Basic environmental and social risks remain unaccounted for in central banking and supervision regulation

Whilst significant progress has been made by several central banks and financial supervisors to implement sustainable regulatory and supervisory measures, key gaps remain, particularly in major economies where broader environmental and social risks are still being neglected. These are findings from WWF´s Greening Financial Regulation Initiative (GFRi) 2023 annual SUSREG Tracker.

Only 18% of central banks show exemplary progress in integrating climate-related risks into their monetary policy and central banking activities, whilst 68% of high-income countries have not yet adopted adequate climate and environmental banking supervision policies. Moreover, ambition and implementation of sustainable financial measures is unequal across central banking and financial supervising countries.

Maud Abdelli, WWF’s Greening Financial Regulation Initiative lead, emphasized that more action is needed, “Central banks and supervisors need to take up a prominent role in directing finance away from the most environmentally harmful sectors like coal, gas and oil, and set minimum ESG expectations in financial regulation and supervision.”

SUSREG Tracker is WWF´s interactive online assessment tool that evaluates progress on the integration of environmental and social risks into central banking, financial regulation and supervision activities. This year’s analysis covers 47 jurisdictions, which together, represent over 88% of the global GDP, 72% of global GHG emissions and 11 of the 17 most biodiversity-rich countries in the world.

According to the report, African countries covered (Kenya, Morocco, South Africa, and Zambia), align to less than 50% of SUSREG’s assessment on climate and nature is observed in the areas of banking supervision, central banking, and insurance supervision.

While expectations are in place for addressing climate-related risks in Kenya and Morocco, the policy coverage needs to be broadened and strengthened. For instance, The Central Bank of Kenya has issued a guidance on Climate-Related Risk Management under the Banking Act, with the purpose of requiring banks to embed the consideration of the financial risks from climate change in their governance arrangements, incorporate the financial risks from climate change into their existing financial risk management practice and develop an approach to disclosure on the financial risks from climate change.

Siti Kholifatul Rizkiah, lead author of the SUSREG Annual Report 2023 said, “Properly managing financial risks stemming from environmental and social risks are an intrinsic part of central banks and financial supervisors mandates. It harnesses the power of the financial sector to safeguard our economy and underpins the foundation of a resilient financial system.”

Financial supervisors in Africa can enhance their financial supervision by fortifying regulations to address key issues such as double materiality, requiring sector policies for high-risk sectors, setting targets for climate and nature, disclosing transition plans, conducting climate scenario analysis and stress testing, and implementing disclosure based on TCFD (Task Force on Climate-related Financial Disclosures) and TNFD (Task Force on Nature-related Financial Disclosures) recommendations.

The South African Reserve Bank (SARB) has demonstrated significant progress this year by launching a public consultation on Climate-related risk practices and disclosures for banks and insurers in August 2023. This initiative mandates financial institutions to establish procedures for managing climate-related risks.

Central banks in Africa are encouraged to integrate environmental and social considerations into their monetary policy. This includes incorporating such considerations into corporate asset purchase programs, collateral frameworks, foreign exchange reserve management, green preferential targeted refinancing lines, and adjusting reserve requirements.

A taxonomy system should be implemented in the country to prevent greenwashing by classifying sustainable and unsustainable activities. The financial sector should be mandated to disclose their portfolio alignment with the taxonomy.

By Faith Jelagat Kibor