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Basic environmental and social risks remain unaccounted for in central banking
and financial supervision

Posted on 18 December 2023

New findings of WWF´s Sustainable Financial Regulations and Central Bank
Activities Tracker 2023 show that several central banks and financial
supervisors are making notable progress to “green” their financial regulation
and supervision. However, significant gaps remain, in particular in high income
countries, countries with the largest GHG emissions and those that are the most
biodiverse rich.
WWF´s Greening Financial Regulation Initiative (GFRi) has today published
findings from its annual SUSREG Tracker. The assessment shows that whilst
significant progress has been made by several central banks and financial
supervisors to implement sustainable regulatory and supervisory measures, key
gaps remain, particularly in major economies where broader environmental and
social risks are still being neglected.  Current financial regulations and
central banking activities focus on climate and do not  fully account for
broader environmental and social impacts, like biodiversity loss and its effects
caused on communities who heavily depend on fragile natural resources for their
livelihood.

Only 18% of central banks show exemplary progress in integrating climate-related
risks into their monetary policy and central banking activities, whilst 68% of
high-income countries have not yet adopted adequate climate and environmental
banking supervision policies. Moreover, ambition and implementation of
sustainable financial measures is unequal across central banks and financial
supervisors. 

Maud Abdelli, WWF’s Greening Financial Regulation Initiative lead, says:
“Inaction or little action is fueling the dual climate-nature crisis. At the
COP28 UN climate summit last week, countries agreed to transition away from
fossil fuels, but they failed to commit to a full phase-out and to prioritise
protecting nature. Central banks and supervisors need to take up a prominent
role in directing finance away from the most environmentally harmful sectors
like coal, gas and oil, and set minimum ESG expectations in financial regulation
and supervision.“

SUSREG Tracker is WWF´s interactive online assessment tool that evaluates
progress on the integration of environmental and social risks into central
banking, financial regulation and supervision activities. This year's analysis
covers 47 jurisdictions, which together, represent over 88% of the global GDP,
72% of global GHG emissions and 11 of the 17 most biodiversity-rich countries in
the world.
 
Some notable progress includes: 
 * The integration of biodiversity indicators into central banks own portfolios
   and pension fund disclosure. 
 * The development of supervision methodologies to tackle biodiversity loss. 
 * The growing requirements for financial institutions and corporations to
   disclose their climate transition plans.
 * The set up of sector-specific lending guidelines for high-risk sectors to
   help financial institutions assess client's E&S risks.


But the assessment also finds that: 
 * The focus of central banking and insurance supervision activities remains
   primarily on climate. 
 * Only 18% of central banks have shown exemplary progress in integrating
   climate risks into their monetary policy and central banking activities.
 * 68% of high-income countries have not yet adopted adequate climate and
   environmental banking supervision policies.
 * Some of the highest emitting countries have not put in place strong
   climate-related banking and insurance supervision policies.
 * More than half of the countries with net-zero targets (20 out of 37) that are
   covered in this assessment have considerably weak climate banking supervision
   policies.
 * Sustainable banking and insurance supervision policies are falling short in
   the most biodiverse countries of the Asia-Pacific and Latin America, leaving
   them highly-exposed to nature-related risks.


Building on its Roadmap for a climate safe and nature positive economy that
recommends new nominal anchors for central banking and financial supervision
mandates (– 1.5ºC, full biodiversity recovery by 2050,  50% GHG emissions
reduction, and nature positive by 2030), WWF urges central banks, financial
supervisors and regulators to: 
 
 * Publish own 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.
 * Apply a precautionary approach using all micro and macro prudential
   supervision tools available. 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. 
 * Utilise their monetary policy toolkit to address environmental and social
   risks while phasing-out always environmentally harmful activities from their
   portfolios, i.e. those that do not adapt to business models that ensures a
   transition to a sustainable economy.
 * Impose higher capital requirements to financial institutions’ lending,
   investing and insuring companies with always environmentally-harmful
   activities like coal, oil and gas expansion.

Siti Kholifatul Rizkiah, lead author of the SUSREG Annual Report 2023 says:
“Properly managing financial risks stemming from environmental and social risks
is 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.”
 
Watch the video below for an overview of the SUSREG assessment main findings and
recommendations: 
 

 
Download
SUSREG ANNUAL REPORT 2023
PDF 26.91 MB
SUSREG ANNUAL REPORT 2023 - EXECUTIVE SUMMARY
PDF 5.79 MB
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