Hussh | We need more from our financial institutions in the fight to address the environmental crisis

We need more from our financial institutions in the fight to address the environmental crisis

A report by WWF Switzerland and WWF Denmark has called for immediate action by central banks and financial supervisors to combat the urgent twin challenges of climate change and biodiversity loss.

The report highlights the need for a precautionary approach and increased integration of environmental considerations into monetary policies and regulations, and emphasises the critical nature of these environmental crises and the importance of staying below the 1.5°C global warming threshold to avoid catastrophic impacts. 

“Carbon budgeting” urges for rapid reductions in greenhouse gas emissions to achieve net-zero by 2050, underscoring the interconnectedness of climate change and biodiversity loss and the need for efforts to simultaneously address both issues.

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Recognising their crucial role in driving economic systems, the WWF report asserts that central banks and financial supervisors have a vested interest in addressing environmental challenges to prevent financial instability. 

The paper’s authors call for a precautionary approach however, encouraging the utilisation of all available tools to mitigate risks related to climate change and biodiversity loss, and questioning sustainable investment strategies for their effectiveness in reducing environmental risks.

There are several notable challenges in integrating climate change and biodiversity loss into operations, including redefining “green” economic activities and balancing environmental harm with economic transformation needs. An option to tackle these challenges includes a “brown” taxonomy which would complement the existing green taxonomy while enabling decarbonisation of economies at the lowest economic and social cost.

The report outlines a set of indicators for central banks and financial supervisors to guide policies and regulations, stressing the significance of incorporating climate change and biodiversity loss into monetary policy, financial regulation, and supervisory activities.

Right now, a disconnect exists between the financial sector and its investments’ environmental impact, exemplified by profits made from loans to companies linked to deforestation. While some progress has been made in integrating environmental issues into financial regulation and supervision, more comprehensive efforts are needed. Unsurprisingly, the WWF is calling for central banks and financial supervisors to take responsibility and address these issues urgently, utilising all available instruments to effectively tackle climate change and biodiversity loss.

A further challenge is redefining “green” or environmentally friendly economic activities, while acknowledging the complexity of activities that are necessary for economic transformation but environmentally damaging — a brown taxonomy would help to differentiate and assign higher financial risks to such harmful activities.

It has become increasingly apparent that clearer goals are needed to ensure immediate action, with even more specific targets set to reduce greenhouse gas emissions and stabilise biodiversity loss. This could be achieved through the integration of climate and biodiversity goals into central bank and financial supervisor mandates, along with cooperation with policymakers and external agencies to drive change.

The report also recognises civil society groups’ importance in fostering connections between biodiversity loss, climate change, and financial institutions, emphasising increased collaboration with financial institutions to define quantitative targets for biodiversity recovery, accompanied by transparency and accountability in sustainable finance to combat greenwashing.