What is the Network for Greening the Financial System (NGFS)?
Not long ago, esteemed climate fiction author Kim Stanley Robinson wrote “The Ministry for the Future,” a dystopian vision of the future set just a few years ahead in 2025. A global coalition of people from vastly differing walks of life to swoop in and deploy radical solutions.
The book predicts institutions will fail to deal with climate impacts, drawing upon a common sentiment that many current political solutions seem lackluster. Yet, just a few years after its publication (2020), some of the high-tech “solutions” in the book now appear less and less realistic. Cryptocurrency, for instance, has a huge carbon footprint.
In contrast, some institutional activities may turn out to be profoundly impactful in fighting climate change. On of these is a little-known, ultra-powerful network of central banks known as the Network for Greening the Financial System (NGFS). It is working to determine how best to minimize the economic risks of climate change.
There will never be a magic bullet to climate change, but the NFGS’s effort to capture environmental externalities in the global financial system could help us make serious progress towards limiting global warming.
What is the Network for Greening the Financial System?
The Network for Greening the Financial System is a network of some 75 central banks and 13 observers (as of 2020) to research and provide recommendations on integrating climate risk into the financial system.
It formed relatively recently in 2017. It was first coordinated by France, the UK, and the Netherlands, but its steering committee now includes the following members:
China: the People’s Bank of China
European Union: the European Central Bank
France: the Banque de France and the Autorité de Contrôle Prudentiel et de Résolution (ACPR)
Germany: the Bundesanstalt für Finanzdienstleistungsaufsicht and the Deutsche Bundesbank
Mexico: Banco de Mexico
Morocco: Bank al Maghrib
Netherlands: De Nederlandsche Bank
Singapore: the Monetary Authority of Singapore
Sweden: Finansinspektionen
United Kingdom: the Bank of England
Canada: the Bank of Canada
Malaysia: the Bank Negara Malaysia
Japan: the Financial Services Agency of Japan
According to its first comprehensive report (2019) titled, “A call for action: climate change as a source of financial risk,” it states:
The NGFS is a coalition of the willing. It is a voluntary, consensus-based forum whose purpose is to share best practices, contribute to the development of climate –and environment– related risk management in the financial sector and mobilise mainstream finance to support the transition toward a sustainable economy.
Why does the NGFS care about climate change?
So, why does the NGFS care about climate change, when governments have been slow to take action and create binding agreements for decades?
The main reason is that awareness has grown about the unique global and systemic risks that can transmit into the economy from climate change impacts.
According to the NGFS, there are four main climate change features that make it uniquely capable of destabilizing the financial system more than other types of shocks.
Breadth and magnitude
Climate change is not limited to a specific region or area. While some areas such as coastal regions are more likely to see significant impacts sooner, the overall effects touch every part of the world and all economic classes of people.
Climate change occurs in a way that is non-linear, meaning it is hard to predict and its impacts can quickly intensify. Known tipping points, such as the die off of coral reefs, the melting of the Greenland glacier, or the slow of the Gulf Stream can rapidly intensify the negative impacts of climate change.
The NGFS warns that climate risks may not be adequately reflected in asset valuations, so it poses a risk for destabilizing the economy.
Not if, but when
Climate change impacts are foreseeable. Scientists are certain that the level of accumulated greenhouse gases (GHGs) will cause specific impacts such as sea level rise. However, the rate and timing of these changes are harder to predict.
We do have enough confidence to know that today’s actions can significantly lessen the destabilizing impacts of climate change.
Irreversibility
Even if we completely stopped emitting GHGs into the atmosphere, we could expect certain changes corresponding to today’s atmospheric make-up.
Some climate impacts sea level rise are scientifically “locked in” because the current level of GHG emissions in the atmosphere guarantees rising levels of water. In the case of sea level rise, however, there is a delay in the earth’s system to catch up with the total geophysical impact caused by the increase in GHGs.
Many projections of pathways to “Net Zero” by 2050 assume that we would be able to remove some amount of CO2 from the atmosphere. Currently, however, there is no technology capable of scaling to meet the level of removals needed at a low enough cost.
For this reason, every additional degree of warming we create will add on more irreversible impacts.
Short-term actions
Climate change is a long-term phenomenon that depends significantly on today’s short term actions. There is a narrow window of time to make a big impact on the level of warming that locks in further impacts well into the next few centuries.
This is why global central banks have teamed up to jumpstart mechanisms to safeguard stability for the world’s economies.
6 key recommendations of the NGFS
In addition to providing its research and sharing resources for conducting scenario analysis and stress testing across global banking portfolios, the NGFS provides 6 key recommendations to its members.
Integrate climate risk into financial stability monitoring and micro-prudential supervision.
Integrate sustainability into the bank’s own portfolio management.
Bridge data gaps by encouraging climate risk disclosures.
Build awareness and intellectual capacity by encouraging technical assistance and knowledge sharing.
Support policy makers in achieving robust, internationally consistent climate and environmental disclosures.
Support policy makers in the development of a taxonomy of economic activities.
Global NGFS Outcomes
Based on the NGFS recommendations, we can see that key outcomes are getting rolled out around the world.
For example, the EU has created its Sustainable Finance Taxonomy for defining sustainable investments and activities. The UK, EU, New Zealand, and other regions are mandating disclosures by financial institutions on the climate risk in their portfolios.
We are likely to see many more actions to unfold that align with the guidance of the NGFS in the future.
On the other hand, it is important to remember that effective climate policy requires more than data from the finance sectors.
Countries, cities, and corporations still need to ramp up their efforts to meet the Paris Agreement target of limiting the global temperature average to well below 2C.
What do you think about this climate solution?
Let me know in the comments. TIA!