Back in 2015, when the Paris Agreement was signed, just a handful of regulators were engaged with climate change risk, notably the Bank of England and the People’s Bank of China.

But now momentum is growing. March 2019 alone saw three important steps forward. First, the Bank of England’s Mark Carney, one of the first central bankers to take action on climate change, announced that the Bank’s Prudential Regulatory Authority would ask insurers to consider physical and transition risks as part of the mainstream, market-wide stress test. Then the San Francisco Fed became the first part of the US central bank to recognise that the effects of climate change are “relevant considerations for the Federal Reserve in fulfilling its mandate for macroeconomic and financial stability”. And at the end of the month, the Bank of Canada became the latest institution to join the Network for Greening the Financial System (NGFS), a voluntary alliance of financial regulators and supervisors.

Launched by the Banque de France in December 2017 with just eight members, the NGFS is now a truly global endeavour: its members include 36 central banks and supervisors plus six observers (including the World Bank, the Organisation for Economic Cooperation and Development, and the Bank for International Settlements).

The NGFS is committed to developing environmental and climate risk management in the financial sector, and to mobilising mainstream finance to support the transition towards a sustainable economy. It offers real potential to deliver on the Paris Agreement goal of making finance flows climate-consistent with long-term climate security (Article 2.1c).

Currently, the Network for Greening the Financial System is examining the prudential risks facing individual financial institutions, the threats from climate change for the economy and financial system as a whole, and also how regulators can help to scale up green finance, for example through their own balance sheets. It has already concluded that short-term action on climate risk is needed to reduce long-term impacts. The first comprehensive report was released in April.

Providing intellectual ammunition for supervisory ambition

Now that the central banking community is aware of the challenge ahead, attention is shifting to the measures that need to be taken so that the unprecedented risks posed by climate change and other environmental issues are confronted before the most catastrophic impacts become unavoidable. The NGFS has set itself an immense task that will require system-wide changes — and a host of questions and uncertainties still remain. Yet, in its own words, the necessary tools and methodologies are “still at an early stage and there are a number of analytical challenges”.

A new research platform has been launched to help fill this gap: the International Network for Sustainable Financial Policy Insights, Research and Exchange (INSPIRE) is commissioning best-in-class, independent global scholarship and analysis that address seven priority themes that advance the work plan and inspire ambition from the NFGS and its member institutions. With initial funding from the Children’s Investment Fund Foundation (CIFF) and the ClimateWorks Foundation, INSPIRE is a platform through which philanthropy can support the progress of central banks and supervisors as they grapple with climate risk and the greening of the financial system. Its purpose, in the words of ClimateWorks’ director of sustainable finance, Ilmi Granoff, is to “provide the intellectual ammunition for supervisory ambition.” By doing so, INSPIRE works as a platform and network to facilitate the implementation of a central recommendation the NGFS made in its latest report: “building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing” (Recommendation 4).

Research needs exist across the financial system

For micro-prudential supervision, issues include the potential (and limitations) of disclosure to address market failures, the risk differentials in asset prices caused by environmental factors, and the challenges for supervisors beyond prudential regulation in areas such as financial inclusion, consumer protection, market creation and financial conduct.

For macro-financial supervision, the main challenge remains the modelling of systemic climate-related risks. Last year, the De Nederlandsche Bank was one of the first central banks to publish the results of a climate stress test. Research questions still to be answered in this area include: what models are available to estimate systemic climate risk and do they sufficiently account for knock-on effects?

Monetary policy is a further important focus area for INSPIRE, building on signals from key central banks that this is a new frontier for analysis and action, notably in a recent speech by the European Central Bank’s Benoît Coeuré. Further research is needed into how climate change might affect inflation targets, and how monetary policy can assist (or inhibit) the transition to a low-carbon economy.

In an open letter central bankers released at the NGFS meeting, Mark Carney, François Villeroy de Galhau and Frank Elderson made clear that getting to a net-zero world “requires a massive reallocation of capital”, adding that “if some companies and industries fail to adjust to this new world, they will fail to exist”.

Facing up to the scale of the task

INSPIRE is also encouraging research on crosscutting themes. These include the development of a common language around the environmental properties and factors of financial assets. This is already happening, for instance, with the development of the EU’s taxonomy on what can be considered an environmentally sustainable economic activity.

Given a context of slowing economic growth, INSPIRE’s last priority theme explores which tools and policy instruments central banks and regulators could employ to address market turbulence while facilitating the transition to a sustainable economy.

Central banks and supervisors are conscious of the scale of the task that lies ahead of them and are seeking inputs from the research community. Dr Ma Jun, chair of China’s Green Finance Committee and chair of the supervision workstream of the NGFS, says: “We welcome the creation of INSPIRE and its contribution to generating robust research necessary to inform policy and regulatory action.”

In an open letter central bankers released at the NGFS meeting, Mark Carney, François Villeroy de Galhau and Frank Elderson made clear that getting to a net-zero world “requires a massive reallocation of capital”, adding that “if some companies and industries fail to adjust to this new world, they will fail to exist”.

INSPIRE’s first call for innovative research has been completed and a second call will be made in the summer, building on the analytical priorities identified in the first comprehensive report of the NGFS



  • INSPIRE’s global advisory committee is chaired by Nick Robins at LSE’s Grantham Research Institute on Climate Change and the Environment, and includes Wang Yao from Beijing’s Central University of Finance and Economics, Alexander Barkawi from the Council on Economic Policies, and Jakob Thomä from the 2° Investing Initiative.
  • This blog post appeared originally on the site of LSE’s Grantham Research Institute with the title Building the research foundations for greening the financial system.
  • The post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.
  • Featured image by QuinceMedia, under a Pixabay licence
  • When you leave a comment, you’re agreeing to our Comment Policy.

Nick Robins is a professor in practice of sustainable finance at LSE’s Grantham Research Institute. He is also a special adviser on sustainable finance with UN Environment. From 2014 to 2018, he was co-director of UN Environment’s inquiry into a sustainable finance system. As part of this, Nick led country activities in Brazil, the EU, India, Italy and the UK, as well as thematic work focused on investors, insurance and green banking. Before joining UNEP, he was head of the Climate Change Centre of Excellence at HSBC. Prior to HSBC, Nick was head of sustainable and responsible investment (SRI) funds at Henderson Global Investors. Nick has also worked at the International Institute for Environment and Development, the European Commission and the Business Council for Sustainable Development.

Matthias Täger is a PhD candidate in environmental policy and development at LSE’s department of geography and environment. He explores how financial market actors govern their relationships with the environment, focusing on the Task Force for Climate-related Financial Disclosures (TCFD). His research aims at understanding and explaining how the TCFD emerged, how the decision-making and knowledge production process leading to the final recommendations unfolded, and how these recommendations are being distributed, institutionalised and marketised within financial markets.