Banking Regulation and Sustainability
17 Pages Posted: 2 Jan 2019
Date Written: November 5, 2018
This paper seeks to answer the question of how banking regulation can contribute to environmental sustainability objectives. The 2030 United Nations Sustainable Development Goals and 2015 Paris Climate Change Treaty place climate action and environmental challenges as central to the required transformation of the global economy. The G20 and the Financial Stability Board (FSB) have expressed concerns that climate change represents a major threat to the future stability of the global economy. Many studies have demonstrated the links between environmental sustainability challenges and economic and financial risks. As banks are the largest providers of credit in many economies, how they manage these risks collectively is an important policy and regulatory concern. This paper discusses how prudential banking regulation and supervision can help to direct, incentivize and encourage banks to support sustainability. In doing so, it reviews some of the main regulatory standards and supervisory approaches that are emerging from best practice to address environmental sustainability challenges. The paper considers some recent international and regional initiatives which address how financial regulation and environmental, social and governance (ESG) factors can be incorporated into financial regulatory and policy frameworks. The paper argues that international regulation should play a larger role in developing harmonized standards for bank risk governance and business model assessment because where sustainability risks are material financial risks for individual banks they can create systemic risks to the banking sector as a whole. Finally, the paper considers some common challenges in developing more effective regulatory approaches for supervising banks in the context of managing the financial risks posed by environmental sustainability.
Keywords: banks, government policy and regulation, sustainability, environment, financial risk and risk management, corporate governance, financial markets, international monetary arrangements and institutions
JEL Classification: G21, G18, Q5, F64, G32, G34, O16, F33
Suggested Citation: Suggested Citation