Climate Change and the Finance Sector – Internal Reform or Tougher Regulation?

Climate change protestors around the world, were given a boost from an unlikely quarter last week, when the governors of the UK and French central banks, described the threat posed by climate change as "existential" for the global financial system. In an article aimed at the international financial community, Mark Carney, the Bank's governor, and François Villeroy de Galhau, the governor of the Banque de France, said financial regulators, banks and insurers around the world had to "raise the bar" to avoid catastrophe.

The theme is not new either to accountingcpd or to Carney himself, who has been attempting to steer the financial community towards a greener agenda for some years, with a series of key note speeches going back to late 2015. But last week's article in the Guardian stiffened the tone of his message. It is a message that has been reinforced by the Bank of England who estimate that $3tr could be wiped out by climate change if it is not adequately dealt with.

Accompanying DeGalhau and Carney's letter, was the launch of a new report from the Network for Greening the Financial System, A Call for Action – Climate change as a source of financial risk, which lays out the steps they believe are necessary for financiers to tackle climate change. There are 6 steps in total:

1. Integrating climate-related risks into financial stability monitoring and micro-supervision.
2. Integrating sustainability factors into own-portfolio management.
3. Bridging the data gaps.
4. Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing.
5. Achieving robust and internationally consistent climate and environment-related disclosure.
6. Supporting the development of a taxonomy of economic activities.

The detail provided as to what steps are required to progress in each area make it clear that the first four are within the remit of central banks and supervisors, while the last two require policy makers to get involved.

The reaction has been broadly supportive, and the two central bank heads have certainly been praised for advancing the debate, but there has been some criticism of the assumption that progress can be made voluntarily by the banking industry itself without tougher regulation to back it up.

What do you think? Is this a problem that the finance sector can make a significant contribution to addressing or do we need a tougher stance from regulators?