Climate change among biggest challenges for central banks

Climate change is one of the biggest challenges that central banks and financial institutions around the world face and they should work together to mitigate climate risks and boost the resilience of the global economy, the governor of the Central Bank of the UAE said.

Central banks and other financial regulatory authorities should continue to develop “safe and effective” supervisory frameworks that can promote green finance and help enforce management and disclosure of climate risks by financial institutions, Khaled Balama said in a keynote address at The Future of Finance conference yesterday in Dubai.

“A greener financial system will contribute to sustaining economic and financial growth and diversified sources of income,” Mr Balama said. “We should work together to enhance the resilience of licensed financial institutions to face the risks of climate change.”

Mr Balama’s comments come as central banks and financial institutions step up green finance as the world seeks to build back better.

The Covid-19 pandemic has also underpinned the need to invest in meeting the UN climate goals and make the transition to a net-zero economy. The 2015 Paris Agreement mandates that countries lower their carbon emissions.

The UAE last week unveiled plans to push for carbon neutrality by 2050 and invest Dh600 billion ($163.5bn) in clean and renewable energy sources in the next three decades.

The push to achieve a greener future comes before the Cop26 climate talks in Glasgow, Scotland, from October 31 to November 12 as the UAE builds momentum and prepares to “play its global role in combating climate change”, Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, said at the time.

The launch of the UAE’s strategy of achieving carbon neutrality by 2050 is also part of efforts to contribute “positively to the issue of climate change” and transform the challenges in this sector into opportunities to guarantee a “bright future for the generations to come”, Mr Balama said.

The signing of the Abu Dhabi Sustainable Finance Declaration in 2019 by financial institutions, including the CBUAE, was a critical step towards sustainability and advancement of the UAE’s green agenda. The initiative integrated public and private sector efforts to develop innovative solutions to attract and increase green and sustainable investments, the governor said.

Nations around the world and major corporations are stepping up efforts to achieve a net zero carbon future. However, there are concerns about whether there will be enough support from investors and financial institutions to fund the transition.

Earlier this month, the International Monetary Fund urged the $50 trillion global investment funds industry to step up efforts to finance the transition to a greener economy and help mitigate the effects of climate change.

Ahmed Al Sayegh, the UAE’s Minister of State and chairman of Abu Dhabi Global Market, said “the future of finance is green” as the pandemic-driven crisis has given “us an opportunity to reflect and build a better, a more digitally enabled and greener world”.

Covid-19 has jolted the financial sector into boosting its resilience and including environmental, social and governance standards and climate change considerations at the heart of its investment decisions.

“It has united the world on a common mission to combat climate change and race to net zero,” Mr Al Sayegh told the conference.

“Technology, innovation and the green agenda have become central to how financial services are produced, distributed and consumed. The green revolution will require all segments of the economy and society – governments, financial markets, businesses, and individuals – to do our part.”

The rapid technological developments in the financial industry continue to play an important role and regulators have the “potential to facilitate both economic growth and financial stability by providing the best digital solutions for central banks, financial institutions and companies,” Mr Balama said.

“We believe that it is necessary for central banks and other supervisory authorities to create an environment conducive to innovation as they exercise their supervisory and regulatory role, and to manage the risks of these modern technologies in an even more effective manner.”

However, the breakneck speed of developments in technologies over the past two decades has significantly changed the financial sector landscape, Fahad Al Shathri, deputy governor for supervision at Saudi Central Bank, said at the conference.

“The traditional financial sector such as banks are no longer exclusive players in the financial services industry with increasing presence of non-traditional players, including FinTechs and Big Tech, serving part of the value chain of the financial ecosystem,” Mr Al Shathri said.

Financial institutions are currently exploring use cases of the underlying technology to boost efficiencies in asset tokenisation, smart financial contracts and trade financing using blockchain.

However there are risks including cyber security, market conduct and money laundering concerns that should be “considered more holistically”.

The breakneck speed of developments over the past two decades has significantly changed the financial sector landscape