Central banks are waking up to climate change dangers

Central banks are waking up to climate change dangers. It's about time
Central banks and other financial sector regulators have not always paid adequate attention to the sector’s impact on the environment. Credit: Shutterstock

The impact of climate change on the stability of individual financial institutions and the financial system in general is growing. It influences the types of activities that financial institutions will fund and the cost of finance.

For example, the increased frequency and intensity of floods, storms and droughts is complicating the insurance industry's ability to assess insurable risks. It is also driving up insurance premiums.

It is affecting the ability of pension funds to plan their investment strategies. Banks are facing increased reputational and financial risks from financing activities that contribute to climate change. These activities include coal mining and cattle farming.

Globally, and their clients are facing an increased risk of litigation for their failure to manage risks associated with climate change. For example, the Commonwealth Bank of Australia was sued for misleading investors by failing to disclose climate related risks in its 2016 annual report.

Financial regulatory authorities are beginning to respond to these developments. The central bank of Brazil requires to explain how they treat when determining their capital requirements. The central bank of China incorporates environmental factors into its monetary policy framework and financial stability assessments.

New international standards encourage financial institutions to be more transparent about their exposure to climate related risks.

It is against this backdrop that the recent decision by the South African Reserve Bank (SARB) to join the Network on Greening the Financial System must be viewed. The Network consists of 42 central banks and banking supervisory authorities, including central banks from China, England, France, Malaysia, Mexico, the Netherlands and the European Central Bank.

The Network's aim is to promote effective environment and climate risk management in the financial sector. It also aims to mobilize mainstream finance to support the transition toward a sustainable economy. Its members recently warned that if banks don't adjust to change "they will fail to exist."

The creation of the Network is an implicit acknowledgment that central banks and other financial sector regulators have not always paid adequate attention to the environmental impacts of the financial sector. The Network's existence is also an acknowledgment that the financial sector has a responsibility to become more environmentally responsible.

This is a challenge for central banks. Their independence requires them to act without fear or favor. But addressing requires them to encourage financial institutions to favor certain types of activities over others. For example, the Lebanese central bank changes the amount of reserves it requires banks to hold against their deposits according to how much they lend for renewable energy projects.

If do not discriminate, financial institutions may continue financing activities that increase greenhouse gas emissions. This can raise the risk of droughts, floods, and more extreme temperature variability. This in turn can affect the quality and quantity of available land and water for producing food, and constructing new housing, education and health facilities. These factors can affect migration patterns, agricultural and other commodity prices. They can also affect aggregate demand, employment levels, public health and confidence in an economy. These are among the factors that often impact on financial stability and inflation.

Climate also poses a legal challenge

The South African Reserve Bank's mandate is set out in the country's Constitution. Article 224 states that the SARB must "protect the value of the currency in the interest of balanced and sustainable economic growth." This is an unusual but not unprecedented mandate. Central banks with similar mandates include those of the Philippines, Russia, Malaysia and Tanzania.

But what exactly does this mean? The term "balanced and sustainable growth" has no precise and universally accepted economic meaning. It is also not clear what the Constitution means when it says that the SARB's mandate is to protect the value of the currency "in the interest" of "balanced and sustainable" growth.

As the SARB's Governor recently noted, the Constitution "tells us what to do, but it is not explicit about how we do it." This is true. The Constitution gives the SARB wide discretion in interpreting its mandate. The SARB currently interprets its mandate narrowly as requiring it to prioritize protecting the value of the currency. This certainly falls within the scope of its constitutional authority. However, it is not the only interpretation that would satisfy this requirement.

For example, the mandate also could be interpreted more broadly as imposing a dual responsibility on the SARB: to protect the value of the currency and to promote environmentally sustainable growth. Sustainable growth could mean growth that meets the needs of the present generation without compromising the ability of future generations to meet their needs. In this case, the SARB would be failing to meet its Constitutional responsibilities if its policies and actions protected the value of the currency but were implemented in a way that resulted in increased funding for large carbon emitters.

What a different approach would look like

A more environmentally responsible approach to its mandate may not lead the SARB to adopt different policy decisions. However, it would lead it to pay more attention to their implementation.

For example, Article 10 of the South African Reserve Bank Act gives the SARB broad authority to trade in different types of financial instruments. These include those issued by government as well as those issued for commercial, industrial and agricultural purposes. The environmental impact of its decision to raise or lower interest rates could vary depending on which financial instruments it decided to buy or sell in implementing its interest rate decision.

The SARB's decision to join the Network is prudent and responsible. Climate change is a reality and it is adversely affecting the financial sector. However, the SARB now needs to take the next step. This would be to reconsider whether it is interpreting its mandate in a way that is both constitutionally defensible and environmentally and socially responsible.


Explore further

US central bank to study Facebook virtual currency

Provided by The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.The Conversation

Citation: Central banks are waking up to climate change dangers (2019, September 2) retrieved 17 October 2019 from https://phys.org/news/2019-09-central-banks-climate-dangers.html
This document is subject to copyright. Apart from any fair dealing for the purpose of private study or research, no part may be reproduced without the written permission. The content is provided for information purposes only.
24 shares

Feedback to editors

User comments

Sep 02, 2019
A demonstration of weather control as a means of economic warfare. Those who claim to care about "climate change" really do not. Those who really care have common habits. They don't necessarily accept what they are ordered to believe. They involve themselves in a subject to the point of getting ideas that aren't mentioned elsewhere. And they do not necessarily automatically opt themselves out of consideration. They can consider their opinions to have meaning. And they certainly do not take specious counters as "proof" alternative theories are "wrong"!
There is no such thing as "climate change', it's only the behavior of the atmosphere changing. And that's caused by weather modification chemicals being dumped into the atmosphere by the government project known as "chemtrails". Remember when so many talked about the "Ozone Hole". That was claimed to be so dangerous, but it hasn't been mentioned since before 2000!

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more