Global Finance and Global Warming

NEW DELHI/LONDON Since 2008, when the global financial crisis nearly brought down the world economy, financial reform has been among the top items on policymakers’ agendas. But, as leaders move from fixing the problems of the past to positioning the financial system for the future, they must also grapple with new threats to its stability, particularly those stemming from climate change.

That is why a growing number of governments, regulators, standard-setters, and market actors are starting to incorporate rules concerning sustainability into the financial system. In Brazil, the central bank views the integration of environmental and social factors into risk management as a way to strengthen resilience. And in countries like Singapore and South Africa, companies listed on the stock market are obligated to disclose their environmental and social performance, a requirement that investors and regulators increasingly view as essential to the efficient functioning of financial markets.

Initiatives like these might once have been regarded as part of a peripheral “green” niche. Today, they are considered central to the operation of the financial system. In Bangladesh, the central bank’s efforts to support economic development include low-cost refinancing for banks lending to projects that meet goals for renewables, energy efficiency, or waste management. In the United Kingdom, the Bank of England is currently evaluating the implications of climate change for the insurance sector as part of its core mandate to oversee the safety and soundness of financial institutions.

In China, annual investment in green industry could reach $320 billion in the next five years, with the government able to provide only 10-15% of the total. In order to prevent a funding shortfall, the People’s Bank of China has recently produced a report with the United Nations Environment Programme (UNEP) setting out a comprehensive set of recommendations for establishing China’s “green financial system.”