Is climate change an issue for central banks? Absolutely – because global warming is a source of significant financial risk and can jeopardise the stability of the entire financial system.

For instance, the increased frequency of extreme weather events with record-high temperatures and heavy rainfall can erode the value of financial assets by rendering entire stretches of land uninhabitable, putting production facilities out of action or destroying harvests. And then there are changes in society and politics – such as the transition away from “brown technology” – which can push individual enterprises or entire sectors out of the market and thus give rise to financial losses.

So the financial risks are real. This is why central banks have been looking more closely at the impact of climate change on banking and pushing for a greener financial system. One outcome of these efforts was the creation in 2017 of the global Network for Greening the Financial System (NGFS), of which the Bundesbank and the Banque de France are founding members. The NGFS’s mission is to analyse the financial risks of climate change and help achieve compliance with the climate goals formulated under the Paris Agreement.

The pressure to act is intense, and this is also reflected by the sharp upturn in membership numbers – indeed, 40 central banks and banking supervisors from five continents have since joined our network – five times as many as when we launched the NGFS. This means that, at the beginning of July 2019, our membership represents 45% of global gross domestic product, three-quarters of global systemically important banks, and two-thirds of global systemically important insurers. And we are continuing to grow by attracting new members, observers and stakeholders. What is more, we play a hands-on role in helping our existing members green their operations.

So what do we do, exactly? April saw the NGFS issue a call for action with a number of key recommendations. One of these is that banking supervisors should focus more attention on climate-related risks and ensure that they are suitably identified and addressed. Climate change and climate policy can impact the balance sheets and business models of commercial banks in many different ways. For example, if a financial institution is a major lender to sectors that are exposed to climate risks, climate policy decisions or technological advances could increase the risk that these loans might not be repaid in full.

Furthermore, the onus is on every central bank to set a good example and make its own portfolio management more sustainable. The Banque de France has already set a milestone by formulating its responsible investment charter, and its latest Financial Stability Review makes a point of addressing climate-related risks.

The Bundesbank has also been greening its operations since 2007. As the portfolio manager for Germany’s central and state governments, it invests a substantial single-digit-billion amount in accordance with sustainable criteria. The Bundesbank is also currently exploring how it can invest its own portfolio sustainably in the future. A sustainable investment strategy is not just “nice to have” – it is becoming an integral strategic component for more and more central banks.

To promote knowledge sharing, the NGFS is planning to issue guidance for central banks on sustainable investment in October. This publication will be complemented by a handbook on climate and environment-related risk management for supervisory authorities and financial institutions, which will be published shortly. We are also keen to get more central banks from developing countries on board because it is the poorest parts of the world which are bearing the brunt of climate change. In individual cases, there is the risk that sovereigns might be overwhelmed by the financial burden of climate change in future.

Climate protection is now high up on the political agenda in Paris and Berlin, too, and it is a key area of cooperation between the two governments. There has been movement on the green finance front as well – France has already issued green government bonds, and this idea is making ground in Germany, too. Judging by market dynamics, green Bunds will probably meet with lively demand.

Yet despite all the efforts that have been made to curb CO₂, global emission levels climbed again last year. This is why it is important for central banks to devote more thought not just to the repercussions for the financial system, but also to the way in which climate change will affect inflation and economic activity. These are delicate topics that need a substantial body of expertise to be built up. Climate change affects every single one of us. Acting within the strict confines of our price stability mandate, we need to take action now to minimise future risks.