COVID-19 reminds us that government has a critical role to promote the greater good of everyone, not only a few. Governments across the world (both national and local) and the policies they promote have always had the potential to make the difference in our ability to solve tough problems. Importantly, we have seen examples of both good government and not-great government in this moment of crisis.
When we look beyond the current COVID-19 pandemic and the pressing need to rebuild the economy, the largest looming issue at our doorstep is undeniably the climate crisis.
Addressing climate change takes leadership at all levels, and a good government will matter. Key institutions to help catalyze a recovery and create the framework to underpin it are those responsible for monetary, fiscal, and financial policy. These include central banks, fiscal and regulatory authorities, and finance ministries. Across the world, these financial policymakers are having to carefully balance crumbling economies and managing the real systemic risks to the financial system resulting from the COVID-19 crisis. Large parts of the global economy have simply come to a halt. These policymakers are not only dealing with liquidity issues common in a crisis, but also solvency. They are in an unenviable, very challenging, but also essential, front-line position.
In many countries, these are also the same institutions that have been calling for stronger action to address risks to the financial system and economic growth from climate change. These policymakers are already starting to quickly craft the combination of monetary, fiscal, and financial policies to cushion the impact of COVID-19, particularly for the most vulnerable, and allow for stimulus efforts to bring economic engines back to full gear once the pandemic is under control. There is no reason why those financial policymakers can’t include climate considerations into stimulus efforts, both in terms of catalyzing economic growth, but importantly, also in terms of managing and reducing clear risks on the horizon from climate change.
Stimulus is by definition an investment in our future, and clearly, we need our future to be resilient across the board. This will mean addressing equity issues as well as climate issues, and these can and should be done simultaneously. The COVID-19 pandemic is illuminating existing inequalities, and the resulting vulnerabilities of large portions of society, which will all need to be addressed in order to ensure a stable and sustainable recovery for everyone.
As the current situation has shown, the greatest costs in a crisis are often borne by those already the worst off. This is particularly true for the effects of climate change: while climate change will impact everyone, it will not impact everyone equally. In crafting an economic stimulus response to COVID-19, governments and public institutions can and should lead the charge in promoting equitable financial policies, and these policies can also help address climate risks. Paying attention to ensuring that the stimulus sets up our economy for maximum resiliency will help achieve a more equitable and less vulnerable society this is better prepared for climate change.
A recovery that does not include the creation of green jobs, climate-resilient infrastructure, and measures to reduce emissions that keep us well under a 2°C warming will not be resilient to the climate crisis on our doorstep. It will not be a sustainable recovery. You need not look too far for examples of climate-related extreme weather events that have resulted in significant economic losses: as far back as 2011, a single flooding event in Thailand cost the country more than 12% of its GDP in damages and losses, according to a World Bank estimate. This has repeated itself again and again in recent years, and key market signals, such as those from ratings agencies, have started to emerge linking economic impacts from climate change to financial resilience and economic growth.
The good news is that the spadework on how to build-in climate considerations into financial policies, regulations and standards has been ongoing since 2015. For example: the Bank of England is planning on stress testing the balance sheets of its regulated banks and insurance firms, seeking to understand how they would fare under the impacts of three warming scenarios (including 4°C by 2080) which would include more frequent severe flooding and sustenance, and how they might cope with a sudden sale of “brown” assets should there be a rush out of fossil-based companies. The Task Force on Climate-related Financial Disclosures (TCFD)’s voluntary framework for climate-related financial disclosures is fast becoming the most commonly used climate-risk management framework for corporations and financial institutions to understand, manage, and in some cases, disclose their climate-related financial risks. Further, organizations like the Network for Greening the Financial System (NGFS) and Coalition of Finance Ministers for Climate Action are coordinating key policymakers from dozens of countries to help devise common approaches to mainstreaming climate considerations into financial policies. If enacted, these approaches will operate in similar ways in different countries, ensuring a level of commonality within the broader financial system. In fact, both the NGFS’s first comprehensive report from last April and the Global Commission on Adaptation report “Driving Finance Today for the Climate Resilient Society of Tomorrow”, which CFA authored, include clear recommendations on how to integrate climate considerations efficiently and effectively into various types of financial policymaking.
A government’s actions in these types of crises matters. How we invest as we climb out of the crisis matters. Those on the front lines of rebuilding economies should ensure that financial policy is designed to maximize our resilience through equitable and climate-smart financial policies. Incorporating climate considerations into the foundation and architecture of the financial system, including through climate risk and resilience standards, climate change policies, climate-related financial stress tests, and green and clean energy incentives will be critical. The costs of inaction on these fronts could not only be as great as our current economic crisis, but also far longer lasting.