Central banks are waking up to climate change dangers. It’s about time
The Commonwealth Bank of Australia was sued for misleading investors by failing to disclose climate related risks in its 2016 annual report. (Reuters/Daniel Munoz)
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
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It is affecting the ability of pension funds
Globally, financial institutions and their clients are facing an increased risk of litigation
Financial regulatory authorities are beginning to respond to these developments. The central bank of Brazil requires banks to explain how they treat environmental risks when determining their capital requirements. The central bank of China incorporates environmental factors
New international standards
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
The network’s aim is to promote effective environment and climate risk management in the financial sector. It also aims to mobilise mainstream finance to support the transition toward a sustainable economy. Its members recently warned
The creation of the network is an implicit acknowledgement 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 acknowledgement 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 favour. But addressing climate change requires them to encourage financial institutions to favour certain types of activities over others. For example, the Lebanese central bank
If central banks 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 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
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 Reserve Bank governor Lesetja Kganyago recently noted
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
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
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.
This article is republished from The Conversation