The time to stay alive at 1.5 ºC is running out-our regulators must act urgently to adapt to this reality
As world leaders gathered in Glasgow for the COP26 climate conference, an important (although obscure to most people) financial regulatory announcement issued by the Prudential Regulation Authority (PRA) of the Bank of England was little known. last week, PRA announced It will consider whether it should change its regulatory capital framework, which may include requiring banks to hold additional capital to deal with the risks posed by climate change.
In essence, the focus of these regulatory requirements is to ensure that financial institutions have sufficient funds corresponding to the risks of their loans and other financial operations. If these risks become a reality, they can make up for their losses and continue to operate without the need for government assistance as they did in 2008.
As the impact of extreme weather events continues to increase as the climate emergency (physical risk) worsens, if world leaders fulfill their net zero commitments (transition risk), the value of fossil fuel investment is destined to fall to zero, and the central bank and Regulatory agency now widely accepted These risks are of great significance to its price and financial stability tasks.
However, so far, financial regulators have focused primarily on protecting finance from the risks of climate change, rather than acknowledging and taking action to continue to fuel the destructive flow of funds in a worsening climate emergency.This is reflected in PRA’s latest report, Discussing the new capital rules mainly involves quantifying the risks of individual financial institutions.In fact, PRA clearly emphasizes that the capital requirement is ‘Is not the right tool to address the root causes of climate change”, but to point out them ‘It should help to provide resilience against its consequences (financial risks)”.
Although the commitment to further work on climate-related risk management is welcome, the narrow approach fails to recognize that the best way to deal with climate risks is first to address the drivers of climate change. PRA considers how to strengthen capital requirements to deal with climate risks, as well as the policy announcement on green UK finance issued before the COP, especially the introduction of Mandatory transition plan With enhanced sustainability disclosure requirements, this is a step in the right direction. However, these measures focus on the climate risks of financing and rely heavily on the free market for self-adjustment. If only more information (disclosure) is provided, it may repeat the mistakes of the lax regulatory approach before 2008 and waste The years we don’t have must adjust finance to 1.5 ºC.
PRA emphasizes that its main role in the transformation is to ensure that the company effectively manages its climate risks.But to protect the integrity of the UK’s financial system and to support the government’s goals now outlined in detail Net zero strategy, The World Bank needs to go beyond mitigating micro-level climate risks that are difficult for companies to quantify, and adapt to Prevention method This explains these uncertainties and recognizes the need to actively guide market participants through a managed transition to protect macro-level stability.The bank should be established on The framework it proposes Greening its corporate bond purchase plan, and formulating capital requirements that not only reflect climate risk, but also climate performance, and formulate emission paths for regulated companies that meet the government’s climate goals.
As COP26 started last weekend, NGO Coalition World leaders including NEF called on world leaders to recognize the role of capital rules in preventing the accumulation of climate-related financial risks.Consider the risks that fossil fuel investment brings to the stability of the earth-and International Energy Agency Emphasize that any new fossil fuel projects are incompatible with the transition to net zero-regulators should accept ‘One to one’ rule. This is a form of financial supervision, which means that for every pound/euro/dollar used to fund fossil fuels, banks and insurance companies will have their own funds of 1 pound/euro/dollar to bear potential losses. This basic risk management principle has been applied to other high-risk (but difficult to accurately measure) risk exposures.For example, the Basel Committee recently Respected One-to-one approach to exposure to certain cryptocurrencies. This will provide the basis for protecting financial stability and protecting the climate by curbing financial entry into harmful investments.
To help realize the government’s ambitious net zero strategy, the Bank of England must use all available tools to Regulate private finance and guide private capital Increase green investment of 5-60 billion pounds every year.Although British banks continue to Billions Entering fossil fuels, other countries are taking important steps: China’s state-owned bank announced that it will no longer provide New coal financing Overseas projects after 2021, and the U.S. government Take precautions Climate-related risks in the executive order last month.In recent years, the World Bank has made great progress in climate research and advocacy, but now is the time Keep alive at 1.5 ºC It is about to run out-our regulators must take urgent action based on this reality.
