Financial Stability in a Planetary Emergency

The transition of the financial sector and its role in accelerating progress towards addressing the risks of climate change and breakdown of natural systems is firmly in the spotlight. Whether it is US Special Envoy, John Kerry, talking to banks about mobilizing capital for green technology and clean energy; the rapid growth of the Network for Greening the Financial System as a forum for central banks and supervisors to collaborate on environmental issues; or former Bank of England governor, Mark Carney’s position as COP26 Finance Advisor to the UK Prime Minister and UN Special Envoy for Climate Action and Finance, the role of finance is center stage.

But are the proposed changes enough to meet the challenges of a planetary emergency? Given that we may have as few as six years left (e.g., until 2027) of carbon emissions at today’s rates before locking in climate change above 1.5 degrees Celsius, are the scale and design of the regulatory changes in proportion to the significant behavioral shifts that are necessary? Do we have the right tools in the toolbox and the right discussions on the table?

Financial Stability in a Planetary Emergency highlights the need for a bold approach to financial regulation. One based on the premise that financial stability is 100% conditional on planetary stability. We outline practical policies a regulator could adopt if given the responsibility of regulating the financial system in line with the needs of society and the planet. Based upon a review of existing literature on climate risks and financial policymaking, together with interviews with leading thinkers on sustainable finance and policy, we outline 10 proposals, summarized below, that could shape the future direction for climate-related financial regulation in the next two to three years:

  • Proposal #1 - Crunch time for stress tests: Expand system-wide climate stress-testing exercises to include a scenario for the physical risks beyond 2050 and a scenario for the transition by 2030.

  • Proposal #2 - Get tougher on buffers: Adjust capital instruments to account for climate-related financial risks. This will limit exposure to carbon-intensive loans, build up capital buffers, and incentivize investment in lower-carbon sectors.

  • Proposal #3 - Stuck in neutral: a ‘polluter pays’ principle for finance : Develop polluter-pays mechanisms for the financial sector that reflect contributions to higher levels of systemic risk from fossil fuel financing and allocate proceeds to deposit guarantee schemes and/or green projects.

  • Proposal #4 - Policing the journey: Regulators set out a clear framework for what Paris and net-zero alignment mean in practice, and the consequences of falling short of expectations.

  • Proposal #5 - From KYC to KYCO2: Introduce mandatory KYCO2 rules based on ID verification processes to ensure banks are collecting sufficient climate and environmental impact data from clients, particularly clients that have the greatest climate impact.

  • Proposal #6 - Hitting the emergency breaks: A financial non-proliferation treaty on fossil fuel and deforestation finance, signed by central banks and all regulated banking institutions.

  • Proposal 7 - A ‘bad bank’ for bad assets: National and regional central banks create a ‘bad bank’ to manage the legacy exposures to assets at high risk of being stranded due to transition policies.

  • Proposal #8 - A green light for lending: Create incentivized green wholesale lending, refinancing or credit enhancement facilities, to accelerate the transition to net-zero.

  • Proposal #9 - Leaving no one behind: Introduce an updated climate and communities reinvestment act that redirects capital towards supporting community resilience and climate action through diverse networks of local and specialist financial institutions.

  • Proposal #10 - Call of fiduciary duty: A global reset on the definition of ‘fiduciary responsibility’ based on a legal framework for impact to be enacted into law and applied to a broader set of financial relationships and institutions, including savings held in banks.


    We consulted 50 sustainable finance experts from across academia, civil society, commercial banks, central banks, and the investor community to assess the feasibility and potential impact of our proposals. Which of these 10 proposals were rated the highest in terms of impact and feasibility?

    This global consultative process has illuminated a latent consensus amongst a diverse array of actors on policies that could be both impactful and feasible. Find out on which these 10 policy proposals there is a consensus.