LONDON: Banks must improve transparency on their exposure to climate-change risk and central banks need to pay closer attention as the entire financial sector is at risk, European Central Bank President Christine Lagarde said on Thursday.

Calling the fight against climate change mission-critical, Lagarde began an overarching review of the ECB’s policy framework last month and said the bank must find ways to do its part, even if ensuring price stability would remain its main task.

“Insurance and economic losses caused by climate-related events are likely to start trending upwards as a share of GDP,” Lagarde said in London. “Central banks need to devote greater attention to understanding the impact of climate change.” Lagarde, who took over at the ECB from Mario Draghi last November, argued that disclosures by companies on their climate exposure is a prerequisite for market participants and banks must carry out appropriate risk assessment.

She also singled out banks for their failures, arguing that their climate-related disclosures have “some way to go.” “The (ECB) is now reviewing the extent to which climate-related risks are understood and priced by the market and is paying close attention to how credit-rating agencies incorporate such risks into their assessments of creditworthiness,” Lagarde said.

“Preparatory work is also under way for a macroprudential stress test to assess climate-related risks, with the first results expected by the end of the year,” she said.

Besides disclosure and risk assessment, financial firms will also play a key role in the transformation of the economy by providing finance, she said.

Published in Dawn, February 28th, 2020