Climate change is not new. Why such a fuss?

April 11, 2023 by Matija Čarman

Recently, we have seen the world of capacity development to pick up and increasingly address the topic of climate change and its impact on various aspects of economies. Personally, observing from the point of view of central banks and the banking sector, this has become quite a hot topic. True, this issue has been addressed already years ago. Well, at least by some. But it is not until recent years that we have seen some substantial shift in the movement and greater awareness of the risks that stem from it.

In 2019, we organized a workshop for experts on financial stability where we included a session on climate risks. I remember that at that time, this topic was still regarded as something quite far away on the horizon and still not so relevant. Many expressed the opinion that the region had other priorities, and that it might be only interesting for institutions and countries that already had a more complex supervisory toolbox in place. Writing this blog, I was curious to read the post-event feedback from participants and there was even a suggestion to leave out the topic of climate.

We, however, firmly believed that the topic was relevant and that it is important to address it and raise the awareness. So we included it bit by bit in many different topics, for instance macroprudential stress testing, bank business models or financial supervision. We believed it would once grow in importance and countries would have to be on top of it. And so it did. Now, there is hardly any topic without the green context, and more and more banks are working on it.

green_fin @unsplash

But what happened? Why this sudden shift? Let us not get misled. Bankers probably did not suddenly become environmentalists and nature lovers. But there must be something about it, and we came to the realization that climate and environmental risks can pose a serious threat for the financial sector and are too big to be disregarded. This is why central banks pay more attention to it now. It is not seen as a political decision anymore; it is part of the mandate of preserving a sound financial system, as climate risks are indeed also financial risks.

At the last workshop on financial stability and stress testing, we tried a very light exercise of capturing country by country what kind of stress tests they were conducting, and marked them in three categories: (i) it’s a dream aka we only wish, (ii) it’s in our focus, and (iii) we have expertise in it. Unsurprisingly, climate stress tests mostly fell in the first category. But we could already see the shift: many were working on their strategies, learning more about it, or were already trying it out with some pilot versions. It is really encouraging to see this shift – the most important thing is that this issue is not left completely unaddressed.

What can central banks actually do? First, it is about managing risks and making the banking and financial system resilient to the impact of climate change. The second, longer-term task is to reduce our impact on the environment. It might seem a bit far-fetched, especially considering the mandate of central banks, but we should not be put off by that. Both tasks are very difficult, considering we are dealing with a new field that we know too little of. What is the role of the CEF? We would like to be part of this movement and support the countries in their efforts to incorporate mechanisms to tackle climate changes. We are considering their needs, capturing existing knowledge and understanding, and connecting different bits and pieces that are already out there. Furthermore, we want to participate constructively in discussions, providing the necessary space and stimulating the exchange of ideas. We do this mostly through our learning events, but recently we also started to prepare for the Green Finance conference in June. It will bring together banking supervisors and the representatives of the CEF Governing Board from central banks and ministries of finance to speak about Green Finance, and to connect and explore what countries are currently doing in this field.

Along this path of aligning with the green agenda, we are wondering what our participants really need. Probably it is not some new skills that they would need to acquire; rather some expert and technical knowledge from different disciplines. More than ever, we need interdisciplinary connections with other experts to come to better solutions.

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