Adapting to climate change has no alternative

Published: 29/4/2021

"Central banks have an obligation to understand the risks relating to climate change and the channels through which they might affect the pursuit of their aims. At the same time we need to make sure that the participants in the financial system are equally aware of those risks," said CNB Governor Vujčić at the online conference The Role of Banks in Greening Our Economies, organised by the CNB and the European Bank for Reconstruction and Development (EBRD) on 29 April 2021.

"Banks and other financial institution should incorporate climate risks into their business strategies and make their business-making more resilient to hazards connected with climate change," the Governor added.

"Central banks are not the ones who are to be expected to take the lead fighting climate change, since their instruments are not as efficient as the ones government can employ to fulfil that task. In addition, if faced with a conflict between maintaining price stability and/or financial stability, and fighting climate change, central banks would and have the obligation, to give priority to price stability and financial stability as their primary mandates," the Governor remarked, referring to the role of central banks.

Francis Malige, EBRD Managing Director of Financial Institutions, explained that owing to the impact of the COVID-19 pandemic green investments became essential and not only desirable.

"Companies cannot afford to become exposed to unnecessary risk or take decisions on unsustainable investments," said Malige.

Frank Elderson, Vice-Chairman of the ECB's Supervisory Board, pointed out that climate change creates material risks for banks. "Through our supervisory action and as part of international networks, the ECB is compelling banks to account for climate change – when managing risks, selecting their board members and devising stress scenarios," added Elderson in his address.

The Croatian National Bank has carried out a survey among Croatian banks on sustainability risks, focusing on climate and environmental risks, in order to gain an insight into whether credit institutions in Croatia are familiar with environmental and climate risks, whether they take these risks into account and whether and how they manage them. The survey results show that banks, although aware of these risks, tend to underestimate their exposure to them, while at the same time to some degree overestimating the opportunities arising from the transition to a low carbon economy. They also expect regulatory guidance and support in adapting their business operations.

Banks have to be aware that supporting the transition to a resilient economy with low emissions of greenhouse gasses will account for a significant part of their business operations, agreed the participants of the panel discussion on green financing as a boost to sustainable growth. Along with the moderator, Sandra Švaljek, CNB Deputy Governor, Alberto Postigo, VP-Senior Credit Officer at Moody’s, Andrea Pavlović, Member of the Management Board of Privredna Banka Zagreb, Ian Smith, Deputy Director, Head of Intermediated Green Finance and Policy, EBRD, and Ian Cochran, Climate Action in Financial Institutions, discussed the manner in which regulators and banks can include in their operations climate and environment issues and risks linked to them and concluded that the results of the questionnaire distributed to banks by the CNB showed that in this regard Croatian banks do not lag behind banks in Europe.

Maroje Lang, head advisor in the CNB's Research Area, pointed out at the end of the conference that defining the problem was important, namely, that the pinpointing of climate change as the source of financial risks is just the first step toward the inclusion of central banks in the project of stimulating the green economy. "However, we yet have to find models on the basis of which central banks and commercial banks will begin crediting the economy so as to decrease financial risks linked to climate change," Lang said.

After the conference, CNB Deputy Governor, Sandra Švaljek, pointed out that the conference and research presented in the course of the conference indicate the commitment of the CNB to encourage banks to contribute to the greening of the economy.

"In Croatia’s economic structure a considerable share is held by economic sectors that could be considered vulnerable to physical and transitional climate risks, and exposures to those sectors have a proportionally high share in the overall exposure of banks. There is therefore an objective need for banks to identify and analyse the risks linked to exposures to companies that belong to those sectors. In addition, there is room for increasing the supply of their green products that are not only a smaller risk for banks, but also contribute to overall economic growth,” Deputy Governor pointed out.