Financial policy not yet on track for climate action

The latest Sustainable Financial Regulations and Central Bank Activities (SUREG) Report by the WWF shows that climate finance policy has so far only comprehensively incorporated climate risks in a few areas and that the focus has so far been on environmental damage and human rights violations rather than long-term changes. Overall, the green and social turnaround in finance is not yet being driven forward sufficiently.

The SUREG Report analyzes climate finance policy in the areas of banking supervision, central banking and insurance in 47 countries and aims to assess the integration of environmental and social aspects into financial legislation, supervisory expectations and monetary policy.

Banking supervision

The first part of the report analyzes the maturity of regulatory requirements for banks with regard to climate, environmental and social risks and their impact on the financial sector. The indicators include, for example, the assessment of dual materiality, climate targets, stress tests and data quality initiatives.

The WFF found that 17 out of 47 countries have good banking supervision with regard to climate risks. European countries in particular are leaders in this area. In contrast, banking supervision with regard to social risks, which include human rights violations, labor issues and negative impacts on local communities, shows deficits in all countries. Only two countries achieve a relatively high standard of banking supervision with more than 50% compliance with the SUSREG criteria: Brazil and Germany.

In detail, the report finds that only three countries (Malaysia, Spain and Thailand) require banks to base their climate targets on scientifically sound data, keep up to date with the latest climate science and also align their portfolios with the goals of the Paris Agreement. Only one country (France) has also made it mandatory for banks to include the protection of biodiversity and nature in their corporate objectives. Another point of criticism is the lack of sustainable and social risks in the minimum capital requirements for banks: no country has yet introduced concrete mechanisms in this area, although the supervisory authorities in the EU, Italy and Hungary are discussing a possible implementation. It is also worth noting that no regulatory or supervisory authority has yet included climate risks in the calculation of liquidity ratios. Climate risks could have an impact on liquidity outflows or the value of liquidity buffers and thus increase the liquidity coverage ratio.

Central banks

This section assesses various measures that central banks can take to address climate, environmental and social risks in line with their main tasks of ensuring monetary and price stability. The indicators include, for example, minimum reserve requirements, transition or exit plans and taxonomy alignment.

For example, it was found that only eight countries (including Germany) attempt to firmly integrate climate risks into the monetary policy of central banks. Central banks have also insufficiently integrated social requirements into their monetary policy and central bank activities. Nevertheless, countries such as Germany and Italy have made relatively significant progress in these areas. (*)

Nevertheless, there are also positive findings. For example, it was found that 24 central banks have already published their methodology for integrating environmental and social aspects into the management of currency reserves. The situation is different when it comes to active incentives. Only 7 central banks have subsidized loans or preferential refinancing lines based on environmental and social aspects. Another method of incentivizing green assets has not yet been used: For example, central banks could adjust reserve requirements by setting lower reserve ratios for green assets and higher ones for brown assets.

Recommendations

Based on the results of the study, the WWF has published various recommendations for integrating climate and social aspects into financial policy. Among other things, it calls for supervisory authorities to publish their own transition plans for a low-carbon and nature-friendly economy and to focus on existing supervisory instruments instead of waiting for perfect data and models. In addition, central banks should use their monetary policy tools to address environmental and social risks while removing the highest emitting sectors from their portfolios. WWF is also calling for higher capital requirements in lending, investment and insurance for companies engaged in environmentally harmful activities.

Conclusion: The report represents a groundbreaking cross-national comparison of various supervisory authorities and central banks. It is striking that, despite the mixed results, Germany in particular can show positive results and thus plays a pioneering role in some areas. In future, international financial policy decisions could well be based on the regulations and instruments that apply here.

(*) It should be noted that the valuation of the Eurosystem central banks is an accumulation of the ECB's fiscal policy and the national implementations of the member states. Therefore, the Eurosystem central banks are typically at or above the level of the European Union central banks.