The report argues central banks must redesign asset purchase schemes to take account of environment-related risks
Policy Exchange report details steps government could take to tackle the environmental and climate risks plaguing the global financial system
The government must leverage its platform as host of the G7 and co-host of the COP26 Climate Summit later this year to push for reforms to the global financial system that can deliver a more sustainable economy, finance experts have urged.
A new analysis, authored by director of the University of Oxford’s sustainable finance programme Ben Caldecott and Policy Exchange think tank senior advisor Benedict McAleenan, this week sets out a number of recommendations for Ministers as they prepare to lead key diplomatic Summits over the coming months.
Among the measures set out in the Capital Shift report is a call for ministers to introduce a compulsory nature-related financial disclosure regime in the UK for companies that would see firms assess their exposure to biodiversity-related issues, such as deforestation and habitat loss, just as it has done with climate-related financial risks. As such, the government should commission the rapid development and adoption of a ‘taskforce on nature-related financial disclosures’ that mirrors the Taskforce for Climate-related Financial Disclosures, the report advises.
The report also calls for the UK to require supervised financial firms and premium listed firms to develop Paris-aligned transition plans that set out how they intend to eliminate environmental risks and negative externalities from their portfolios and loan books over time.
In addition, it argues that central banks should redesign asset purchase schemes to take account of environment-related risks associated with corporate assets and bond issuers, while higher capital charges should be introduced for assets at greater risk from climate and nature-related financial risks.
Writing in a foreword to the report Anthony Browne, MP, a former chief executive of the British Bankers Association and former economic advisor to the Prime Minister, argued there was a compelling case for wide-ranging reforms to require the financial system to take better account of nature-related risks. “From mortgages attached to housing on flood plains, to commodities futures exposed to ecological volatility, to pensions invested in fossil fuel companies, environment-related risks stretch into almost every part of the system,” he said. “All of this must be addressed and I applaud the authors of this report for offering credible options to do so.”
McAleenan emphasised the current financial system was riddled with unidentified risk and as such needed significant reform. “Just like before the last financial crash, there’s a huge financial risk that’s going unidentified by banks, insurers and investors around the world,” he said, pointing to mortgages attached to how housing on flood plains was leaving insurance firms exposed to huge payouts after natural disasters while commodities traders and agriculture investors’ vulnerability to volatile weather patterns and damaged ecosystems was increasing.
“Virtually all physical assets could be affected in some way,” he said. “We know that environment-related risks are there and if we identify them properly then they can be managed down. Many central banks, including the Bank of England, the ECB and the Fed have started to take action on this, but all have a long way to go. Some central bank policies are actually reinforcing the status quo of fossil fuel-based economies, dampening risk signals and hampering transition.”
The report recommends that the UK work with other common law jurisdictions to promote principles-based financial regulation, which it said was better suited to the development of sustainable finance than rules-based approaches.
Meanwhile, the UK should lead a coalition to create the first comprehensive digital map of all physical…