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.
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, financial institutions 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 banks to explain how they treat environmental risks 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.
- Read the full article at Fin24.