Report reveals gaps in green financial regulations across banks
Central African banks are encouraged to integrate environmental and social considerations into their monetary policy.
What you need to know:
- Protecting biodiversity is crucial in addressing climate change as environmental degradation and physical damage caused by climate change can severely impact the economy and financial system.
- The financial sector should also be mandated to disclose its portfolio alignment with the taxonomy.
Several central banks and financial supervisors are making significant strides to incorporate "green" practices into their financial regulation and supervision. This is according to recent WWF Sustainable Financial Regulations and Central Bank Activities (SUSREG) research.
The concept of "greening" financial regulation and supervision involves taking steps to integrate climate change and, to a certain extent, biodiversity considerations into the daily decision-making processes of central banks. This is done to mitigate potential future financial risks related to climate change and the harm caused to the environment.
Protecting biodiversity is crucial in addressing climate change as environmental degradation and physical damage caused by climate change can severely impact the economy and financial system. However, SUSREG's assessment on climate and nature alignment in banking supervision, central banking, and insurance supervision indicates that Kenya, Morocco, South Africa and Zambia have less than 50 per cent alignment.
Although several central banks and financial supervisors have made significant progress in implementing sustainable regulatory and supervisory measures, the 2023 WWF's Greening Financial Regulation Initiative (GFRi) Tracker assessment reveals critical gaps, particularly in significant economies where broader environmental and social risks are still being ignored.
Last August, the South African Reserve Bank took a significant step forward by launching a public consultation on climate-related risk practices and disclosures for banks and insurers. This initiative requires financial institutions to establish procedures for managing climate-related risks.
Although there are expectations for addressing climate-related risks in Kenya and Morocco, the policy coverage needs to be expanded and strengthened. On the other hand, there are currently no regulations or supervisory expectations in Zambia concerning climate and environment-related risk management for banks and insurers. Addressing this gap could be crucial for promoting sustainability in Zambia's financial sector.
Financial supervisors in Africa can enhance their financial supervision by fortifying regulations to address critical issues such as double materiality, requiring sector policies for high-risk sectors, setting targets for climate and nature, disclosing transition plans, conducting climate scenario analysis, and stress testing, among others.
Central African banks are encouraged to integrate environmental and social considerations into their monetary policy. This includes incorporating such considerations into corporate asset purchase programmes, collateral frameworks, foreign exchange reserve management, green preferential targeted refinancing lines, and adjusting reserve requirements.
WWF urges countries to implement a taxonomy system to prevent greenwashing by classifying sustainable and unsustainable activities.
The financial sector should also be mandated to disclose its portfolio alignment with the taxonomy.
WWF also urges central banks, financial supervisors, and regulators to publish their transition plans for a low-carbon and nature-positive economy that are transparent and measurable and encompass all central banking, financial regulation and supervision activities.
"Instead of waiting for the perfect data and models, financial supervisors need to prioritise preventive and impactful measures in the face of uncertain and potentially catastrophic environmental threats," SUSREG says.
WWF is also urging Central banks to utilise their monetary policy toolkit to address environmental and social risks while phasing out always environmentally harmful activities from their portfolios like those that do not adapt to business models that ensure a transition to a sustainable economy.
WWF wants Central banks to impose higher capital requirements on financial institutions' lending, investing and insuring companies with environmentally harmful activities like coal, oil and gas expansion.
Siti Kholifatul Rizkiah, the lead author of the SUSREG annual report, says: "Properly managing financial risks stemming from environmental and social risks are an intrinsic part of central banks and financial supervisors' mandates. It harnesses the power of the financial sector to safeguard our economy and underpins the foundation of a resilient financial system."
Only 18 per cent of central banks show exemplary progress in integrating climate-related risks into their monetary policy and central banking activities, whilst 68 per cent of high-income countries still need to adopt adequate climate and environmental banking supervision policies.
Maud Abdelli, WWF's GFRi lead, says: "Inaction or little action is fueling the dual climate-nature crisis. At the COP28, countries agreed to transition away from fossil fuels but failed to commit to a full phase-out and prioritise protecting nature."
