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Addressing climate-related financial risks and overcoming barriers to scaling-up sustainable investment

Journal Article

Published on 10 December 2020

Abstract

Climate change represents a material risk for individual financial institutions and systemic financial stability. Moreover, there is increasing awareness that finance plays a crucial role in achieving the global climate targets. However, to date, climate risks are not sufficiently accounted for, hindering sustainable investments. To align finance with sustainability and safeguard macro-financial stability, it is crucial to adequately assess forward-looking climate risks for lending and investment decisions. The Group of Twenty should support efforts by central banks, financial supervisors, international financial organizations, and the financial sector to integrate climate and sustainability factors into risk management and advance the mainstreaming of sustainable finance.

Key Recommendations
The G20 should support efforts by central banks, financial supervisors, international financial organizations, and the financial sector to integrate climate and sustainability factors into risk management and advance the mainstreaming of sustainable finance. We propose nine action points:
  1. Operationalize a standardized taxonomy for investments based on their climate and sustainability impact by building on science-based research
  2. Promote standards for the disclosure of climate and sustainability risks across the financial sector
  3. Mainstream science-based climate-financial risk assessment in public and private investors’ risk management
  4. Integrate sustainability risks into the Basel IV framework
  5. Decarbonize portfolios of central banks and public financial institutions
  6. Integrate science-based climate-financial risk assessment into the operational frameworks of international financial institutions
  7. Scale-up sustainable finance for developing countries through MDBs and DFIs
  8. Develop sustainable insurance solutions and boost resilience investment to support countries that are particularly vulnerable to climate change
  9. Foster cooperation between financial supervisory authorities, scientific research, and civil society
Topics: Finance