Slow, disruptive climate policies risk to financial stability – Bundesbank

Businesses' necessary adaptation to climate change and potentially disruptive policy decisions in the move to a climate-friendly low-carbon economy are the biggest risks global warming entails for financial stability, Sabine Mauderer, board member of Germany's central bank (Bundesbank), said during a debate at the Green Finance Forum in Frankfurt. "The more the economy depends on non-sustainable activities, the greater the risks," Mauderer said. Financial risks from direct consequences of rising global temperatures, such as a greater incidence of severe flooding or forest fires, were already significant. However, slow and insufficient regulation may ultimately lead to hectic disruptive economic and political decisions that hit asset prices and valuations, Mauderer said. The international central bank initiative Network for Greening the Financial System (NGFS) was launched in 2017 because of the realisation that risks from climate change "had not been fully appreciated" from a so-called macroprudential perspective, she said, referring to its effects on systemic economic stability. Upcoming EU sustainable finance regulation had to create standardised and binding disclosure rules for companies so banks could assess potential business partners' exposure, Mauderer said.

Speaking at the same event, Mario Nava of the European Commission's directorate for finance said the forthcoming EU taxonomy for sustainable finance would serve as "a grammar for investors" that is focussed on the impact of investments rather than on their returns. "We need a transformation of the whole economy," Nava said, adding that the incoming commission under president Ursula von der Leyen would move quickly to roll out its Green Deal for Europe, which would also include corresponding financial regulation. Policymakers had remained inactive on addressing climate change for too long, Nava said. Protecting the public good that is the atmosphere it could not be done without private capital, he added.

The debate about the role of central banks in climate action has picked up recently, in particular since the new president of the European Central Bank (ECB), Christine Lagarde, has put it on her agenda. While many agree that central banks need to consider the impact on financial stability, some central bankers warn against overstretching central banks' role. Bundesbank head Jens Weidmann, who is also part of the ECB's rate setting council, warned in October that central banks lack the mandate to intervene in climate policy and therefore could not align its own monetary policy activities with climate targets. Germany's government meanwhile has set out to devise a strategy to better align the country's financial policy with climate targets, for which the EU taxonomy is expected to be a key point of reference.