COVID-19 and the Lessons for Widening Sustainable Finance

We are in the midst of an unprecedented pandemic. Apart from the tragic loss of life, the economic implications will be felt for years. This will not only be in terms of the businesses that have been closed down, many of which will never re-open, but also through effects on employment and career development, and the massive levels of debt that governments are incurring in order to support their economies.

Scientists have for long sounded alarm about the likely outbreak of a pandemic like COVID-19. But despite such warnings, governments around the world actively cut the budgets of their health services, including those aimed at dealing with pandemics. In the UK, a cross-government pandemic influenza outbreak drill took place in October 2016. Exercise Cygnus, as it was called, identified that the UK’s National Health Service would need thousands more intensive care beds in a pandemic crisis, that doctors would have to start triaging patients and only help those with a better chance of survival, and that there would be a shortage of masks and other protective equipment available to frontline staff. The required investments in equipment and facilities were never made and tragically the predictions of the exercise have now become a reality, as the UK now has the highest number of COVID-19 deaths across Europe. Similarly, in the USA the administration over the last three years cut the funding and workforce of the Centers for Disease Control and Prevention, and the USA now suffers from the highest COVID-19 deaths in the world, numbering more than 85,000 at the time of writing.

A parallel can be drawn to scientists’ warnings of a climate catastrophe. The world is facing the growing threat of abrupt and irreversible climate change. Scientists recently revealed that a large part of the Arctic Ocean has already warmed by more than 4°C above pre-industrial conditions. We have been witnessing an increasing number of climate-related incidents such as hurricanes, earthquakes and bush fires, leading to a loss of life, jobs and habitation. The harrowing scenes of the recent Californian or Australian fires that led to such devastating loss of human and animal life and habitation may be a harbinger of a “new normal”. Are we going to be equally slow to heed such calls for action, until a global climate emergency forces us to act?

One of the major sectors of the economy that needs to act in this regard is the financial sector. It is financial institutions that fund the activities of the companies contributing to global warming and environmental destruction. Going forward, it is crucial that the financial system starts to fully consider the cost of economic activities that cause environmental destruction, pollution and biodiversity loss when making decisions on loans and investments. Furthermore, it is crucial that the financial sector is better prepared to deal with systemic risks, including climate and other environmental risks.

In this regard, it is positive to see that central banks have been showing greater awareness of sustainability risks and acknowledging the need for them to act in helping to align the financial system with sustainable development. Launched at the Paris One Planet Summit in December 2017 by eight institutions, the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) has grown to 65 members and 12 international observers. NGFS members have acknowledged that climate change represents a systemic risk to financial stability and have started to develop approaches to integrate climate-related financial risks into prudential supervision frameworks. A recent survey by the Basel Committee on Banking Supervision revealed that the majority of its membership considers it “appropriate to address climate-related financial risks within their existing regulatory and supervisory frameworks.”

Many countries have been considering to introduce disclosure requirements for climate-related financial risks, as suggested by the Task Force on Climate-Related Financial Disclosures, as well as micro- and macro-prudential instruments to mitigate these risks. A number of central banks – including the Bank of England, the Nederlandsche Bank and the Banque de France – have already started developing climate stress tests for their financial systems.

But calls have emerged from the financial industry to delay prudential measures aimed at addressing climate risks. Without doubt, this is a period of great stress for our economies and the financial sector, and pragmatism and flexibility are needed to manage a difficult crisis situation where so much is at stake. But we need to be clear that the current crisis must not be used as an excuse to undermine efforts by central bankers and financial supervisors to climate-proof financial systems. If anything, the COVID-19 crisis should strengthen the resolve of central banks and supervisors to speed up efforts to integrate environmental and climate risks in financial decision making to prevent the next big crisis to occur.

The central policy challenge facing both pandemics and climate crises is the same – we must make rapid progress in mitigating risks in the face of deep uncertainty and make our societies and economies more resilient. The financial sector will have to play a key role in this.


An abridged version of this article was first published by OMFIF on 14 May 2020 and can be accessed here.

Aziz Durrani is Senior Financial Sector Specialist at the South East Asian Central Banks (SEACEN) Research and Training Centre.

Ulrich Volz is Director of the SOAS Centre for Sustainable Finance and Reader in Economics at SOAS, University of London.

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Aziz Durrani is Team Lead & Senior TA Specialist, Technical Assistance at the ASEAN+3 Macroeconomic Research Office (AMRO).