There’s growing consensus among central bankers that climate change poses a threat to the stability of the financial system, but capturing that risk is much easier said than done, says TD Economics.
In a new report, TD observes that the ranks of central bankers worried about the impact of climate change on financial stability is on the rise.
It notes that former Bank of Canada governor Mark Carney touched off the movement in 2015 when, as governor of the Bank of England, he “trailblazed the idea that financial regulators should take an active role in promoting green risk management practices.”
Since then, the number of central bankers adding climate risk to their list of threats has steadily increased.
As of last month, TD reports that the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) had grown to include 49 members and nine observers.
“Such rapid growth in the number of central banks entering the fray is indicative of an evolving consensus that climate change (and actions to address it) will have material impacts on economies and financial systems around the world,” it says.
Yet, the recognition of the importance of climate-related risks is accompanied by a great deal of uncertainty in how to measure and evaluate these risks.
“While there appears to be general agreement on these risk elements, any forward-looking assessment as to how (and to what extent) these risks could manifest complicates the task for central banks and regulators,” TD says in its report.
Among other things, it notes that reliable data on “climate-related risks and their impact on asset returns is scarce,” and that there’s a “need to develop expertise in climate-related data analysis and modeling frameworks.”