Los banks they must regulate the risks related to the nature and the environment: the new report of the Greening Financial Regulation Initiative (GFRi) argues that many of the stricter rules established for global systemically important banks after the 2008 financial crisis should apply to the current crisis of nature and environment in general– More comprehensive risk monitoring, additional capital requirements and stress testing against adverse scenarios.
Sustainable Financial Regulation and Activities of Central Banks (SUSREG)
- Both national regulatory requirements and the performance of global systemically important banks fall short on all issues assessed in this paper: disclosure, risk management, capital and liquidity requirements, and long-term considerations.
- The current landscape of regulatory expectations on nature-related risks reveals a glaring gap between the 11 countries assessed, especially serious in the case of the US, Canada and the UK, which show minimal action despite that 13 of the 29 global systemically important banks are domiciled in these countries. This highlights the need for scalable and coherent regulation to avoid regulatory arbitrage.
- Among global systemic banks assessed, 50% have strategies to engage clients on forest-related issueswhile only one of them has a strategy for water securitywhich highlights a clear imbalance in the environmental approach. Besides, none of them currently use scenario-based risk management for water security or deforestationwhich reflects the lack of comprehensive environmental risk planning.
International financial regulation must evolve to take into account risks and impacts related to nature and the environment. Globally systemically important banks play a crucial role in the stability of the financial system and their resilience is vital to avoiding widespread financial crises. At the same time, banks have a significant environmental footprint and, consequently, a great opportunity to mitigate its negative impacts on nature and the environment. This requires a coherent and coordinated approach between supervisors and the intervention of international standardization bodies.
The data of CDP Climate Charge show that the big banks continue to turn a blind eye to the range of risks posed by the loss of nature and environmental degradation. We’ve heard before that big banks are ‘too big to fail’, but if they don’t report and act on nature and the environment the opposite is likely to be proven. Regulators must demonstrate that they have learned the lessons of the financial crisis and act quickly to enforce comprehensive and holistic environmental disclosure and safeguard financial stability.
As a result of the analysis carried out, a series of recommendations are proposed:
- For the Financial Stability Board and the Basel Committee on Banking Supervision: that integrate the risks related to nature and the environment in global financial frameworks and adapt the frameworks for global systemically important banks. This includes improving risk management practices, adjusting capital buffers to take into account exposure to environmental risksthe incorporation of metrics in the annual evaluations and the modification of the criteria of systemic importance to reflect the risks related to the nature and the environment.
- For national financial regulators and supervisors: to strengthen regulations for both national and global systemically important banks headquartered in their countries, so that: integrate risks related to nature and the environment into their management frameworksdevelop specific risk scenarios, apply systemic risk buffers, coordinate supervisory efforts across regions, incentivize improve risk management and information disclosure, and improve environmental risk monitoring processes.
- For global systemically important banks: to increase actions related to nature and the environmenthighlighting improvements in disclosure on nature-related risks and collaborative efforts through adhering to frameworks such as the Working Group on Nature-Related Financial Disclosures (TNFD). This involves aligning climate and nature policies, integrating environmental considerations into all business practices, and adjusting financial practices – such as capital and liquidity requirements – to strengthen resilience against nature and environmental risks. atmosphere.
- For the G20: to urge the Financial Stability Board and the Basel Committee on Banking Supervision to integrate nature and environmental risks into Basel requirements and within the framework of global systemically important banks; require greater transparency and reporting requirements, and develop evaluation and monitoring criteria for these risks.
