a transition to a sustainable economy.
  • Impose higher capital requirements to financial institutions’ lending, investing and insuring companies with always environmentally harmful activities like coal, oil and gas expansion.

Siti Kholifatul Rizkiah, lead author of the SUSREG Annual Report 2023 concluded: “Properly managing financial risks stemming from environmental and social risks are an intrinsic part of central banks and financial supervisors mandates. It harnesses the power of the financial sector to safeguard our economy and underpins the foundation of a resilient financial system.”

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