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European Financial Leaders Publish Open Letter On Climate-Related Financial Risks
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By Lynn L. Bergeson

On April 17, 2019, Mark Carney, Governor of the Bank of England, Francois Villeroy de Galhau, Governor of the Banque de France, and Frank Edelson, Chair of the Network for Greening the Financial Services (NGFS), published an open letter on the financial implications of global warming.  Co-signed by the NGFS coalition, consisting of 34 central banks, the letter warns of global warming’s potential damage to infrastructure and private property, negative human health effects, decrease in productivity, and wealth destruction.  The letter states that no countries are immune to the effects of climate change and that “if some companies and industries fail to adjust to this new world, they will fail to exist.”  Although the Paris agreement has and continues to promote a low-carbon economy, further measures would be central to achieving zero net zero carbon emissions by 2050.  Key to reaching this goal would be a massive reallocation of capital, the financial experts highlight.
 
Given the challenges associated with achieving zero-carbon emissions, in the letter, Carney, Villeroy de Galhau, and NGFS members propose four recommendations to policymakers and financial firms:

  • The integration of climate-related financial risks into daily work, financial stability monitoring, and board risk management.  Policymakers and financial firms should conduct scenario analyses and take a long-term strategic approach, which considers risks associated with global warming.  These risks should be embedded it into their business-as-usual governance and risk-management frameworks.
  • Leadership by example, particularly by central banks, to integrate sustainability into their own portfolio management.
  • Internal and external collaboration among public authorities to bridge data gaps important to assessments of climate-related risks.
  • In-house capacity building and knowledge sharing with various stakeholders on the financial risks related to climate change.

According to the letter, the successful implementation of these four recommendations would lead to two broader calls for action on disclosure and classification of these risks.  Market and regulators’ support in assessing risks and opportunities from climate change accompanied by consistent international disclosure are critical.  In addition, NGFS members also encourage the development of a classification system to identify economic activities that would contribute to the transition to a low-carbon economy.  In sum, robust leadership and collaboration play a crucial role in identifying global solutions for the financial sector.