TACKLING CLIMATE CHANGE · 2020-02-19 · Tackling climate change: The role of banking regulation and supervision Sabine Mauderer Deutsche Bundesbank Sustainable investment needs

TACKLING CLIMATE CHANGE The role of banking regulation and supervision

2 omfif.org

CONTENTS

3 FOREWORDS

6 EXECUTIVE SUMMARY Getting ready for green regulation Financialinstitutions,investorsandother marketparticipantsmustprepareforradical changesintheregulatoryandinvestment landscape.

8 CHAPTER ONE A threat to stability Mostcentralbanksacknowledgethat climatechangeisamajorthreattofinancial stability.However,opinionsvaryonwhether theyshouldtakeaction,andsomeare strugglingtoreconciletheirclimate ambitionswiththeirmandates.

12 STATE OF PROGRESS

14 CHAPTER TWO Tools for better regulation Centralbanksareinvestigatingthe applicationofmarket-fixingandmarket- shapinginitiativestobolstersustainable investments.Settingoutsomeuniform ‘green’taxonomiesisconsidereda crucialyetchallenginginitialstepin therightdirection.

19 FOCUS ON GREEN FINANCE

22 FOCUS ON MONETARY POLICY

24 CHAPTER THREE Facing the future Policy-makersareinvestingmoretimeand resourcesintothefieldofclimate-risk supervision,butremainhamstrungbyscant andoftenpoor-qualitydata.Problemsarise atallstages,fromthecountryleveldownto individualcompanydisclosures.

28 CASE STUDIES: REGULATORY APPROACHES TO CLIMATE RISKS

34 APPENDIX

©2 0 2 0 3

THEbattleagainstclimatechangeisall-pervasiveandall-encompassing.Acampaignonceviewedasnarrowly

esoterichas,withinafewshortyears,broadenedandintensifiedintoanall-outglobalcrusadelinkingthestrataofpolitics,businessandpublicaffairs.Asinstigatorsofmuchthatisconsideredbeneficialinmodernlife–aswellasperpetratorsofmanydevelopmentsregardedasmisdeedsorworse–banks

andfinancialinstitutionsarecaughtinthemaelstrom.Furthermore,governmentshavethrustcentralbanksandotherregulatorybodiesintothecentreofthestruggle.Theseagenciespolicingworldfinance,alongsidetheentitiestheysuperviseandregulateacrossbankingandcapitalmarkets,faceafreshincreaseinpublicandpoliticalpressures,alreadygrowinginexorablysincethe2008financialcrisis.Butallthesefinancialactorscanalsogainfromopportunitiesprovidedtheydemonstratesufficientagilityinmasteringthenewrulesoftheclimatechangelandscape.Againstthismany-sidedbackground,OMFIFandMazarsareproudtohavecome

togethertoproduceaglobalreportthatseekstoanswertwobasicquestions.Whatpolicyadjustmentsarebeingundertakenindifferentjurisdictionsaroundtheworldtoassessandcontrolclimaterisks?Howaretheseactionslikelytodevelopinfuture?And,inviewofthemomentumofevents,ourreportmayhelpbanksandotherfinancialinstitutionstobestreacttopresentandfutureshiftsintheregulatoryenvironment.Ourreportshowsthatmonitoringandmitigatingclimaterisk,harmonisingpolicy

approachesandpluggingtheall-too-obviousgapsindataprovisionandinternationalcoordinationhavebecomeprioritytasksforglobalfinance.Allplayers–regulatorsandregulatedalike–mustprepareforradicalchange.Ifsufficientnumbersmeetthechallengeheadon,thenthereisgoodreasontohopethattheinstitutionsconcerned,andthewiderworld,willenjoyaprosperousandstablefuture.

Rudi Lang is Partner and Leader of Global Financial Institutions Group at Mazars.

Rudi LangMazars

Preparing for radical change

FOREWORDS

4 omfif.org

FOREWORDS

Danae KyriakopoulouOMFIF

ENVIRONMENTALcatastrophes,manyofwhichcanbeattributedatleastpartlytoclimatechange,aregrowinginfrequency,severityandcost.Withtheserisethelikelihoodofmassiveeconomicandsocialdisruption.Tippingpointsinlossofbiodiversityandicemassareinsight.TheIntergovernmentalPanelonClimateChangeestimatesglobaleconomicimpairmentof$54tnby2100iftemperaturesriseonaverageby1.5degreesCelsius–withstillworseoutcomesiftheearthheatsupmore.Politiciansandpublicopinionaroundtheglobeare

increasinglyawareofthescaleofeffortsneededtohaltthetrend.Centralbanksandregulatoryauthoritiesmustensurethatphysicaldamage,fallingconfidenceandthecostofadjustingtoalow-emissionsgrowthmodeldonotwrecktheglobaleconomy.Theworldwidefinancialservicesindustryisattheforefrontofthedebate.Asaforumforprivate-publicsectorinteractions,OMFIF

ispleasedtopartnerwithMazarsinproducingthisreport.Weseethisbothashelpingdefineregulatorybestpracticeandalsoaspreparatoryreadingforfinancialinstitutionsgettingreadyforchangingregulatoryandsupervisoryregimes.Weexaminecentralbanks’andregulators’differentapproachestoclimate-relatedrisks,includinginassessingandstress-testingfinancialinstitutions.Throughindividualcasestudies,thereportillustratesthevarietyofregulatoryandsupervisoryapproaches.Weinvestigate,too,howcentralbankscanintegrateclimateconsiderationsintheirmonetarypolicyframeworks–andhowtheycanpromotegreenfinancepoliciesthroughregulatoryinnovations.Wearegratefulto33centralbanksandregulatory

authoritiesacrosssixregions,representing77%ofglobalGDP,whichparticipatedinanOMFIFsurveybackingthisreport.Wewouldliketothankthemanyofficials,expertsandindustryparticipantswhoaidedourresearch.Ouraimistoproduceaconcreteandconstructiveguidetoashiftingregulatorylandscape.Wehopetheresultsfulfiltheseexpectations.

Danae Kyriakopoulou is Chief Economist and Director of Research at OMFIF.

Finance at the forefront

Sarah BreedenBankofEngland

The time to actis now

INNovember2020,theUKandItalywillhosttheUnitedNationsclimatechangeconferenceinGlasgow.Itisanoutstandingopportunitytoaccelerateglobaleffortstoaddressclimatechangeandtoputitattheheartofeveryfinancialdecision.Suchanaccelerationisessentialifwearetoavoidpotentiallycatastrophiccoststotheeconomyandsignificantrisktothefinancialsystem.In2019wewitnessedamarkeduptickinthefocus

onclimateissues,intheUKaswellasabroad,andinboththepublicandprivatesectors.TheUKparliamentdeclareda‘climateemergency’,andtheUKbecamethefirstG7countrytocommittonet-zerogreenhouse-gasemissionsby2050.AttheBankofEngland,wesetexpectationsforbanksandinsurersfortheirmanagementofclimaterisksandlaunchedplanstostresstestfirms’resiliencetoavarietyofclimatescenarios.Actionslikethisareneedednow.Climatechange

representsthetragedyofthehorizon:bythetimeitisclearthatchangestotheclimatearecreatingrisksandcoststhatwewanttoreduce,itmayalreadybetoolatetoact.Leadingthechargeinthisarea,andothers,isthe

NetworkforGreeningtheFinancialSystem–anenormouslysuccessfulvehiclefordevelopingcapabilityandsharingbestpracticeamongcentralbanksandsupervisoryauthoritiesinaddressingthefinancialrisksfromclimatechange.Wesharecommonchallenges,whetherstemmingfromlackofdataortheinadequaciesofconventionalfinancialandmacroeconomicmodelstoassesstheserisks.Thisreportunderlinestheimportanceofinternationalcollaborationinovercomingthoseobstaclesandachievingourmutualgoals.Thewindowforanearlyandorderlytransitionisfiniteandclosing.It’sforallofustoactnow.

Sarah Breeden is the Executive Director of UK Deposit Takers Supervision at the Prudential Regulation Authority (part of the Bank of England) and Chair of the Network for Greening the Financial System’s Macroprudential workstream.

5

Ma JunPeople’sBankofChina

ITisincreasinglyclearthatclimate-relatedphysicalandtransitionrisksposemajorchallengestofinancialstability.Asaresult,theserisksshouldbescrutinisedandmanagedbyfinancialregulatorsandinstitutions.Studieshaveshownthatphysicaldestructioncausedbysealevelriseandmoreintensenaturaldisastersmaycausefinanciallossesoftensoftrillionsofdollars.Ascarbonpricesincreaseanddemandforfossil-fuelenergyfalls,thevaluationsofoilcompaniesandcoal-firedpowergenerationassetscouldfallby40%-70%,whiletheratioofnon-performingloanstotheseindustriesmaysurgetodoubledigits.Severalcentralbanksandfinancialsupervisorshave

carriedoutinternalstudiesontheimplicationsofclimaterisksforfinancialstability.MoremembersoftheNetworkforGreeningtheFinancialSystemareinitiatingsimilarresearchprojects.TheNGFS’ssupervisionworkstreamiscompilingresearchmodelsandmethodologiesonenvironmentalriskanalysisforfinancialinstitutions,withthefindingssettobepublishedinApril2020.Iexpectmanyregulators,startingwithafewcoreNGFS

members,willmakeeffortstoenhanceawarenessamongfinancialinstitutionsofenvironmentalandclimaterisks.Theywillencouragebanks,assetmanagersandinsurancecompaniestoconductenvironmentalriskanalyses.Theywillhelpdevelopresearchcapacitiesanddatabases,andprovideguidanceonkeyassumptionsforscenarioanalysesandstresstestsandondisclosureoffinancialinformation.Thisreportprovidesausefulupdatetothediscussion

ontheroleofregulatorsinanalysingclimaterisksandregulatinginstitutions’activitiestomitigatefinancialrisks.Itwillhelpraiseawarenessofthiscriticalissueandsolicitmorecontributionsfromthefinancialsectoronappropriatesupervisoryapproaches.

Ma Jun is a Member of the Monetary Policy Committee of the People’s Bank of China and Chair of the Network for Greening the Financial System’s Supervision workstream. He is former Co-Chair of the G20 Green/Sustainable Finance Study Group.

Increased awareness as risks arise

Tacklingclimatechange:Theroleofbankingregulationandsupervision

Sabine MaudererDeutscheBundesbank

Sustainable investment needs broad focus

©2 0 2 0

CLIMATEchangeisoneofthegreatestchallengestohumankindandaffectsalleconomicagents,withconsequencesforourdailylives–allovertheworld.Itisaglobalproblemthatcallsforglobalanswers.ThatisthespiritoftheNetworkforGreeningtheFinancialSystem.Climatechangeasasourceoffinancialriskis

becomingmoreprominentasthefrequencyandseverityofcatastrophiceventsaregrowing.Centralbanksmusttakeresponsibilityintheirroleasfinancialsupervisorsandguardiansoffinancialstability.Wemustexaminetheeffectsofclimatechangeandclimatepolicyforourownoperations,includingmonetarypolicy.Recently,theNGFSissued‘asustainableandresponsible

investmentguideforcentralbanks’portfoliomanagement’.Thisguideoutlinespossiblewaystoincludesustainableandresponsibleinvestmentprinciplesinthedifferentportfoliosthatcentralbanksmanage.Theresultsofoursurveyareencouraging.ManyNGFSmembersalreadyincorporatesociallyresponsibleinvestingintheirportfoliomanagement,whileothersarereviewingtheiroperations.Mostofthesurveyrespondentsfavourabroadenvironmental,socialandgovernanceapproachoveranarrower,climate-specificfocus.AmongthetopdriversofSRIintegrationaretheneedforprotectionagainstsustainabilityriskandanenhancedrisk-returnprofile.However,centralbanksfacespecificchallenges.We

mustactwithoutprejudicetoourmandateandavoidconflictsofinterest.Thus,notallportfoliotypeslendthemselvestoSRItothesamedegree.WhiletheadoptionofSRIisrelativelystraightforwardforcentralbanks’ownportfolios,themanoeuvringroomforintegratingSRIprinciplesintomonetarypolicyportfoliosseemslimited.PublicationssuchasthisreportandtheNGFSportfolio

managementguidearecrucialtokeepupthemomentumandlowerbarriersforotherstofollowsuit.Centralbanksmustactandfindtheirroleinprotectingourclimate.

Sabine Mauderer is a Member of the Executive Board of the Deutsche Bundesbank and Chair of the Network for Greening the Financial System’s workstream on scaling up green finance.

6 omfif.org

EXECUTIVE SUMMARY

Acrosstheworld,financialinstitutionsandinvestorsshouldexpectever-

tougherregulatoryactiononclimatechange.Mostcentralbanksfromadvancedandemergingeconomiesnowidentifyclimatechangeasamajorthreattofinancialstability;eventwoyearsago,hardlyanymadethatclaim.Sofar,fewcentralbankshavedecidedsignificantclimateaction.Thatnumberisexpectedtogrowmarkedly.Theagendahasshiftedfromwhether

centralbanksshouldactontheclimatecrisistowhatmeasurestheyshouldtakeandinwhatsequence.Thereportrevealsamosaicofpracticestomonitorandcontrolclimaterisks,frommicroprudentialtoolsandstressteststomacroprudentialandmonetarypolicy.Centralbanksareincreasinglyfacilitatinggreenfinancebydevelopingnewregulatoryregimessuchasgreeninvestmenttaxonomies.Theyarebuildingsustainableinvestmentpracticesintotheirownassetmanagement.Tofacilitatemeaningfulchange,policy-

makersmusthaveaccesstobetterclimate-riskdata.Theymustovercomefragmentationofdifferentregulatoryframeworks.Collectiveactioninvolvingallpartsofglobalfinanceiskeytoenhancingresilienceandensuringprosperity.

Gettingready for green regulation

7

Wide awareness of threat – disagreement over responsibilities•Mostcentralbanksandregulators(70%ofrespondents)seeclimatechangeasamajorthreattofinancialstability.Respondentshighlightthepotentialofclimateriskstotranslatetosystemicfinancialinstabilitythroughsuddenchangestoassetvaluations,ordamageanddisruptiontoeconomicinfrastructure.

•Respondents’viewsvaryonresponsibilitiesforrespondingtorisks.Amajorityof55%saytheyaremonitoringrisks,withafurther27%sayingthattheyareactivelyrespondingtothem.Overall,12%saythat,whiletheyseeclimatechangeasamajorrisk,actionshouldcomefromotherpolicyinstitutions.Thesedivergencespartlyreflectdifferencesinmandates.Capabilityofresponsediffersacrossadvancedandemergingeconomies,insomecasesmakingactionsubjecttocriticismthatcentralbanksareexceedingtheirpowers.

•InitiativessuchastheNetworkforGreeningtheFinancialSystemhavegatheredmomentumoverthepasttwoyears.Withinthenetworkmembersareatdifferentstagesinunderstandingrisksanddevelopingsupervisorypractices.

Complementary approaches on taxonomy – but fragmentation a problem•Severaljurisdictionsaredevelopingcomplementaryregulatoryinfrastructuressuchasgreeninvestmentclassifications(taxonomies)tofacilitatemoreconsistentandtargetedgreenfinancepoliciesandinvestment.However,thelimitedscopeanduniformityofsustainabletaxonomiesholdbacktheirfullutility–moreharmonisationisrequired.

•Fragmentationofclimate-riskframeworksisdeemedakeychallenge,with31%ofrespondentsconcernedaboutthecomparabilityandconsistencyofsupervisoryframeworks.

•Whilesomecentralbanksarerespondingtothiscallandinvestingresourcestodevelopthenecessaryin-houseexpertiseandinformation,thechallengesareconsiderableandrequireeffortsfromallsidesofthefinancialindustry.

More climate stress-testing – sizable minority support for green monetary policy•Onlyaminority(15%)ofrespondentsincludeclimate-relatedconsiderationsintheirroutinestresstestsoffinancialinstitutions.Nearlyfour-fifths(79%)reportthattheyintendtodosointhefuture.

•Manyinstitutions(39%)arelargelywaryofusingmoreinterventionist‘market-shaping’microprudentialtoolsforclimatepurposes,inpartbecauseoftherisksofunintendedconsequencesindistortingcurrentprudentialrules.Only13%ofrespondentssupportedtheneedfor‘green-supporting’or‘brown-penalising’factorstoincentivisebankstoincreasecreditforgreeninvestmentsandreducelendingtounsustainableones.

•Nearlyhalfofrespondents(42%)seearoleformonetarypolicytosupporttheclimateagenda.Mostofthosedisagreeingwiththisapproachsaycentralbanks’monetaryresponsibilitiesshouldplayonlyanancillaryroleinaddressingclimatechange.Sociallyresponsibleinvestmentandenvironmental,socialandgovernancecriteriaarestartingtomakeheadwayincentralbanks’owninvestmentmanagement.

Major concern over data gaps – and different approaches to plug them•Almostallrespondentshighlightasmajorproblemsthelackofappropriateanalyticaltools,methodologiesanddata,wheresignificantgapsexist.Dataavailabilityandqualityarethekeyconcernfor84%ofrespondents.Thisincludesfirm-leveldataneededtohelpguidegreeninvestmentsandsectordataoncarbonemissions. Thisisanareawhereratingsagenciescanplayanimportantrole.

•Intermsofaddressingdatagaps,mostparticipants(55%)donotrequireinstitutionsundertheirregulatoryperimetertodisclosetheirclimate-relatedrisks.34%saytheyareconsideringthisinthefuture.Bycontrast,aroundhalfofrespondents(48%)favourvoluntaryengagementwithfinancialinstitutions.

Mainreportfindings:

©2 0 2 0


FromwildfiresinCaliforniaandAustraliatofloodsinIndiaandIndonesia,climate-relatedthreatsaretoppingthelistofglobal

worriesmobilisingactivists,governmentsandpublicopinion.Thereisincreasingrecognitionthatsuchrisksarenotonlyathreattotheenvironmentandecosystems,butalsojeopardisetheworld’seconomyandfinancialsystem.

Physical damage and economic disruptionClimaticphenomenaposesubstantialphysicalriskstothefinancialsector,includingdamagestopropertyandinfrastructureanddisruptiontotradeandeconomicactivity.A2019WorldBankstudyonresilientinfrastructureestimatesthatinfrastructureinkeytransportandpowergenerationsectorsincursaverageannuallossesof$30bnfromsuchhazards.Theseeconomiclossescantaketheformofdirectdamagestoproductionfacilitiesorlogisticsinfrastructure.Therecanalsobelossesduetoreducedavailabilityofandchangesinthepriceofrawmaterials.InsurancecompanyMunichREestimatesthattherewerearound850naturalcatastrophesin2018,incurringatotalcostof$160bn.Costsfromdisastersareusuallyimmediateandvisible,

enablingdirectmeasurement.Butgradualchangesintemperaturecanalsohaveeconomiceffects.Variationsinprecipitationandtemperaturescanaffectwateravailability(affectingagriculture)orthepopularityoftouristdestinations(suchasskiorseasideresorts),thusimpactingbusinessesandindustriesoperatingintheseareas.Theseeffectscantricklethroughthefinancialsector,becomingsystemic.Forthebankingsector,thesemaybefeltdirectlythroughthe

CHAPTER ONE

A threat to stabilityMostcentralbanksacknowledgethatclimatechangeisamajorthreattofinancialstability.However,opinionsvaryonwhethertheyshouldtakeaction,andsomearestrugglingtoreconciletheirclimateambitionswiththeirmandates.

8 omfif.org

Physical, liability and transition risks

PHYSICAL RISKSaretransmittedtothefinancialsectorlargelythroughthetangible,disruptiveimpactofclimateeventssuchasnaturaldisasters,risingsealevels,volatileweatherpatternsandnaturalresourceshortages.Physicaldamagetoinfrastructureandrealestateassets,forexample,canhaveimplicationsforsystemicallyimportantfinancialinstitutions,andbyextensionregulators,especiallyifcorporatebalancesheetsorportfoliosarecomprisedofassetswhosebookvaluecouldbediminishedsignificantlythroughsuchoccurrences.

LIABILITY RISKS relatetothefinancialcostsandlossesthatcouldemergefrompartiesclaimingcompensationfromfinancialinstitutionsduetodamagesstemmingfromnaturalhazardslinkedtoclimatechange.

TRANSITION RISKSmayarisewhenthevalueoffinancialinstitutions’assetsfallsabruptlyduetoadjustmentsmadetofacilitatethetransitiontoalow-carboneconomy.Paradigmshiftsinpolicies,publicattitudes,andtechnologieswhichrenderfinancialassetsreliantonfossil-fuelsupplyandmakegenerationresourcesobsoletemayaffectthefuturecredithealthandriskexposureofcorporateandfinancialinstitutions.

9

exposureofmortgagebookstofloodrisk.Globallyactivebanksandinvestorsfaceincreasedcreditriskintheirportfoliosthroughthedeteriorationofcorporateandsovereignissuers’creditworthinessastheybecomemorevulnerabletoclimaterisk.Thiscanaffectcorporateandsovereignbondyields,aswellasthestockvalueoffirms.Suchcostsarebecomingmorevisible.TheUnitedNationsOfficeforDisasterRiskReductionnotesthatthetotaleconomiccostofclimate-relateddisastershasrisenbynearly150%inthelast20years.Theinsurancesectorisparticularlyexposed,aspartiesthat

havesufferedlossesfromtheeffectsofclimatechangeseekcompensationfromthosetheyholdresponsible.Climatechangeisexacerbatingthefrequencyandintensityofnaturalhazards.Assuch,historicaltrendsininsurancecostsandpastweatherpatternsmaynolongerbesufficienttopredicttheemergenceofnewliabilitycosts.Weather-relatedinsurancelossesincreasedalmostfive-foldtoanaverageof$50bnperannuminthe2010s,fromayearlyaverageofaround$10bninthe1980s.Withlargeinsuranceinstitutionsandfossil-fuelcompanies

comprisingmajorsegmentsofthefinancialsystem,climatechangeislikelytoexposethemtosignificantliabilityclaims.Thisisalreadyhappeninginseveraljurisdictions.Forinstance,inJanuary2018,theCityofNewYorkfiledamulti-billion-dollarlawsuitagainstfivelargeoilcompaniesfordamagesandclaimsonclimate-adaptationcoststoinfrastructure,duetothefirms’contributionstoglobalwarming.Meanwhile,theglobalinsuranceprotectiongapremainssizeable.Theuncertaintyassociatedwithclimatescenarioanalysiscomplicatesthetaskofmodellingimplicationsforinsurers’liabilities.Householdsandbusinesseswillbeaffectedtoo,astheycouldfacemoreexpensiveormorecurtailedinsurancepolicies.Financialinnovationisbeginningtoaddressthechallenge.

Catastrophebondsareinsurance-linkedsecurities,sharingriskswithcapitalmarketsforthedirectorreinsurancecostsforpotentialnaturaldisasterdamages.Thesebondsaredesignedtocoverspecificcategoriesofnaturalhazardsandhaverelativelylowmaturitiesofaroundthreetofiveyears.Indisaster-pronedevelopingregions,sovereigndisasterriskinsurancepoolssharedbetweencountrieswithdifferentriskprofilesarefastemergingasacost-effectiveclimate-riskmanagementtool.Poolinghelpstolowermembers’insurancepremiumsthroughdiversificationandtransfersaportionofexcessriskstotheprivatesector.Thiscanbeespeciallyimportanttosmalleconomiesthatarehighlyvulnerabletonaturaldisastersandwhichindividuallymaylackthetechnicalexpertiseorthefinancialscaletohedgetheirclimaterisksthroughinsurance-linkedsecurities.

Stranded assets and a climate ‘Minsky moment’Asthefinancialsectorbecomesincreasinglyexposedtothephysicalandliabilityrisksposedbyclimatechange,itfacesadditionaltransitioncostsfromtheneedtocomplywithgovernments’commitmentstoaddresstheseeffects.The2015ParisclimateagreementincludesacommitmenttolimittheincreaseinglobalaveragetemperaturestobelowtwodegreesCelsiuscomparedwithpre-industriallevels.Signatorieshavealsopledgedtocutcarbonemissionsby45%from2010levelsby2030,toreachnetzeroby2050.TheEuropeanUnion,aswellas

morethanadozengovernmentsaroundtheworld,hasbegunlegislatingtoachievecarbonneutralityby2050.TheEUhasalsocommittedtoa40%reductioninemissionsby2030comparedwith1990levels.Achievingthesetargets,requiringsignificantchangesinbehaviourbyhouseholdsandbusinessesandindustries,willbringchangesinassetprices.Thisimpliesacleartrade-offbetweenphysicalandtransition

risks.Gettingthebalancerightwillbecrucial.Themoresuddenanddisorderlythetransition,thegreaterthecostsandriskstofinancialstability.ReflectingtheideaoriginallyadvancedbyeconomistHymanMinskyonfinancialinstabilitycausedbyrapidcollapsesinbullishassetmarkets,transitionrisksmayarisethroughsuddenadjustmentstoalow-carbonemissionsmodeofeconomicproduction.Forexample,investorportfolioscontainingassetsderivedfromfossilfuelsuppliesmaybeovervaluedoveralong-termhorizonastheimpendinglow-carbontransitiontomeetUnitedNationsgoalsrenderassetsunusableor‘stranded’.Potentiallossesareestimatedat$1tn-$4tnwhenconsideringfossilfuelsaloneandupto$20tnwhenincludingawiderrangeofsectors.Thesecanrepresentamaterialshareofglobalfinancialassetsandcancausefinancialinstabilitythroughtheeconomicrepercussionsofdecliningassetprices.

The role of central banksAsregulatorsandsupervisorsofthefinancialsystem,andasinstitutionswithabroadrangeofinstrumentsattheirdisposal,centralbankshavebegunexploringhowtheycanaligntheirapproacheswithclimatecommitments.Thisrefersprimarilytotheirsupervisoryfunctions–andtoalesserextentalsotheirmonetarypolicyandotheroperations–toensurethetransitiondoesnotjeopardisefinancialstability,aswellastoaddressphysicalandliabilityriskstofinancialstability.Traditionally,thelong-termeffectsofclimatechangehavebeen

perceivedasoutsidetheremitofcentralbanksandsupervisors.Insteadthefocushasbeenonlargelyshort-tomedium-termpolicygoalssuchaspricestabilitythroughinflationtargeting,

‘Inthelongrun,climatechangeposesamajorrisktothestabilityofthefinancialsystemandthesustainabilityofinvestmentreturns.Incomingyears,awiderangeofassetclassesareexpectedtoexposefinancialinstitutionstoclimate-relatedrisks,negativelyaffectingthesustainabilityofportfolios’returns,aswellastheircreditriskprofile.’ Developed economy central bank, Europe

©2 0 2 0


10 omfif.org

maintainingfinancialstabilitywithmacro-andmicroprudentialregulation,andreservesmanagement.InaspeechatLloyd’sofLondonin2015,BankofEnglandGovernorandthen-chairoftheFinancialStabilityBoardMarkCarneydubbedclimatechangeasthe‘tragedyofthehorizon’,statingthat‘onceitbecomesadefiningissueforfinancialstability,itmayalreadybetoolate.’But70%ofrespondentstoour2019CentralBanksandClimate

ChangeSurveynowacknowledgethatclimatechangeisamajorrisktofinancialstability.Whilemostcentralbankswithinthatgrouphighlightthatthisisalong-termrisk,theystillrecogniseditasamatterofconcern.AccordingtoarespondentfromaLatinAmericancentralbank,‘Raisingawareness[onclimatechange]andcapacity-buildingintersectwithleadership,inwhichcentralbankscouldplayanimportantroleasinstitutionsthatfostertransparencyandlong-termism.’AsshowninFigure1,55%ofrespondentssaidtheyare

monitoringrisks,withafurther27%activelyrespondingtothem.Overall,12%viewclimaterisksasaconcerntowhichotherinstitutionsshouldrespond.Only6%didnotviewclimatechangeasaconcern.Thesemixedopinionsreflectthedistinctionbetweeninterpretingclimatechangemitigationasadistinctendgoal,asopposedtoonepolicyconsiderationamongothers.Severalrespondentsareatveryearlystagesofmonitoring

andaddressingrisks.Theystatedthattheyhavesetupinternalnetworksandworkinggroupstodealwithsustainability-relatedissues,andaredevelopingframeworksforriskanalysisandmonitoring.AccordingtoarespondentfromaEuropeancentralbank,‘Analyticalwork,includingthedevelopmentofstresstesting,isstillongoingtoassessclimatechange’simpactsonfinancialstability.’AnotherrespondentfromaLatinAmericancentralbanksaid,‘Whiletherehasbeennoexplicitchangetotheregulatoryframeworkinordertointegrateclimatechangerisks,thebankisworkingtoenhancestatisticalinformationtodevelopaframeworktomeasuretheimpactofclimateandenvironmentalrisksonthefinancialsystem.’Withintheminorityofrespondentswhodonotviewclimate

changeasamajorrisktofinancialstability,thereasonsfordoingsoaremixed.Somecitealackofadequateinformation.OnecentralbankfromLatinAmericanotes,‘Althoughwerecognisetheimportanceofsocialandenvironmentalriskstoindividualinstitutionsandtothewholefinancialsystem,wearestillassessingtheextenttowhichclimatechangeisamajorrisktofinancialstabilityandhowbesttodealwithit.’Othersaremoresceptical,recognisingthatclimatechangecanhaveimpactsonfinancialinstitutionsbutrejectingthenotionthatthesecanbecomeamajorrisktofinancialstability.ArespondentfromacentralbankinAsiaPacificsaid,‘Wedonotviewclimatechangeasamajorrisktofinancialstability’butrecognisedthat‘climateandenvironmentalrisksareasourceoffinancialriskandweexpectourregulatedfinancialinstitutionstocloselymonitorandassesstheserisks.’AcentralbankfromEuropenotesthat‘fromafinancialstability

perspective,climate-relatedrisksmighthaveasystemicimpact.However,theserisksarenotwellunderstoodyetandfromourverypreliminaryresultswedonotjudgeclimatechangeasamajorriskforfinancialstability,atleastatthisstage.’Still,eventhemoststaunchlyconservativeamongour

respondentsacknowledgethetangibleimpactsthatclimatechangecanexertuponarangeofmacroeconomicissues,includingfutureoutputgrowth,capitalformation,productivityandthelong-runleveloftherealinterestrate.OneAsiaPacificcentralbankstatesthat‘theeffectsofclimate

changeandanypolicydesignedtomitigateclimatechangearemostlikelytoaffectthesupply-sideoftheeconomyandmanifestaslargechangesinrelativeprices.Inaflexibleinflationtargetingframework,understandingtheseeffectsimprovestheabilityofmonetarypolicytoachievelowandstableinflation,whiletakingintoaccountotherpolicyconsiderations,suchasfullemploymentandfinancialstability’.Thisrespondentaddedthat‘climatechangefactorsmaybecomenewvariablesinfluencingthemonetaryandfinancialsectors,butauthoritiesmustdeveloprelevanttoolstobeabletoassociateitwithmonetaryandfinancialstabilitypolicy.’Overall,analysisofresponsesacrossdifferentquestions

showsagrowingunderstandingandwillingnesstodevelopexpertiseinhowclimatechangecanfitintocentralbanks’supervisionpractices.ArespondentfromasupervisoryauthorityintheMiddleEastsays,‘Wearebuildingcapacityandunderstandingofrisksinthisfield,andareplanningtoincludeclimatechangeriskassessmentinourriskassessmentcycle.’An

‘Climatechangemayposearisktothefinancialsysteminthelongterm.Onlyasuddentransition(politicalortechnological)toamoresustainableandlow-carboneconomycouldbeamajorrisktofinancialstability.’Emerging market central bank, Europe

Figure 1: Central banks take on climate change‘Isclimatechangeaconcernforyourinstitution?’,shareofresponses

Source: OMFIF Central Banks and Climate Change Survey 2019

Figure 1.2

Central banks take on climate change

‘Is climate change a concern for your ins�tu�on?’, share of responses


0% 20% 40% 60% 80%

Yes, we are monitoring risks

Yes, we are activelyresponding to risks

Yes, but it is for otherinstitutions to respond to

No, it is not a concern


11

Africancentralbanksaysitis‘preparingaregulationdedicatedtothemanagementofenvironmentalriskswhichwillestablishprinciplesandguidelinesintermsofgovernance,assessmentandmonitoring,disclosureofenvironmentalrisks,aswellastrainingandcapacitybuilding.’

Making mandates fit for purposeCentralbanks’andsupervisors’increasedinterestinclimatechangehasnotcomewithoutcriticism.Asorganisationspossessingsignificantinstitutionalindependencefromotherbranchesofgovernment,mostcentralbankscanpursuecrucialmonetarypolicyandfinancialstabilityobjectivesrelativelyinsulatedfromshort-termpoliticalinfluence.Interventionforlong-termsustainabilityissuesisregardedbysomewithadegreeofreticence,andasa‘second-best’optioninlieuofothergovernmentmeasuressuchasfiscalpolicyandtaxation.Thishasattimescreateddifficultiesforcentralbankslookingtomarshalthemomentumtoadvancetheirclimateagenda,addingtotheconsiderablescrutiny(mixedwithcriticism)theyhavefacedforpursuingunorthodoxmonetarypolicyinthewakeofthe2008financialcrisis.Additionally,theoperationalscopetosupporttheclimate

agendavarieswidelyacrosscentralbanks,withsustainabilityfarfrombeingauniversallyexplicitmissionstatement.Somemonetaryandprudentialauthoritieshaverelativelynarrowinterpretationsoftheirmandatetoaddressclimateissues.Forinstance,in2015,BoEGovernorCarney’scallforcentralbankerstoengageinapolicyareaoutsidetheirtraditionalcharterwasmetwithaccusationsof‘missioncreep’(thegradualexpansionofamandatebeyonditsscope).Otherspossessrelativelywiderpolicyremitstosupportgreenfinancemeasuresandclimatepolicy.Manycentralbanks,includingthoseofChina,BrazilandBangladesh,oftenhavebroaderdevelopmentalobjectivesthatcanbeinterpretedflexibly.Inthesejurisdictions,targetedpoliciessuchasgreencreditallocationinstrumentsandexplicitgreenmicro-andmacroprudentialpolicieshavebeenemployedaspartofeconomy-widesustainabledevelopmentobjectives.Reflectingthesedivergences,therecontinuestobemuch

debateontheroleofcentralbanksindirectlyinfluencingclimatepolicyandmitigatingitsassociatedrisks.Insomecases,pursuingclimatechangepolicymoredirectlymayrequirealteringcentralbankchartersorinterpretingexistingonesmorebroadly.Thiscouldopencentralbankstopotentialcriticismforoversteppingtheirprerogatives.

International coordination and divergenceCentralbanks’mandatesandfunctionsmayvary,butinternationalcoordinationandunconventionalactionarekeytotacklingclimatechange,ariskthataffectsallcountries.Thereisaneedforcollaborativeresearchtodevelopanalyticaltoolstofactorinclimaterisks.Aframeworktosharebestpracticesandexperiencesonenvironmentalandriskmanagementinthefinancialsectorisalsorequired.InDecember2017duringtheOnePlanetSummitandatthe

initiativeoftheBanquedeFrance,eightinstitutionsfromfourcontinentssetuptheCentralBanksandSupervisorsNetworkforGreeningtheFinancialSystem.Self-describedasa‘coalitionofthewilling’,injusttwoyearstheNGFShasgrownnine-foldto

54membersand12observersasofDecember2019(seeFigure2).TheseincludecentralbanksandregulatorsfromAfrica,AsiaPacific,Europe,LatinAmericaandNorthAmerica.TheNGFSfeaturesthreededicatedworkstreams.Thefirst

focusesonmicroprudentialsupervision,climatedisclosuresandtheriskdifferentialbetween‘green’and‘brown’assets,andisheadedbyMaJun,adviseratthePeople’sBankofChina.ThesecondisledbySarahBreeden,executivedirectorforUKdeposittakerssupervisionattheBankofEngland,andfocusesonmacrofinancialresearchonhowclimatechangeaffectssystemicmacroeconomicstability.Thethirdworkstreamisdedicatedtotheroleofcentralbanksinscalingupgreenfinance,andischairedbySabineMauderer,amemberoftheexecutiveboardoftheDeutscheBundesbank.Amongthecentralbanksparticipatinginourresearch,82%areNGFSmembers,withafurther6%consideringjoining.Membersofthenetworkareunitedintheirbeliefthatclimatechangeisarisktofinancialstabilityandthatcentralbanks‘havetoleadbyexample’,inthewordsofNGFSChairandDeNederlandscheBankExecutiveBoardMemberFrankElderson.Buttheirabilityandwillingnesstoaddresstheissuevarywidely.Inchoosingwhichinstrumentstodeploy,centralbanksand

regulatorsknowthattheirdecisionswillhaverepercussionsspreadingwellbeyondthefinancialsphere.❖

AfricaBankAl-MaghribBanqueCentraledeTunisieSouthAfricanReserveBank

Middle EastAbuDhabiFinancialServicesRegulatoryAuthorityDubaiFinancialServicesAuthority

Latin AmericaBancoCentraldeCostaRicaBancodelaRepública(Colombia)BancodeMéxicoComisiónNacionalBancariaydeValores(Mexico)ComisiónparaelMercadoFinanciero(Chile)SuperintendenciaFinancieraDeColombia

EuropeBancad’ItaliaBancodeEspañaBancodePortugalBankofEnglandBankofFinlandBankofGreeceBanquecentraleduLuxembourgBanquedeFrance/AutoritédeContrôlePrudentieletdeRésolution

GermanFederalFinancialSupervisoryAuthorityMagyarNemzetiBankCentralBankofIrelandCentralBankofMaltaCentralBankoftheRussianFederationCommissiondeSurveillanceduSecteurFinancier(Luxembourg)DanmarksNationalbankDeNederlandscheBankDeutscheBundesbankEuropeanBankingAuthorityEuropeanCentralBankEuropeanInsuranceandOccupationalPensionsAuthoritySwedishFinancialSupervisoryAuthorityNorwegianFinancialSupervisoryAuthorityGuernseyFinancialServicesCommissionNationalBankofBelgiumNationalBankofSlovakiaNorgesBankOesterreichischeNationalbankSverigesRiksbankSwissFinancialMarketSupervisoryAuthoritySwissNationalBank

Asia PacificBankIndonesiaBankNegaraMalaysiaBankofJapanBankofKorea

BankofThailand

HongKongMonetaryAuthority

JapanFinancialSupervisoryAuthority

MonetaryAuthorityofSingapore

People’sBankofChina

ReserveBankofAustralia

ReserveBankofNewZealand

North America

BankofCanada

DepartmentofFinancialServicesoftheStateofNewYork

ObserversBankforInternationalSettlementsBaselCommitteeonBankingSupervisionEuropeanBankforReconstructionandDevelopmentEuropeanInvestmentBankInter-AmericanDevelopmentBankInternationalAssociationofInsuranceSupervisorsInternationalMonetaryFundInternationalOrganisationofSecuritiesCommissionsNordicInvestmentBankOrganisationforEconomicCo-operationandDevelopmentSustainableInsuranceForumWorldBankandInternationalFinanceCorporation

Figure 2: NGFS members asof12December2019

©2 0 2 0


Regulatory progress on climate risksCentral banks and regulatory authorities are increasingly integrating climate risks into their activities. This table highlights which areas of operation this is affecting, and in which jurisdictions, based on public information. Many are moving ahead with stress tests, disclosures and standards for green finance, but macroprudential measures and monetary policy applications are less popular. These are explored in greater detail in the case studies on pages 28-33.

12 omfif.org


13 ©2 0 2 0

Assessing climate risk as a financial risk in stress tests

Encouraging or mandating climate-related financial disclosures

Incentivising or subsidising green finance and/or discouraging brown investments

Setting standards for green finance/lending (sustainability criteria) which their regulated banks will have to apply

Applying climate considerations to monetary policy

Applying green principles to own portfolio

Measures to manage own carbon footprint beyond investments

Where also a debt management office, issuing green bonds

Measuresinplaceorannouncedandduetocomeintoeffect

Measuresinconsideration

Nomeasures

Australia

Braz

il

China

Euroarea

Fran

ce

German

y

Greec

e

Hon

gKo

ng

Ireland

India

Japa

n

Keny

a

Mex

ico

Moroc

coNethe

rland

s

Poland

Sing

apore

Swed

enUK US


Tools for better regulationCentralbanksareinvestigatingtheapplicationofmarket-fixingandmarket-shapinginitiativestobolstersustainableinvestments.Settingoutsomeuniform‘green’taxonomiesisconsideredtobeacrucialyetchallenginginitialstepintherightdirection.

Theethosguidingclimatechangeactionamongcentralbanksandregulatorsissplitbetweenpolicytools

exhibitingapassive,‘market-fixing’approachandthosereflectingamoreactivist,‘market-shaping’one.Manypotentialtoolsareavailable.Theyincludesupportivefunctionssuchasdevelopingstress-tests,andmoreproactivepolicieslikegreenquantitativeeasing.

Thegoalofmarket-fixingapproachesistoincentivisefinancialmarketparticipantstointernalisetheinherentmispricingofassets.Whilethesewillgenerallybeguidedbygovernmentpolicy(suchasthedecisiontosetacarbontax),centralbankscanplayamorehands-off,supportingroleinfacilitatingthebetterfunctioningoffinancialmarkets.Thecomplementarymarket-shapingapproachisonewherecentralbanksproactivelypromotegreenfinanceandreduceunsustainableeconomicactivities.

Collaboration for climate risk supervisionMostofoursurveyparticipantsaremembersoftheNetworkforGreeningtheFinancialSystem,whichfostersanenvironmentforcollaborativeresearchandcapacitybuilding.Severalrespondentshighlightthattheywouldrequireaccurateassessmentsoftherisksfromclimatechangebeforetheycouldcraftlong-termresponses.Nearlyallrespondentshighlightdatagapsandheterogeneityasmajorrisksinclimaterisksupervision,withonesayingthateffectivesupervisionofclimateriskisstill‘complicatedbylimiteddataavailabilityandthelackofdatastandardisation’.Conventionalstresstestsarethemostcommonrisk

assessmentframeworkusedbycentralbankregulatorsandothersupervisorstogaugetheresilienceoffinancialinstitutions’capitaladequacylevelsandmacrofinancialstabilitytopossiblecrisisscenarios.Butthereisagrowingconsensusthattheconventionalmacroeconomicmodels

Figure 3: Central banks determined to implement climate stress tests but process still at early stage‘Doyouincludeclimate-relatedrisksand/orclimate-riskscenarioanalysisinstresstesting?’,shareofresponses


Figure 2.1: Central banks determined to implement climate stress tests but process still at early stage

‘Do you include climate-related risks and/or climate-risk scenario analysis in stress testing?’, share of responses


0% 20% 40% 60% 80% 100%

Yes

No, but we are looking toimplement in future

No and we are notconsidering including them

CHAPTER TWO

14 omfif.org

15

usedtodoso–suchasdynamicstochasticgeneralequilibriumandintegratedassessmentmodels–areinadequateforassessingthecomplex,non-lineardynamicsofclimatechangeandenvironmentalpolicies.Integratingclimateriskscenarioanalysesintotheirstandardstresstestsrequiresdrawingfromalternativetechniques,suchasstock-flowconsistentandagent-basedmodelling.ThiswasechoedbyacentralEuropeanregulatorsharingthat‘analyticalwork,includingthedevelopmentofstresstesting,isstillongoingtoassessclimatechange’simpactsonfinancialstability.’AsshowninFigure3,onlyaminorityofcentralbanksand

regulatorssurveyedareconductingclimate-relatedscenarioanalysesintheirroutinestresstests.Manycentralbanks,evenmembersoftheNGFS,aregrapplingwiththenoveltyofemployingclimate-relatedanalyticaltools.Thiswasespeciallychallengingforsomecentralbanks,suchasthosefromrelativelysmalljurisdictions,thatfaceconstraintsintermsofin-houseexpertiseandresources.Encouragingly,whilemostcentralbankssurveyeddonotincludeclimateconsiderationsinstresstests,79%ofrespondentsreporttheyarelookingtodoso.Somearealreadyintheearlystagesofimplementing

suchconsiderations,orreportedtobewaitingformoreconclusiveresearchtoinformtheirdecisions.OnecentralbankfromEuropecommentedthatwhileclimateriskscouldbeaddressedthrougha‘dedicatedstresstest-likeexercisewithalessfrequentandlonger-termfocus’,thenecessarytoolsandmethodologieswere‘stilladmittedlyatanearlystage’.TheBankofEnglandhascommittedtorunningclimatestresstestsoninstitutionsin2021.InNovemberandDecember2019,theBanquedeFranceandEuropeanBankingAuthorityannouncedtheywillrunclimatestresstestsonbanksfrom2020.Severalsurveyparticipantshighlightedtheimportance

ofinternationalcollaborationthroughforumssuchastheNGFS,UnitedNationsEnvironmentProgramme,G20StudyGrouponSustainableFinanceandtheInternationalFinanceCorporation’sSustainableBankingNetworkaseffectiveguidancefor‘buildingcapacityandunderstandingofrisksinthefield’ongreenmacroprudentialpolicytools.

Voluntary v. mandatory climate disclosuresAkeyquestionisthepressureregulatorscanexertonfinancialinstitutionstobeginmeasuringandaddressingclimate-relatedrisks.Itiswidelyacknowledgedinregulatorycirclesthatclimaterisksarenotaccuratelyreflectedinassetvaluationswithinfinancialmarkets.Thiscreatesamarketfailure,ascompaniesandinvestorsaresubjecttoasymmetricinformationonthepotentialriskexposuresofstrandedassets.Thiscanbecounteredbyappropriatelyvaluingeconomicactivitiesonfinancialmarkets,forwhichdisclosuresarenecessary.Theseseektorectifythepaucityofreliablefinancialinformationonclimatechangeandinsufficientinvestorawarenessonthedegreeofexposuretowardsrisks.Climate-relateddisclosurescanbeanimportantaspect

ofmarket-fixingmicroprudentialregulations.Oftenitisnotwithinthemandateofcentralbanksandsupervisorstomakesuchdisclosurescompulsory.Instead,theycouldsignaltheir

Figure 4: Investment community moves on disclosuresNumberofTCFDsupporters,selecteddates

Source: Financial Stability Board, OMFIF analysis

‘Many[banks]havetakenaproactiveapproachandmakepublicdisclosuresoftheirstanceonclimatechangeattheheadoffice/parentlevel.’Regulatory authority from the Middle East

September 2019:

898September 2018:

513

December 2017:

230

June 2017: 102

positionthroughrecommendationstothemarketregulatororgovernment.SinceitsformationbytheG20FinancialStabilityBoardin

2015,theTaskForceonClimate-relatedFinancialDisclosures(TCFD)hasbecometheleadingvoluntarystandard.Thenumberofbackersgrewalmostninefoldto898in2019from102inJune2017(seeFigure4).Whiledisclosureisjustafirststep,theimplicitexpectationisthatreleasingclimateriskdataproperlywouldenablefinancialmarketstoallocatecapitalmoreefficientlytogreenandsustainableinvestments.Generally,centralbanksandregulatorssurveyeddonot

requireinstitutionswithintheirregulatoryperimeterto

©2 0 2 0


16 omfif.org

disclosetheirclimate-relatedrisks,althoughone-thirdareconsideringdoingso(seeFigure5).Only6%ofrespondentssaidtheyoperatemandatorydisclosureframeworks.Thereasonsfornotrequiringmandatoryreportingor

directlyencouragingclimateriskdisclosuresweremixed.Somecentralbankshaveseparatedresponsibilitiesfromprudentialfunctionsthataremanagedbyotheragencies.Otherswerestillinthemidstofdevelopingaformalisedpolicyonclimatedisclosures.ManyEuropeancentralbanksaremonitoringadvancesmadeattheEuropeanUnionlevelconcerninglegislationgoverningdisclosures,suchastheCapitalRequirementsDirectiveV.Onecentralbanknotedthat‘evenbeforetheEUlegalframeworkisformallyupdated,weareassessingwhatroleclimate-relateddisclosurescanplayinoursupervisoryframework.’Onenuancethatemergedinsurveyresponseswasa

distinctionbetweenrules-andprinciples-basedapproachestoclimatedisclosureregulation.Article173oftheFrenchEnergyTransitionLawisanexampleoftheformer.Itlegallymandatesthatmajorinstitutionalinvestorsandassetmanagersreportclimaterisksforprudentialsupervisioninregularstresstests.However,mostcentralbankssurveyedfavouredvoluntary

engagementwithfinancialinstitutions.WhiletheTCFDrecommendationswereoftenacknowledgedasausefulframeworktodrawupon,theywerenotnecessarilyseenasstandardstowhichinstitutionsshouldrigidlyadhere.Giventherelativenoveltyofclimateriskassessments,manyrespondentsstressedtheimportanceofsolicitinginputfromcommercialbanksandinsurerstodevelopcontextuallyappropriateclimatedisclosureframeworks.OneEU-basedNGFSmembersharedthatitis‘askinginstitutionsundertheirsupervisiontomapouttheirvulnerabilitytoclimaterisk’.TheBankofEnglandoffersaprominentexampleofaprinciples-basedapproach,withtherecentsupervisorystatement

fromthePrudentialRegulationAuthorityoutliningregulatoryexpectationsforclimatechangetotheUKfinancialindustry.

Enhancing risk management frameworksAnothermarket-fixingapproachwithintheexistingscopeofcentralbankmandatesisinfluencingthegovernanceandriskmanagementprocessesofcommercialbanksandinstitutionalinvestors.Whileclimatedisclosureframeworksinmanyjurisdictionsarestillbeingresearchedorundernegotiation,supervisoryauthoritiesareemphasisingclimatechangeasasourceofmaterialriskthattheprivatesectorshouldaccountforindependently.Severalcentralbanks,suchasthatofBrazil,havealreadydevelopedenvironmentalandsocialriskmanagementandgovernancestandardsforregulatedinstitutions.TheUKgovernmentandregulatorshaveshownstrongleadershipinthisarea.ItsDepartmentforWorkandPensionshasintroducedrulesrequiringpensionfundtrusteestooutlinetheirapproachtoengagementwithandvotingoftheirsharesininvesteecompanies,aswellashowtheytakeaccountofenvironmental,social,governanceandclimatechangeconsiderationsintheirinvestmentdecision-making.

Figure 5: Weak appetite for mandatory disclosures(a) ‘Inyourcapacityasbankingregulator,doyoumonitorandevaluatetheapproachescommercialbankstaketoaccountforclimate-related risks,andifso,how?’,shareofresponses

(b) ‘Ifyoudonotrequiredisclosureofclimate-relatedrisksbyinstitutionswithinyourregulatoryperimeter,areyouconsideringmakingsuchrequirementsmandatory?’,shareofresponses


0% 10% 20% 30% 40% 50% 60%

Yes, on a mandatory basis and following the TCFD frameworkYes, on a mandatory basis and following other frameworks

We encourage and recommend disclosure following the TCFDframework

We encourage and recommend disclosure following otherframeworks

No

0% 10% 20% 30% 40% 50% 60% 70%

Yes, we are considering making such disclosures mandatoryunder the TCFD framework

Yes, we are considering making such disclosures mandatoryunder other frameworks

No, we are not considering making disclosures mandatory

0% 10% 20% 30% 40% 50% 60%

Yes, on a mandatory basis and following the TCFD frameworkYes, on a mandatory basis and following other frameworks

We encourage and recommend disclosure following the TCFDframework

We encourage and recommend disclosure following otherframeworks

No

0% 10% 20% 30% 40% 50% 60% 70%

Yes, we are considering making such disclosures mandatoryunder the TCFD framework

Yes, we are considering making such disclosures mandatoryunder other frameworks

No, we are not considering making disclosures mandatory

‘Prudentialrulescouldfavour“green”investmentsandloans...TheEBAisalreadyassessingthepossibilityofintroducingamorerisk-sensitivecapitaltreatmentofgreenassets,asa“green-supportingfactor”.’Valdis Dombrovskis, Vice-President, European Commission


17

TheBankofEngland’sPrudentialRegulationAuthorityhasissuedasupervisorystatementthatsetsoutexpectationsforbanks,insurersandbuildingsocietiestoembedintheirgovernancearrangementstheconsiderationofclimate-relatedrisks.Thisincludesensuringthatfirmshave‘clearrolesandresponsibilitiesfortheboardanditsrelevantsub-committeesinmanagingthefinancialrisksfromclimatechange’.Furthermore,theUK’sFinancialConductAuthorityintendstointroducerulesrequiringindependentgovernancecommitteestooverseeandreportonfirms’environmental,social,governanceandstewardshippolicies.Althoughclimaterisksintersectwithenvironmentaland

socialriskmanagement,theypossessdistinctcharacteristicsreflectingtheirlong-termhorizons,multidimensionalnatureandtheuncertaintyinvolved.Riskmanagementframeworks,aswellastheoverarchingstrategiesgoverningthem,mustbeequallydynamictoaccommodatethisunpredictability.Thisapproachwaspopularamongrespondentstoour

survey,with41%sayingtheyarelookingintowaystoevaluatetheapproachescommercialbankstaketoaccountforclimate-relatedrisks(seeFigure6).Amongthese,mostdosoinconnectionwiththeirgovernanceandriskmanagementframeworks,suggestingtheyrecogniseclimatechangeasalong-termandunpredictablephenomenon.Thisincludesscrutinyofboththestandardsofinternalbankmanagementandstrategicoutlook,alongsidesupportforintegratedriskmanagement,asmutuallyreinforcingactions.Andwhile59%ofcentralbankssurveyeddonotconductsupervisionofclimate-relatedriskmanagement,mostofthesesaidtheyintendtoassesscommercialbankactionsinthisarea.OneLatinAmericanregulatorsaidthe‘involvementofseniormanagementinfinancialfirmsiscrucial,aswellasthegradualregulatoryinvolvementinfocusingthisattentionbyprovidinginformation,incentivisingaction,andincreasingawarenesstoensurethatclimate-relatedrisksareunderstoodanddiscussedatboardlevelandconsideredinrisk-management.’IntheUKsinceOctober2019,thePrudentialRegulationAuthorityhasupdatedtheSeniorManagersandCertificationRegimetorequirethatresponsibilityforclimate-changeriskmustbeallocatedexplicitlytoaseniormanagerfunctionholder.

‘Market shaping’ macroprudential tools Complementing‘marketfixing’,‘marketshaping’approachesenvisioncentralbanks’roleasoneinwhichtheyproactivelyfosterandpractisegreeninvestmentandfinancewhiledisincentivisingunsustainableeconomicactivities.Suchanactivistapproachusesprudentialandmonetarytoolstostimulatedemandforgreenassetsandcantakeoneoftwoforms.ThefirstconcernsadjustingprudentialregulationssuchastheBaselIIIcapitalrequirementstoincreasebanks’greeninvestmentsandreduceunsustainableones.Thesecondemploysmonetarypolicytoolssuchasgreenquantitativeeasing,climate-alignedcriteriaincentralbankcollateralframeworksandportfoliomanagement,andgreencreditallocationandquotas.Centralbanksparticipatinginoursurveyweregenerallyless

enthusiasticabouttheprospectofmarket-shapingactions.

Manyexpressedconcernsaboutthesemoredirectmethodsofclimaterisksupervisionthatuseunconventionalprudentialandmonetarytools.Suchinterventionscouldcreatemarketdistortions,andmightinvolvepolicytrade-offswithcentralbanks’othergoals.Onenotablesuggestionforamendingprudential

supervisioninfavourofthisobjectiveistoadda‘green-supportingfactor’or‘brown-penalisingfactor’tobankingregulations.AttheEuropeanCommission’s‘ImplementingBaselIII:Challengesandimpact’eventinNovember2019,CommissionVice-PresidentValdisDombrovskissaidtheEuropeanBankingAuthorityisconsideringofferingbanksregulatoryreliefforgreeninvestmentsintheformofa‘green-supportingfactor’inthenextrevisionofBaselcapitalrequirements.TheseBaselIIIprudentialregulationswereintroducedafterthe2008financialcrisistoimprove

Figure 6: Only minority of central banks monitor commercial banks’ climate-risk approaches‘Inyourcapacityasbankingregulator,doyoumonitorandevaluatetheapproachescommercialbankstaketoaccountforclimate-relatedrisks?’,shareofresponses


Figure 2.3: Only minority of central banks monitor and evaluate commercial banks’ climate-risk approaches

‘In your capacity as banking regulator, do you monitor and evaluate the approaches commercial banks take to account for climate-related risks?’, share of responses


0% 10% 20% 30% 40%

Yes, we consider theirgovernance frameworks

Yes, we consider their riskmanagement frameworks

Yes, we consider both

No

No, but we are looking intoways of doing so

Green-supporting factors and brown-penalising factorsA GREEN-SUPPORTING FACTORlowerscapitalrequirementsforfinancialinstitutionsconductingmoregreeninvestmentsbyassigninglowerriskweightstosustainableassets.Thiswouldincentivisebankstoincreasethevolumeofcredittogreeninvestments.

A BROWN-PENALISING FACTORassignshigherriskweightstocarbon-intensiveassets,requiringbankstoincreasecapitalrequirementstocovertheincreasedrisksandtherebydisincentivisingcreditallocationtounsustainableinvestments.

©2 0 2 0


18 omfif.org

thebankingsystem’sresiliencethroughenhancedcapitalandliquiditystandardsdesignedtoimprovetheirregulation,supervisionandriskmanagementcapacities.Theframeworkcomprisesthreepillars:minimumcapitalrequirementsthataremandatoryforallfirms;supervisoryreviewsenablingregulatorstoprescribeadditionalcapitalforfirmsonacase-by-casebasis;andmarketdisciplinerelatedtodisclosurerequirements.Whiletheaforementionedmarket-fixingapproachesgo

somewaytowardsaddressinggapsinpillarstwoandthree,climate-relatedrisksderivedfromholdinggreenorcarbon-intensiveassetsarenotexplicitlyfactoredinunderthecurrentframework.Reflectingthis,oneAsiaPacificregulatorsaidthey‘followcloselytheBaselIIIpillarthreedisclosurerequirementswhichdonotpresentlycoverclimate-relateddisclosures.’IntheUK,thePRA’ssupervisorystatementfromApril2019notedexistingrequirementstodiscloseinformationonmaterialriskswithintheirpillarthreedisclosuresandonprincipalrisksanduncertaintiesintheirstrategicreport.Itsetoutexpectationsoffirmstoconsiderwhetherfurtherdisclosuresarenecessarytoenhancetransparencyontheirapproachtomanagingthefinancialrisksfromclimatechange.Proposalsforalteringprudentialregulationstointegrate

green-supportingandbrown-penalisingfactorshaveencounteredcontroversy.Fromtheregulatorystandpoint,centralbanksandsupervisorsarereluctanttoimplementprudentialmeasures.Thisreluctancestemspartlyfromalackofdatatoevaluatethelinksbetween‘greenness’andcreditrisk.Amongrespondentstooursurvey,39%saytheydonot

supporttheuseofmicroprudentialtoolstoaddressclimatechange(seeFigure7).OneAfricancentralbanknotedthatit‘wouldliketosupporttheuseofmicroprudentialtoolstoaddressclimatechangebutalltheunintendedconsequencesneedtobeexplored’.Anotherregulatorqualifiedtheneedto‘evaluate(andquantify)whethercurrentprudentialrulesmeanthatcapitalrequirementsadequatelyreflectthefinancialrisksresultingfromclimatechangethatinstitutionsareexposed

to,orifchangestotheframeworkarenecessaryandjustified.’Nonetheless,thescopeforreformswas,inthesameregulator’sview,conditionalonnot‘distortingorjeopardisingthecredibilityandsuitabilityofprudentialrules’.Others’scepticismwasrootedinthepotentialpolicy

trade-offsinvolvedinincentivisingcreditallocationintoandawayfromspecificsectors.OneEuropeancentralbanksaid‘prudentialrules,whicharedesignedtoprotectfinancialstability,mustnotbechangedforotherneeds…prudentialregulationassuchshouldnotbeadjustedtotargetnon-prudentialgoals,suchasallocationsofcapitaltowardssustainableinvestments.’Overall,green-supportingandbrown-penalisingfactorswereparticularlyunpopularamongrespondentsaskedtodeclaresupportforvariousmicroprudentialtoolstoaddressclimatechange,eachchosenby13%ofoursample.Justunderone-thirdofrespondentssaidthatneitherofthe

optionsofferedaccuratelyreflectedtheirposition.Whiletheydidnotwishtostatethattheysupportedtheuseofgreen-supportingfactors,brown-penalisingfactorsorareformofBaselrequirementsmorebroadly,neitherdidtheydirectlyopposesuchmeasures.Manycommentedontheneedformoreinformationtoassessthesemeasures’potentialpolicyeffectivenessandthetrade-offsinvolved.OneLatinAmericancentralbankadmittedthat‘webelieveweneedtounderstandbettertheimplicationsofmicroprudentialtoolstoaddressclimatechange’whileaMiddleEasternregulatoryagencysaid‘wehavenotyetcometoaconclusionaboutthis’.Thepoliticisednatureofclimateinterventioncanmake

centralbanksreluctanttoimplementprudentialreforms.AEuropeancentralbanksaidthat‘fromafinancialstabilityperspective,prudentialtoolsshouldberiskadequateandshouldnotbedesignedtosupportpoliticalgoals.’Itechoedothers’concernsaboutprematureactionandalackofinformation,statingthat‘athoroughassessmentofthefinancialrisks,whichcouldsubstantiatetheapplicationofprudentialtoolswithregardstoclimatechange,isnotavailableyet.’Marketparticipantsandothercommentatorshaveexpressed

frustrationwithwhattheycallan‘overlycautious’approachbyregulatorstowarnthat‘greendoesnotmeanrisk-free’andthattheuseofgreen-supportingfactorsisthereforeunwarranted.Someargueinsteadthat,bythetimeathoroughassessmentoftheimpactsofmicroprudentialmeasurescanbepossible,itmaybetoolateurgencytoresolvetheclimateemergency.❖

Figure 7: Mixed attitudes on microprudential tools‘Doyousupporttheuseofanyofthefollowingmicroprudentialtoolstoaddressclimatechange?’,shareofresponses


Figure 2.4: Mixed attitudes on microprudential tools

‘Do you support the use of any of the following microprudential tools to address climate change?’, share of responses


0% 10% 20% 30% 40% 50%

Green supporting factors

Brown penalising factors

Reforming Baselrequirements

Other

We do not support any

‘Weareundertakinganin-depthsurvey...Thiswillallowfinancialauthoritiestohaveaprecisediagnosisofthereadinessandcapacityoffinancialinstitutionstoaddressclimate-and/orenvironment-relatedrisks.’Central bank from Latin America


19

Taskedwithsafeguardingfinancialandpricestability,centralbankshavefocusedontherisksthatclimate

changeposestotheportfoliosofinstitutionstheysupervise.Butclimatechangeisalsocreatingopportunitiesfortheinvestmentcommunity,andforcentralbanksthemselvesintheircapacityasportfolioandreservesmanagers.

A shared vocabulary for ‘greenness’Afirststepindevelopinganunderstandingofthelinksbetween‘greenness’,‘brownness’andcreditqualityistodefinewhat‘greenness’and‘brownness’mean.Somejurisdictionsandregulatorsaredevelopinggreenandbrown‘taxonomies’toclarifywhichassetsandeconomicactivitiesareconsideredenvironmentallyfriendlyandwhichareunsustainable.OneEuropeancentralbankrespondentsaid‘thelack

ofharmoniseddefinitionsisanimportantdeterrentforestablishing,inacomparablemanner,whichactivitiesandsectorsshouldbeconsideredalignedwiththegoalsofenvironmentalsustainability,andthereforetoassessinstitutions’exposuretoclimaterisk.’Manyrespondentsconcurredwiththisstatement,indicatingthatexistingsector-andasset-leveldataweretooscanttogiveworthwhileguidanceontheimplementationofgreenmicroprudentialpolicies.Severaljurisdictionsarecraftingtaxonomiestoscaleup

greenfinanceinnovationandharmoniseregulation,andmoreintendtodoso.Amongsurveyrespondents,39%saidgreentaxonomiesarebeingdevelopedintheirjurisdiction,withafurther3%sayingthatbothgreenandbrowntaxonomiesarebeingdrafted(seepage20).Only27%saytherearenotaxonomiesbeingdevelopedandnorarethereplanstodoso.Onejurisdictionthatisrelativelyadvancedindevelopinga

taxonomyisChina,whichissueditsGreenIndustryGuidanceCatalogueinMarch2019.SeveralChineseministriesandregulatoryagencies,includingthePeople’sBankofChina,collaboratedonitsdevelopment.Thecataloguesetsuniformstandardsnationwideforpolicy-makerstodeterminewhichindustriesandprojectsareeligibleforgreenbondfinancing.Itsetsenvironmentalobjectives,suchaspollutionpreventionandenergyefficiency,butdoesnotexplicitlymakeclimatechangemitigationacoreobjective.TheEUisanotherjurisdictionatarelativelyadvancedstage

ofdevelopingagreentaxonomyrelatedtotheEuropeanCommission’ssustainablefinanceactionplan.Thetaxonomy,whichsetsoutalistofeconomicactivitiesalignedwithsixenvironmentalobjectives,willcomplementparalleleffortstoscaleupandharmonisegreencapitalmarketsthroughan‘EU

GreenBondStandard’.ThetaxonomyisscheduledtocomeintoeffectbyDecember2022,butobstaclesremain.Forexample,theprecisecompositionofeconomicactivitiesisstillsubjecttolivelydebateamongmemberstates.Afurtherchallengeistheoriginaldesignofthetaxonomy;itwasnotinitiallydevelopedforbanksandislikelytorequireupdatesbeforeimplementation.Thereislessencouragingnewsontheothersideofthe

green-browntaxonomydivide.Asindicatedinoursurvey,fewresourcesarebeingcommittedtothedevelopmentofbrowntaxonomies.Thiscouldlimitthepolicyandinvestorutilityoftaxonomicframeworks.Whilegreenassetsandactivitiesareenvironmentallybeneficial,thosenotclassifiedasgreenarenotautomaticallyunsustainableinnature.Theycouldbemarginallysustainable,neutral,orpolluting(brown).

FOCUS ON: Green finance

©2 0 2 0


● Climatechangemitigation● Climate change adaptation● Sustainableuseandprotectionof

waterandmarineresources● Transition to a circular economy, waste prevention and recycling● Pollutionpreventionandcontrol● Protection of healthy ecosystems

The EU taxonomy sets out a list of economic activities aligned with six environmental objectives:

Toprogress,theseclimate-riskframeworkswouldrequirestudyingariskdifferentialbetweengreenandbrownassets.Reflectingthistaxonomicgap,oneEuropeancentralbankrespondingtooursurveysays‘itistooearlytousesuchtoolsinthismannerwithoutthepresenceofcleardefinitionsofgreen/brownandaclearriskdifferential’.Anotherburdeniskeepingthetaxonomyuptodatewithtechnological

innovation.AsnotedbyEuropeanCommissionDirector-GeneralforFinancialStabilityOlivierGuersent,‘Theonlythingyouknowaboutanenvironmentaltaxonomyisthatthedayyouadoptit,itisoutdated.’

The role of rating agenciesRatingagenciescanplayanimportantroleinsupportingthepracticalimplementationofclimaterisksupervision.Thecollateralframeworksthatcentralbanksusedeterminethetermsofeligibilityofassetsofferedbycommercialbanksinexchangeofcentralbank-issuedmoney.Tosupportclimateagendas,policy-makerscouldmodifythesetoacceptsustainableassetsthat,undercurrentframeworks,wouldbeclassifiedashigher-risk.Somerespondentsseeopportunitiesforcentralbanksin

thispolicyarea.OneEuropeancentralbanksays‘collateralpolicyneedstotakeaccountofclimaterisk’while‘monetarypolicyisaimedatpricestability’.ThePBoCisanotableexampleofamonetaryauthoritydirectlyusingitscollateralframeworkforgreenfinance.SinceJune2018,China’scentralbankhasacceptedgreenbondsrateddouble-Aandaboveasvalidcollateralwithinitsmedium-termlendingfacility.Thealternativewouldbeforexternalcreditratingagencies

toaltertheirriskratingsoncollateralisedassetstoaccountforclimatefactors.Ratingagencieshavealreadytakenstepsinthatdirection.Lendingfurthersupporttowardsthedevelopmentofmoreholisticmethodologieswouldnotonlybenefitcentralbanks’collateralframeworks,butcouldhelpthewiderfinancialsectorinternaliseclimaterisksintheirdecision-making.

20 omfif.org

Figure 8: Growing appetite for taxonomies‘Aretheregreenandbrowntaxonomiesbeingdevelopedinyourjurisdiction?’,shareofresponses



Figure 2.5: Growing appetite for taxonomies

‘Are there green and brown taxonomies being developed in your jurisdiction?’, share of responses


0% 10% 20% 30% 40%

Yes – green only

Yes – brown only

Yes – green and brown

No

No, but there are plans fordeveloping such taxonomies

21

Guiding green credit linesThecreationoftaxonomiescouldenablecentralbankstodevelopgreencreditallocationpoliciestomandateorencouragecommercialbankstolenddirectlytoenvironmentallybeneficialsectors.Onesuchpolicycouldbecreditfloorsforminimumlendingrequirementstosustainablesectors,or,conversely,creditceilingsthatlimitloanstocarbon-intensiveindustries.Centralbanksinseveraldevelopingeconomieshaveintroducedgreencreditquotas.In2015theReserveBankofIndiaincludedrenewableenergyandsocialinfrastructureprojectsastargetedcategoriesinits‘prioritysectorlending’programme.Upto40%ofcommercialcreditfrominstitutionsthattheRBIregulatesisdirectedtoPSLareas.Whilegreencreditquotassetpredefinedloantargetsto

preferredsectors,thisdiminishesthecontrolcommercialbankshaveoverriskmanagementandloanorigination.Therearealternativewaystoinfluencecreditallocationwhilekeepingthechoiceofassumingdefaultriskswithintheprivatesector.Casesinpointincludesubsidisedloans,preferentialrefinancinglinesanddifferentialreserverequirements.Thesegreenfinanceincentivesenablecommercialbankstodecidehowmuchcredittheyextendandtowhichprojects.ExamplesofgreenloansubsidiesincludetheBankofJapan’sloansupportprogramme,whichofferslow-interest,long-termcredittobanksthatbacksustainableprojects.Othercentralbankshaveengagedinsimilaractivities.TheBanqueduLibanlowerscommercialbanks’reserverequirementsby100%-150%ofthevalueofloanscertifiedtoassistenergysavings.In2018,thePBoC

Greenwashing: Cases in which financial assets and economic activities are misleadingly labelled as green or sustainableFROMapolicy-makingstandpoint,centralbanksmuststrikeajudiciousbalancebetweenrobustregulatorystandardsandflexibilityforcontextandtimelines.AccordingtooneAsiaPacificcentralbankrespondingtooursurvey,‘thelackofasetofinternationalcomparablestandardsforgreenfinance’inhibitseffortsto‘scaleupgreenfinanceandavoidgreenwashingforcross-bordergreencapitalflows’.Ontheotherhand,anoverlyrigidoronerous

regulatoryregimethatisinsensitivetodifferenteconomiccontextsandindustriescouldproveequallyunconducive.OneconcernraisedinconnectionwiththeEUtaxonomy,forinstance,isthatoverlyrestrictiveinterpretationsof‘greenness’coulddiscourageshort-termcapitalflowsneededforlow-carbontransitioninvestments.Thereisacontinuingdebateaboutwhetherthetaxonomy’sproposedclassificationsgiveanunfairadvantagetothosecountriesthatdonotrelysoheavilyonfossilfuels.CommentinginSeptember2019ontheEUtaxonomy,BankofEnglandGovernorMarkCarneysaidamorenuanced,‘richer’approachisrequired.However,asjurisdictionspursuedifferenttaxonomicsystems,regulatorsarewaryofbeinghamperedbyincompatibleprotocolsanddivergingstandards.AMiddleEasternsupervisoryauthoritycautionedthat‘theprocesscanbelengthyandinvolvesmultiplestakeholdersand,crucially,economicrationaleandtransitionconsiderations.However,itisclearlyunhelpfulforeachjurisdictiontodevelopitsowntaxonomy,giventheproblemtobeaddressedisaglobalone.’

becamethefirstcentralbanktoacceptgreenbondsandloansaseligiblecollateralfromcommercialbanks.

GreenwashingTheincreasingmomentumofinvestorinterestinsustainablefinance,alongsidetheparallelsurgeofgreencapitalmarketinitiatives,posesotherdistinctchallengesforcentralbanksandregulators.Onesuchhazardistheriskofgreenwashing.Dubiouscasesofgreenbondcertificationorthemisuseoftheirproceedstonon-stipulatedendscouldgreatlydiminishinvestorconfidenceinthecredibilityoftheassetclass.❖

©2 0 2 0


‘The process of developing a taxonomy can be lengthy and involves multiple stakeholders and, crucially, economic rationale and transition considerations. However, it is clearly unhelpful for each jurisdiction to develop its own taxonomy, given the problem to be addressed is a global one.’ Regulatory authority from the Middle East

Centralbanks’andregulators’growinginterestintheclimateagendahasprecipitatedcallsfromcivilsociety

andthefinancialcommunityforpolicy-makerstointegrateclimateconsiderationsintotheirmonetaryoperations.TheevidencefromtheOMFIFsurveyisthatthispressureisstartingtotakeeffect.Nearlyhalfthecentralbanksandregulatorspolledseearoleformonetarypolicyinsupportingtheclimateagenda.Therearestrongreasonswhythisshouldbethecase.

AccordingtoBanquedeFranceGovernorFrançoisVilleroydeGalhau,‘Ifyoulookattheeconomiceffectofclimatechange,it’sprobablyinthelongrunastagflationaryshockwithhigherpricesandlowereconomicoutput.Thisisoneofthemostdifficultshockswecentralbankershavetodealwith.’Theeffectsofphysicalandtransitionrisksonpricestabilitycanworkthroughseveralchannels.Weatheranomaliesandnaturalhazardscoulddiminishmacroeconomicproductivecapacitybydamaginginfrastructure,supplychainsandecosystems.Gradualchangesintheclimatecanmakeshort-termweatherpatternsmoreerratic,withgraverepercussionsformacroeconomicoutputandprices.Transitionriskscanaffectthesupply-sideconditions

relevantformonetarypolicy.Theneedtopreventtemperatureincreasesandthecostofthetransitiontowardsalower-

carboneconomymayentailreducingshort-termeconomicgrowth.Price-basedclimatepoliciessuchascarbontaxescouldcreatesupply-sideshocksasfirmsadjustbytemporarilyloweringproductiontoaccommodateregulatoryrestrictions.Climateriskscanalsohavedemand-sideeffectsthroughtheirimpactonhouseholdwealthandprivateconsumption,investmentandtrade.Suchpotentialdeclinesinaggregatedemandforgoodsandservices,aswellaschangesininvestmentpreferences,couldexacerbateassociatedsupply-sideshocks.Institutionsareinvestigatingthelinksbetweenclimate

risksandpricestability.TheECBhasexploredtheGermaneconomy’svulnerabilitytospecificphysicalriskchannelssuchasbottlenecksontheRhine,animportantshippingrouteforindustrialinputsandcommodities,causedbysummerdroughts.TheBankofCanadahasexploredtheeffectofclimatechangeontheforestry,agriculturalandminingsectors.Thisgradualintegrationofclimateconsiderationsinto

monetarypolicyframeworkshasnotgenerallytranslatedintocentralbanksusingmonetarypolicytodirectlyaddressclimatechange.Asizeableminority(42%)seearoleforintegratingclimate

considerationsintotheirmonetaryoperations(seeFigure9).Theprevailingrationaleamongthosewhoopposethisviewisthatcentralbanks’monetaryresponsibilitiesshouldplayonlyanancillaryrole.OneAsiaPacificcentralbanksaysitdid‘notseemonetarypolicyasaparticularlyeffectivetoolfordirectlycontributingtothetransitiontoalow-carboneconomyascomparedwithcarbontaxes,emissionspermitmarkets,andregulatoryaction.’Nonetheless,thecentralbankqualifiedthatitexpectsthat‘monetarypolicywillneedtoconsiderrisksfromthephysicaleffectsofclimatechangeaswellasfromthebroaderpolicyresponsetoclimatechange’.Othercentralbanksconsideredmonetarypolicytobea

second-bestsubstituteformanagingclimatetransitions.OneEuropeancentralbanksaidits‘viewisthatmonetarypolicyislesssuitedtoputtingtheeconomyonapathwithstructuralchangetowardsalow-carboneconomy.Othertools,mainly

22 omfif.org

Figure 9: Central banking community divided on role of monetary policy‘Doesyourinstitutionseearoleformonetarypolicytosupporttheclimateagenda?’,shareofresponses


FOCUS ON: Climate risks and monetary policy

‘Climatechangeriskwouldbebetteraddressedthroughgovernmentpoliciesandregulatorymeans.’Regulatory authority from the Middle East


Figure 3.1: Central banking community on the fence when it comes to role of monetary policy

‘Does your institution see a role for monetary policy to support the climate agenda?’, share of responses


0% 20% 40% 60%

Yes

No

2 3

globalfiscalpolicytools,aresubstantiallymoresuitable.’AnotherAsiaPacificrespondentsaysclimatemitigation

objectivesare‘notanaimofmonetarypolicyinandofitself’butacceptedthat‘monetarypolicyisconcernedabouttheimpactofclimatechangetotheextentthatitaffectstheoutlookforinflationandgrowth’.Beyondconventionalmonetaryoperations,climaterisks

couldbeintegratedintocentralbanks’unconventionalpolicypractices,suchasquantitativeeasing,aswellasintotheirreservesmanagementframeworks.Manycentralbankbalancesheetsholdaconsiderablevolumeofcarbon-intensiveassets,precipitatingcallsfortherecalibrationofQEprogrammestosupportsustainableobjectives.Thiscouldhavetheaddedeffectofstimulatingprivate-sectorsustainableinvestmentsbyloweringtheinterestratesongreenbonds.However,mostcentralbanksarehesitanttocommitto

greenQEprogrammes.Traditionallycentralbankassetpurchaseprogrammeshaveadheredtotheprincipleof‘marketneutrality’andavoideddirectingcredittospecificindustriesandcompanies.Moreover,therelativeimmaturityofthegreenbondmarketposespracticalconstraints.TheBankforInternationalSettlementsnotesthat,whilethecreditratingsofgreenbondshaveimprovednoticeably,theaccessibilityandliquidityofthesecondarygreenbondmarketremainlimitedincomparisontoconventionalsecurities.Centralbanks’activitiesinthisareahaveremainedfairly

conservativeoverall,butchangestotheprincipleofmarketneutralitymaybeimpending.ECBPresidentChristineLagardehasbeenvocalaboutrestructuringthecentralbank’sassetpurchaseprogrammetoaccountforclimatecriteria.However,thesechangeswoulddependonpushingthroughbroaderregulatoryreforms.Lagardehasnotedthatclimate

integrationwouldbecontingenton‘objectivecriteria’,suchastheforthcomingEUtaxonomy,thatwouldenabletheECBto‘assesswhetherandhowitcanapplygreenfinancialinstrumentstoitsAPP’.

Decarbonising central bank operationsDespitetheuncertaintysurroundinggreenQEandtargetedcredit,somecentralbanksaregoinggreenthroughothermeans,suchasintroducingmoreexplicitsustainabilitycriteriaintotheirportfoliomanagementandinternaloperations.AnNGFSreportfromOctober2019outlinedhowcentralbankscouldpotentiallyadoptalayeredapproachtointegratingsustainabilityintotheirdifferentportfoliomandates.Whilesomecentralbankassetportfolioshaveclearshort-tomid-termpolicygoalsrequiringstabilityandlowrisklevels,othersmayhavemoreleewaytoaccommodateabroaderscopeforsustainability.Inmid-2019,Hungary’scentralbankannounceditsintenttoestablishaspecialisedportfolioforgreenbondstohelpstimulatethedevelopmentofthegreenfinancemarket.InwesternEurope,DeNederlandscheBankandtheBanquedeFrancehaveoutlinedresponsibleinvestmentchartersguidingassetselectioncriteriaforportfoliosforwhichtheyarefullyresponsible.France’scentralbankwasthefirsttoformallyadoptaresponsibleinvestmentcharter,andDNBwasthefirstcentralbanktosigntheUnitedNationsPrinciplesforResponsibleInvestment.Thoughstillintheearlystages,theintegrationofsociallyresponsibleinvestingandESGconsiderationsisgainingtractionincentralbanks.In2019theBancad’Italiabeganintroducingsustainabilitycriteriaforitsequityinvestments,andinNovembertheSverigesRiksbankdivesteditselffromseveralCanadianandAustralianlocalbondsowingtoconcernsabouttheirstates’climateimpact.❖

‘Wedonotconsidermonetarypolicyasaparticularlyeffectivetoolfordirectlycontributingtothetransitiontoalow-carboneconomyascomparedtocarbontaxes,emissionspermitmarkets,andregulatoryaction.’Central bank from Asia Pacific

©2 0 2 0


Facing the future

CHAPTER THREE

24 omfif.org

Policy-makersareinvestingmoretimeandresourcesintothefieldofclimate-risksupervision,butremainhamstrungbyscantandoftenpoor-qualitydata.Problemsariseatallstages,fromthecountryleveldowntoindividualcompanydisclosures.

Manychallengesarecomplicatingcentralbanks’endeavourstointegrateclimaterisksintotheir

supervisoryframeworks.Thetopconcernforrespondentstooursurveywasdata

availabilityandquality,with84%identifyingthelackofdecision-usefuldataforassessingclimaterisksasthebiggestchallengetomovingaheadwiththesupervisionofsuchrisks(seeFigure11).ThisalignswiththerecommendationsissuedinApril2019bytheNetworkforGreeningtheFinancialSysteminitsfirstcomprehensivereport,whichhighlightedclimatedatagapsasamajorobstacleforcentralbanks.Whilesomepolicy-makersarerespondingbyinvestingagreatmanyresourcestodevelopin-houseexpertiseandinformation,thechallengesareconsiderableandrequireamulti-stakeholdereffort.Centralbankinitiativestodesignfeasiblesupervisoryframeworksmustaccountforthesedataandmethodologicallimitations.Regulatorsandfirmsmusttakestepstobridgethesegapsandprepareforatimewhen,asaresultofadvancesindatacollection,theywillhavesufficientstatisticstobackimplementation.

Impact of data limitations on risk policyDatagapscanhamperconsiderablythefeasibilityofanalysingtheimpactofphysicalandtransitionrisks.Aparticularchallengeforcentralbanksandsupervisors,andforthoselookingtosupporttheiragendathroughdataprovision,isassemblinghistoricalandforward-lookingdataseries.Manyfinancialinstitutionsandnon-financialfirmsonlyrecentlybeganassessinganddisclosingtheirclimate-relatedrisks.Whilecountry-levelclimatedataareoccasionallyavailable,measuringfinancialexposurestoclimatechangerequiresdetailedinformationatthesectorandcompanylevels.Undertakingborrower-specificanalysisrequiresasset-leveldatacombinedwithinformationonclimateeffectsforparticularindustriesandbusinessesatspecificlocations.Bottom-upportfolio-specificscenarioanalyses,reliant

onfirm-leveldata,areessentialtodirectgreeninvestmentsstrategically.Sectoraldataoncarbonemissionsobscurevariationinproductionprocessesandtechnologies,aswellasanytime-dependentchangesinindividualfirms’environmentalimpact.Thelackofnuanceintop-downdatahasimportantimplicationsforpolicy-makersandinvestors.Investmentinsectorsotherwiseconsideredcarbon-intensivecouldbeintendedtointroducecleanertechnologies.Respondingtooursurvey,oneAsiaPacificcentralbankidentifiedthe‘lackofdetailedemissionsdataacrossemissionsscopes,comparablegeolocationdatabetweenassets,infrastructure,businessoperationsandecologicalriskzones’asthebiggestdatachallenges.AEuropeancentralbankaddedthat‘oneofthemain

challengestofurtherprogress[inclimate-risksupervision]istheavailabilityofenoughdetailedinformationregardingexposuresofbankstosectorsandcompanies’.Somegranularclimate-riskdataattheassetlevelareavailablefromproprietaryplatformssuchasthe2°InvestingInitiative,FourTwentySevenandCarbonDelta.However,actionableclimate-riskdataareoftenacquiredandprocessedatgreat

25

expense.AcentralbankfromAsiaPacificlamentedthelackofnecessaryresourcestointegratethelimitedvolumesofavailableclimate-riskdataintosupervisoryactivities–aproblemespeciallyforsmallerjurisdictions.

Green finance considerations for supervisionCentralbanks’supervisoryapproachesconcerningclimateriskfocuspredominantlyontheexposureoffinancialinstitutionstothesefactors.Severalprivatefinancialinstitutionsareseekingtobalancenegativeexposuretobrownassetswithinvestmentsspurringclimatemitigationandadaptationsuchasrenewableinfrastructureandenergy.Centralbanksandsupervisorsmostlyacknowledgethat

effectiveclimatedisclosuresandriskmanagementrequireasynthesisofbothmarket-ledinnovationandregulatoryguidance.However,87%ofrespondentssaidtheygenerallydonottakefirms’greenfinanceactivitiesintoaccountwhenassessingtheirexposuretoclimaterisk.Thatbeingsaid,manycentralbanksdemonstratedthat

theyareconsciousoftheneedtooperatewithinabroaderframeworkofconcertedaction.OneAfricancentralbanksaid‘supervisingclimateriskscanhaveawideimpactextendingbeyondjustthesupervisedentities.Acollaborativeeffortisthereforerequiredthatbringstogetherallstakeholdersandrole-playersinordertotakeappropriateandcoordinatedaction.’Althoughtherewasconsensusthatitistooearlyto

Figure 11: Central banks determined to implement climate stress tests but process still at early stage‘Whatdoyouseeasthebiggestchallengesinthesupervisionofclimaterisk?’,shareofresponses


NOTE FOR SIMON: Too big again, so doubled the width. -KU

Figure 3.2: Central banks determined to implement climate stress tests but process sll at early stage

‘What do you see as the biggest challenges in the supervision of climate risk?’, share of responses


0% 10% 20% 30% 40% 50% 60% 70% 80%

The lack of data available to identify and assess climate-related risks

The proliferation of fragmented schemes and shortcomings incomparability and consistency across different sectors

The lack of political leadership in this agenda on a global scale

Public attitudes towards central banks taking on this agendaand related threats to central bank independence

The existence of frequently contradictory intersecting legal,regulatory and operating requirements

Other

and jurisdictions

‘Thebiggestchallengeisthelackofrules/requirementsspecifyingtheroleofeachmarketparticipant.’Central bank from Europe

©2 0 2 0

Figure 10: Supervision focus on negative risk‘Whenassessingfirms’exposuretoclimaterisk,doyouevaluateandtakeintoaccounttheirapproachestoleveragegreenfinanceopportunitiesandinnovateinproductdevelopment?’,shareofresponses


Figure 2.6: Supervision focus on negative risk

‘When assessing firms’ exposure to climate risk, do you evaluate and take into account their approaches to leverage green finance opportunities and innovate in product development?’, share of responses


0% 20% 40% 60% 80% 100%

Yes

No

employmicroprudentialtools,somecentralbanksidentifiedothermeanstobolstergreenfinance.OneAsiaPacificcentralbanksaidthat‘whilewedonottakeintoaccountthesefactorsinassessingafinancialinstitution’senvironmentalorclimate-relatedrisksonitsbalancesheet,wedomonitorsuchdevelopmentsaspartofourholisticsupervisoryassessmentofthefirmpertainingtoitsbusinessstrategies.’Regulatoryandsupervisoryregimesthatsupportgreen

financehaveofteninvolvedcollaborationbetweencentralbanksandcommercialbankingassociations.In2017theCentralBankofKenyaworkedwiththeKenyaBankers


26 omfif.org

Association,CapitalMarketsAuthorityandnationaltreasurytodevelopthecountry’sgreenbondsprogramme.TheBancoCentraldoBrasil’sResolution4327onsocialandenvironmentalresponsibilityforfinancialinstitutionsbuildsonvoluntarygreenprotocolsoriginatedbyBrazil’sbankingfederation.Otherregulatorsemploysubsidiestoincentiviseprivate-sectorgreenfinance.In2019theMonetaryAuthorityofSingaporeintroducedasustainablebondgrantsscheme,expandingonits2017greenbondgrantsscheme.Theprogrammehelpssustainablebondissuersdefraythecostsofexternalreviewandratings.However,greatuncertaintyremains.Asidefromtheirown

regulatoryinitiatives,mostofthecentralbankssurveyeddonotformallyevaluateprivate-sectorgreenfinanceaspartoftheirsupervisorymandate(seeFigure10).Therationalefornotincludingprivate-sectorgreenfinancialinnovationinasupervisorycapacityrelatestotheperceivedconstraintsofcentralbankmandates.Insomejurisdictions,regulatoryandsupervisoryactivitiessuchasconsumerprotectionaredividedbetweencentralbanksandotherauthorities.Wherepossibleinthisreportwehavesurveyedvarioustypesofinstitutionstoensureacomprehensiveassessmentofthesupervisorylandscape.Theircommentspointtoaneedfor

‘Unequivocalsignalsgivenbypoliticalandfinancialauthoritiesarekey.Inaddition,toolssuchasenvironmentalscenarioanalysisareveryrelevantandthefinancialsystemneedstoinnovateanddevelopnewmethodologies.Involvementofseniormanagementinfinancialfirmsiscrucial.’Central bank from Latin America

concertedactionongreenfinancebetweenregulatorsontheglobalaswellasnationallevel.Overall,severalrespondentssaidtheyaredevelopingmeansorwouldseektoincludesuchconsiderations–albeitwiththequalificationthatitis‘unlikelytobeakeyareaoffocus’,accordingtoonerespondent.

Fragmentation and consistencyAmongsurveyrespondents,thesecond-mostfrequentlycitedchallengetoproperclimate-risksupervisionafterdatashortcomingswasthefragmentationofclimate-riskschemes,citedbyone-thirdofinstitutions.Somehighlightedthecomplicationstosupervisionarisingfromthelackof‘comparabilityandconsistency’ofdisclosureframeworks,asinthecaseofcompany-leveldisclosures.InadditiontotherecommendationsoftheTaskForce

onClimate-relatedFinancialDisclosures,popularreportingstandardsincludethoseoftheSustainabilityAccountabilityStandardsBoardandGlobalReportingInitiative,whichusedifferingmetricsforclimateperformance.TheSASBusesarelativelynarrowframeworkrangingbetweentwoand10sustainabilitymetricsperindustry,whiletheGRI’scanexceed80.Moreover,thevoluntarynatureofmanydisclosurerequirementsmeansthatevencompany-leveldisclosureswithinacommonreportingstandardmaynotbeconsistent.Theproblemsposedbyfragmentationarefar-reaching.

AccordingtooneAfricancentralbank,‘Supervisingclimateriskcanhaveamuchwiderimpactthanonlyonsupervisedentities,andacollaborativeeffortisthereforerequiredthatbringstogetherallstakeholdersandrole-playersinordertotakeappropriateandcoordinatedaction.’TheNGFSitselfacknowledgedinitsApril2019‘CallforAction’thatthereisatrade-offbetween‘thefragmentationofregionalornationalapproaches,diversityofjurisdictions’collectivepreferenceanddifferingstagesofdevelopment’ontheonehand, and‘harmonisationinordertoavoidlevel-playingfieldproblemsandtofacilitateglobalassessmentofriskprofiles’ontheother.❖


©2 0 2 0 27


28 omfif.org

� Australia ● ● RESERVE BANK OF AUSTRALIA, APRA AND ASICTheReserveBankofAustraliajoinedtheNGFSinJuly2018.TheRBAhasidentifiedclimatechangeasasystemicrisktotheAustralianeconomy,withitsOctober2019FinancialStabilityReviewdescribingindetailthepotentialimplicationsofclimatechangeonpriceandfinancialstability.TheRBAmonitorsclimaterisksaspartofitsmonetarypolicyandfinancialstabilitymandates,andworkscloselyonclimateriskregulationwiththeAustraliaPrudentialRegulationAuthority,AustralianSecuritiesandInvestmentsCommissionandTreasuryaspartofthecountry’sCouncilofFinancialRegulators.Thecouncilhasestablishedaworkinggrouptobetterunderstandthefinancialimplicationsofclimatechangeandco-ordinateinteragencypolicies.APRAandASIChavestronglyencouragedthefinancialinstitutionsandlistedfirmsundertheirremittodiscloseclimate-riskinformationalignedwithTCFDrecommendations.APRAhassaidfinancialinstitutionsshouldtreatclimaterisksasamainstreamriskfactor.ArecentAPRAsurveyofinstitutions’climate-riskmanagementpracticesnotedthatwhilemanyweremakingprogresstoimplementmeasures,therewassubstantialroomforimprovement.A2018ASICstudyonclimateriskdisclosuresconcludedthatalthoughlargelistedfirmsrecognisedtheimportanceofclimatedata,theywereoftentooheterogeneousandlimitedtobeofmeaningfuluse.APRAisnowconsideringhowtoassessbankandinsurerexposurestophysicalandtransitionriskscenarios.

� Brazil BANCO CENTRAL DO BRASILTheBancoCentraldoBrasilisatthefrontierofemployingenvironmentally-alignedprudentialregulationpolicies,beingthefirstregulatortoengagecommercialbanksinthisarea.Since2011theBCB’sResolution3,988hasrequiredbankstoconduct

environmentalandsocialstress-testingandintegratetheserisksinlinewithBaselIIcapitaladequacyrequirements.Annualstresstestsnecessitatebankstoconsidertheirexposuretoavarietyofrisks,includingenvironmentalandsocialones,andtodemonstrateadequatecapitaltocoverthem.In2014theBCBpublishedthoroughguidelinesonsocialandenvironmentalresponsibilityapplyingtoitsauthorisedfinancialinstitutions,buildingonvoluntaryprotocolsfromthebankingsector.Thisestablishedtheexpectedareasofenvironmentalandsocialriskthatbanks’governanceframeworksshouldaddress.Notably,banksarerequiredtogatherdataonfinanciallossesduetoenvironmentaldamagesstretchingbackfiveyears.Apartfromgreenmacroprudentialregulation,theBCBhasintervenedinspecificcreditmarketsthroughenvironmentalregulation.Since2008,thecentralbankhasmadeaccesstosubsidisedruralcreditintheAmazonrainforestconditionaloncompliancewithenvironmentalandsocialregulations.ThisisestimatedtohaverestrictedaroundBrl2.9bn($700m)inloanstoharmfuleconomicactivitiesbetween2009-11.

� China ● ● PEOPLE’S BANK OF CHINA ThePeople’sBankofChinaisafoundingmemberoftheNGFSandchairsitsfirstworkstreamonsupervisionoffinancialinstitutions.Thecentralbankemploysmacroprudentialandmonetarypolicytoolstopromotegreenfinancialdevelopment.AlongsideothersupervisoryentitiessuchastheChinaBankingandInsuranceRegulatoryCommission,thePBoCadherestoChina’sGreenCreditPolicy,firstoutlinedin2007,andtheGuidelinesonEstablishingtheGreenFinancialSystemreleasedin2016.Theseplansrequirebankstoshiftloansawayfromunsustainable,high-pollutionorhigh-emissionindustriestoenvironmentally-friendlyoptions.ThemeasuresthePBoCemploystosupportthesegoalscanbedividedbroadlyintothefollowingareas:standardisingtaxonomiesforgreenfinancialproducts;requiringmandatorydisclosureforenvironmentalrisks;restrictingloanstonon-compliantpollutingfirms;andincentivisingcommercialbank

CASE STUDIES: Regulatory approaches to climate risksThis section highlights the initiatives across climate risk supervision through micro- and macroprudential regulation and other measures across 20 jurisdictions, as well as other activities in support of green finance.

Washington DC, 17 October 2019

NGFS publishes A Sustainable and Responsible Investment Guide for Central Banks’ Portfolio Management

Climate change is a source of financial risk. The Network for Greening the Financial System (NGFS) encourages central banks and supervisors across the globe to lead by example and include sustainability considerations in their portfolio management, without prejudice to their primary mandates. Therefore the NGFS today publishes A Sustainable and Responsible Investment Guide for Central Banks’ Portfolio Management. This guide – the first of its kind – is a hands-on approach aimed at central banks that wish to adopt Sustainable and Responsible Investment (SRI) practices. It builds on the results of an SRI portfolio management survey among NGFS members and concludes with case studies of first-hand experiences by some NGFS members. Among the five SRI strategies identified in the guide, the most prominent are green bond investments and negative screening for equity and corporate bond holdings. The survey shows that there is a growing momentum among NGFS members: 25 out of the 27 respondents have already adopted SRI principles in their investment approach or are planning to do so. Those principles range from a broad scope of environmental, social, and governance (ESG) considerations to a climate-specific focus. As the mandates and status of central banks differ, the guide does not offer a one-size-fits-all solution, but discusses potential SRI approaches and ways to implement them, allowing central banks to account for their own specific challenges. Going forward, the NGFS will further engage with key stakeholders on this guide. “The work of the NGFS is vital to scale up the work of central banks and financial supervisors in the field of sustainable finance. The publication of this guide highlights the unique role of the Network, that works concretely to better equip our community of central bankers to lead by example and, quite literally in this case, to put our money where our mouth is. We thus send a strong signal to the financial system as a whole, to ensure that it turns green and sustainable,” said Frank Elderson, Chair of the NGFS and executive board member of De Nederlandsche Bank.

● ●=memberof


29

lendingtogreenprojects. InDecember2015thePBoCissueditsGreenBondGuidelines,aswellastheChinaGreenBondEndorsedProjectCatalogue.Thesesetouttheofficialcriteriaforprojectsthatqualifyas‘green’,themanagementprocedureforbondproceeds,andthereportingrequirementsforperiodicdisclosures.Astheregulatoroverseeingtheinterbankbondmarketandissuancebyfinancialinstitutions,thePBoC’sguidelinescoveraround93%ofoutstandingbondsinChina.InDecember2017thePBoCandChinaSecuritiesRegulatoryCommissionreleasedtheProvisionalGreenBondAssessmentandVerificationGuidelines.Theseaimtopreventgreenwashingbysettingstandardsforqualifiedentitiesratingandverifyinggreenbondcompliance. ThePBoC’sshareddatabasewiththeministryofecologyandenvironmentandwithbanksfacilitatesmacroprudentialpoliciesbyassessingenvironmentalcreditrisksforloanapprovalsandreviews.Thedatabasehelpsrestrictcreditavailabilityforfirmsthatviolateenvironmentalcompliancestandards. ThePBoCincorporatesgreenperformancemetricsintomacroprudentialassessmentsystemsguidingcommercialbankstoextendlinesofcredittogreenprojects.

Since2018,ithasbroadenedthetypesofcollateralitacceptsformedium-termlending,becomingthefirstcentralbanktoacceptcommercialbanks’greenbonds,loansandasset-backedsecuritieswitharatingofdouble-Aandaboveaseligiblecollateral.

� Euro area ● ● EUROPEAN CENTRAL BANK TheEuropeanCentralBankisanNGFSmemberandwieldsimmenseinfluenceasthecentralbankshapingthemonetarypolicyofitsmemberstates.ThereismuchdebateontheroletheECBcouldandshouldplaytocomplementtheEuropeanUnion-widesustainablefinanceagenda.Itsnewpresident,ChristineLagarde,hasdescribedclimatechangeas‘missioncritical’fortheECB. OneofthemostsignificantsuggestionsincludestheECBadopting‘greenquantitativeeasing’withinits€2.5tnassetpurchaseprogramme.InNovember2018itwasnotedthat,duetotheAPP,theECBheldasignificantportionofbothpublicandprivatesectorgreenbonds,withestimatesofaround24%and20%oftheeligibleinvestmentuniverserespectively.ThemarketneutralityprinciplethatguidesassetpurchaseshasresultedintheECB’sAPPbalancesheetreflectingtheindustrymakeupofcarbon-intensiveeconomicactivities.TheECBisbeginningtoimplementsustainabilityprinciples,includingdivestments,proxyvotingandhiringexternialspecialistslistedbytheUnitedNationsPrinciplesforResponsibleInvestmenttomanageseveralofitsnon-monetaryportfolios,suchasitspensionportfolio.Itisreviewingimplementingsuchcriteriainitspaid-upcapitalandgeneralreservefunds.InNovember2019,EuropeanCommissionVice-PresidentValdisDombrovskisannouncedthatbankscouldgetregulatoryreliefforgreeninvestmentsunderthenextrevisionstotheBaselcapitalrequirements.Amonthlater,theEuropeanBankingAuthoritypublishedits‘actionplanonsustainablefinance’,whichsetsa

timelinetodeliveronitsenvironmental,socialandgovernancemandatesbyfocusingonkeymetricsanddisclosuretosupportbanks’greenstrategies,andexploringevidenceneededtoadjustriskweights.OnlookersexpectclimatechangewillbecomeagreaterareaoffocusfortheECBunderitsnewpresidentChristineLagarde,whoplanstoincludetheagendainthebank'sstrategicreview.Onassetpurchases,thefinalisingoftheEU-levelsustainabilitytaxonomycouldenabletheECBtoplayamoreactiveroleindirectingcorporatepurchasestowardsgreenbonds.

� France ● ●BANQUE DE FRANCE AND AUTORITÉ DE CONTRÔLE PRUDENTIEL ET DE RÉSOLUTIONTheBanquedeFranceisafoundingmemberandhousesthesecretariatoftheNGFS.TheBanqueparticipatesintheG20GreenFinanceStudyGroup,whichaimstoharmoniseanddeepengreenbondmarkets.Thecentralbankalsosupportsgreenfinanceresearchthroughpartnershipswithuniversities,researchcentresandthinktanks.Since2018ithasofferedanannual‘YoungResearcherPrizeforGreenFinance’tofundstudiesonclimateriskstothefinancialsector.NationallegislationsuchasArticle173of2016’sEnergyTransitionLawhasbroughtclimate-riskstotheforefortheBanqueandAutoritédecontrôleprudentieletderesolution,itsprudentialagency.Article173mandatesthatclimaterisksbeintegratedintoprudentialsupervision‘inthecontextofregularstresstests’.ThemainprincipleunderpinningtheBanque’sclimateagendaisraisingawarenessandenhancingownershipoftheserisksinthebankingsector.Thecentralbankwillbeimplementingstresstestsforclimaterisksfrom2020. A2017BanquedeFrance-ACPRreportconcludedthattransitionriskswereparticularlyrelevanttofinancialstability,butalsostatedthatthetimeframefortheirmaterialisationwasbeyondtheconventionallengthusedtosupervisecommercialbanks.Afollow-upsurveyin2018tookstockoftheprogressmadebymajorFrenchbanksandinsurerstoaccountforvariousclimaterisks.Thishighlightedsignificantprogressinpreparingfortransitionrisks,modestprogressinassessingphysicalrisks,andalowlevelofsophisticationinanalysingliabilityrisks.LikeDNB,theBanqueappliesESGconsiderationstofundportfolios,andinMarch2018becamethefirstcentralbanktoadoptaresponsibleinvestmentcharter.ThisisalignedwithkeyinternationalESGstandardsincludingtheUNSustainableDevelopmentGoals,theUNGlobalCompactand2015Parisclimateagreement. InOctober2019theACPRcreatedtheClimateandSustainableFinanceCommission,taskedwithassessingtheclimateandsustainablefinancecommitmentsoffinancialsectorentitiesthroughdefiningmethodsformeasuring,communicating,comparingandmonitoringsuchcommitmentsoverthelongterm.

©2 0 2 0

Continues overleaf ➛


30 omfif.org

� Germany ● ● BUNDESBANK AND BAFIN TheBundesbankisafoundingmemberoftheNGFSandchairsthenetwork’sthirdworkstreamonscalingupgreenfinance.Thisfocusesonhowcentralbankscanmoreproactivelysupportthetransitiontoasustainableeconomy.TheBundesbankworkscloselywithBaFin,Germany’sfinancialregulatoryauthority,tomonitorthecapacityforindividualfinancialinstitutionstoundertakeclimateriskdisclosures. QualitativeinformationontheriskmanagementcapabilitiesofGermansmallandmedium-sizedbanksregardingclimateriskwascollectedaspartofa2019stresstest.Itwasconcludedthatclimateriskmanagementremainsatanearlystage–onlyaround33%ofparticipatingbankssaidtheywouldcoverclimateriskatleasttosomeextentintheirriskmanagementframework.Inthesamemonth,BaFinlaunchedaconsultationonitsexpectationsandrecommendationstosupervisedentitiesfordealingwithsustainabilityrisks. TheBundesbankisintegratinggreenfinanceintoitsownbusinessareas.Sixofthe16portfoliositmanagesonbehalfoffederalstatesusesustainabilitycriteriaintheirinvestments.Threestates–Hesse,Baden-WuerttembergandNorthRhine-Westphalia–areinaworkinggroupwiththeBundesbanktodevelopbespokesustainabilityandESGindices.Moreover,theBundesbankisconsideringexpandingitsowninvestmentstoincludemoresustainabilitycriteria,especiallyinitsnon-monetaryportfolios.

� Greece ● ● BANK OF GREECE TheBankofGreecewasoneofthefirstcentralbankstodevoteconsiderableresourcestowardsclimateandenvironmentaleconomicsresearch,reflectingthecountry’shighsensitivitytonegativeclimatechangeeffects.Asearlyas2009theinterdisciplinaryClimateChangeImpactStudyCommitteewassetupwithintheBanktoraiseawarenessandintegrateclimaterisksintopolicy-making.Notably,a2011committeereportconcludedthatunderaworst-case‘businessasusual’scenario,climateimpactscouldcauseGreece’sGDPtofallby2%annuallyby2050,worseningto6%by2100.Cumulativeeconomiccostsoverthistimeframewereestimatedat€701bn.Thecommitteeworkedcloselywithothergovernmentbranches,includingtheministryofenvironmentandenergy,todevelopGreece’s2015NationalClimateAdaptationStrategy.InJanuary2019theBankofGreecejoinedtheNGFSandinMarchsubscribedtotheUnitedNationsEnvironmentProgrammeFinanceInitiative’sPrinciplesforResponsibleBanking,encouragingthebanksitsupervisestofollowitsexample.GovernorYannisStournarashasbeenoneofthemostvocalcentralbankersonclimatechange,deliveringnumerousrelatedspeechesduringhistenure.

� Hong Kong ● ● HONG KONG MONETARY AUTHORITYAtitsGreenFinanceForuminMay2019,theHongKongMonetaryAuthoritysetoutathree-prongedapproachtopromotegreenandsustainablefinance.Onestrategyisthepromotionofgreenandsustainablebankingpracticesundertakeninthreephases.Thefirstphase,alreadyunderway,isdevelopingacommonframeworkandmethodologyforauthorisedfinancialinstitutionsunderitsremittoundertake‘greenbaselineassessments’.Thisframeworkwillbeinformedbyindustryconsultationandinternationalbestpractices,drawingontheHKMA’sparticipationintheNGFS.TheHKMAintendstocompletethisstageby2020followedbyacomprehensivegreenassessmentexercise.Subsequentphaseswillenactmeasurabletargetsforthebankingindustry’spromotionofgreenfinanceandmethodstotrackandevaluatetheirprogressinthisarea.TheHKMAhaslaunchedaCentreforGreenFinanceundertheauspicesofitsInfrastructureFinancingandFacilitationOfficetoconductcapacitybuildingandexperiencesharingforsustainablepracticesinthebankingandfinanceindustry.TheauthorityhasalsocommittedtoextendingresponsibleinvestmentprinciplesinthemanagementofitsExchangeFund.TheseprinciplesprioritiseESGinvestmentsifthelong-termreturniscomparabletootherinvestmentsonarisk-adjustedbasis.

India RESERVE BANK OF INDIASince1949,theReserveBankofIndiahasemployedaPrioritySectorLendingprogramme,grantingittheabilitytodirectupto40%ofcommercialbanklendingtospecificeconomicsectors.Traditionally,focussectorshavebeenrelatedtoagriculture,education,infrastructureandmicro,smallandmedium-sizedenterprises.In2015,theprogrammewasamendedtoextenditsreachtofacilitatesustainabledevelopmentbyexplicitlyincludingsocialinfrastructureandrenewableenergyprojectsaspriorityareas.Thishasstimulatedcreditflowforrenewableenergyprojects,thelendingforwhichexpandedatahigherratethanoverallcreditgrowthbetween2009-14.TheRBIisreviewingwhethertoincludeenvironmentalrisksaspartofitsmonitoringofagriculturalmarketsandtheirimpactonfinancialandmonetarystability.Thismaybecomeapressingneedinthelightofclimatechange’sdirectimpactonagriculturalactivitiesandtheirimportancetoIndia’seconomy.Givenagriculture’sPSLstatus,commercialbanksregulatedbytheRBIareobligedtoprovidesupportintheeventofnaturaldisastersaffectingthesector.TheRBI’s‘masterdirectiononreliefmeasuresbybanksinareasaffectedbynaturalcalamities’outlinesinitiativessuchasreschedulingexistingloansandsanctioningfreshloanstoaidrecovery.A2018reportfromActiononClimateToday,aninitiativeworkingcloselywithgovernmentsinSouthAsia,concludedthatthelocallyconcentratedportfoliosofmanyIndianbankswouldbeexposedtohighfinancialrisksifthefrequencyandseverityofnaturalhazardsriseintandemwithclimatechange.


31

Continues overleaf ➛

©2 0 2 0

Ireland ● ● CENTRAL BANK OF IRELAND TheCentralBankofIrelandisanNGFSmemberandacknowledgesthatclimatechangeisafundamentalrisktofinancialstability.AletterfromPhilipLane,theformergovernorandnowchiefeconomistoftheEuropeanCentralBank,highlightedthestrategicpriorityoftacklingclimaterisksaspartoftheCBI’smandateto‘servethepublicinterestbysafeguardingmonetaryandfinancialstability’.TheCBIhasfocusedontransitionrisks,withplanstointegratecarbon-relatedsystemicriskfactorsintoitsmacroeconomicandfinancialstabilityassessments.TheCBIisresearchinghowtoadaptanalyticalmodelstoincorporatetheimpactofacuteandchronicclimatechangeeffects.Ontheprudentialside,thecentralbankhasalreadysuggesteditintendstoincreaseitsfocusontheadequacyoffinancialinstitutions’emergingriskmanagementanddisclosures.Firmswillbeexpectedtousetoolssuchasscenarioanalysisandstresstestingtodeterminetheirvulnerabilitiestoclimaterisksandactappropriatelytomitigatethem.SustainabilitycriteriaarebeingappliedtotheCBI’sportfoliomanagementandinternaloperations.ThecentralbankusescompliancewiththeUNPrinciplesforResponsibleInvestmentasaconditionforallocatingthemandateofitsequitiesportfolio.TheCBIisalsodevelopingESGcriteriaforitsfixed-incomeassets,withthecentralbankalreadyholdinggreenbondsinitsinvestmentportfolioandaspartoftheECB’spublicsectorpurchaseprogramme.TheCBI’snewheadquartersweredesignedtobeenergyefficient,withthecentralbankpledgingtohalveitsgreenhousegasemissionsby2030.

Japan ● ● BANK OF JAPAN AND FINANCIAL SERVICES AGENCYJapanistheworld’slargestsupporteroftheTCFD,with172companiesassentingtoitsrecommendationsasofSeptember2019.ThemainsupervisorybodiesoverseeingthefinancialsectoraretheBankofJapanandFinancialServicesAgency.Likeothermajorcentralbanks,theBoJhasemployedunconventionalpoliciessuchasquantitativeeasingtostimulategrowth.However,anunusualaspectoftheBoJ’sQEprogrammeisitsheavyinclusionofequitiesthroughexchangetradedfunds.Viewsonthecontributionsofequitypurchasestogreengoalsarenonethelessunclear.Somehavearguedthesearebeneficial,enablingcentralbankpurchasestosupportlow-carbonprojectsfundedprimarilybyequityandprojectloans.Othersaremoresceptical,asequitystocksmaybemoreexposedtoclimaterisksaffectingassetvalues.Since2012theBoJhasengagedincentralbankfinancingsupportinglinesofcredittogreenactivities.Thisisaccomplishedthroughafundingfacilitycalledthe‘LoanSupportProgramme’,providingpreferentialliquidityatlowinteresttofinancialinstitutionslendingtosociallyandenvironmentallybeneficialprojects.

BoththeBankofJapanandFinancialServicesAgencyareNGFSmembers.TheFSAsupportsTCFD-aligneddisclosures.InMay2019itlaunchedaTCFDconsortiumtopromoteinformationsharingandcapacitybuildingonclimateriskdisclosures.InOctober2019theagencyannouncedaresearchpartnershipwith2°InvestingInitiative,aLondon-basedsustainabilitythinktank,toassesstheimpactofclimaterisksonJapan’sfinancialstability.

� Kenya CENTRAL BANK OF KENYARelatingtoitsfinancialstabilitymandatesupportinggovernmentobjectivesforgrowthandemployment,theCentralBankofKenyaisastrongadvocateofgreenandsustainablefinance.WhiletheCBKhasnotexplicitlyoutlinedguidelinesonenvironmentalriskslinkedwithmonetarypolicy,ithascollaboratedextensivelywithpublicandprivatesectorinstitutionstopromoteNairobiasanAfricancentreforgreencapitalmarkets.Developinggreenfinancialproductsalongsidetheprivatesectorisintendedtoenablecommercialbankstobuildtherequiredcapacityforeffectiveandmeaningfulimplementation.ThiswillalsogivetheCBKtimetobuildtheinternalcapacityforeffectivesupervisiontoavoidgreenwashing.In2015,thecentralbankpartneredwiththeKenyaBankersAssociationtocreateasetofsustainablefinanceguidingprinciplesforthebankingindustry.Twoyearslater,theCBKlaunched,inconjunctionwiththeBankersAssociation,CapitalMarketsAuthorityandTreasury,theKenyaGreenBondsProgramme,whichprovidescapacitybuildingandtechnicalassistancetofacilitategreenbondissuances.KenyaunveileditsregulatoryframeworkforgreenbondsinFebruary2019,andissueditsfirstgreenbondthatOctober,raisingaround$41mforclimate-resilientstudenthousing.TheTreasuryhassignalleditsintenttodebutKenya’sfirstsovereigngreenbond.Additionally,since2009thecentralbankhasissuedlong-terminfrastructurebondsontheTreasury’sbehalf.Unlikeconventionalsecurities,theseinfrastructurebondsaretax-exempttoattractinvestors.Theproceedsareusedtofinancesustainableprojectsthatimprovetransport,energyandwaterinfrastructure.

� Mexico ● ● BANCO DE MÉXICO AND CNBVTheBancodeMéxico(Banxico)isafoundingmemberoftheNGFSandpartofitssteeringcommittee.TheNationalBankingandSecuritiesCommission(CNBV),theprimaryregulatorofMexico’sbankingandsecuritiesindustry,joinedthenetworkinSeptember2019.PresentlynoexplicitcomponentofBanxico’sortheCNBV’sregulatoryframeworksrequiresthemtoincorporateclimaterisksintotheirriskmanagementresponsibilities.However,Banxicoisworkingwithmultipleinternationalpartnerstodevelopframeworkstomeasuretheimpactofclimateandenvironmentalrisksonthefinancialsystem.In2018,thecentralbankcollaboratedwithGermandevelopmentagencyGIZ,theInstitutoTecnológicoAutónomodeMéxicoandCambridge


32 omfif.org

InstituteforSustainabilityLeadershiptoembedforward-lookingenvironmentalscenarioanalysisintoitsdecision-makingprocess.Thisprojectsoughttoincreasefinancialinstitutions’resiliencetoenvironmentalrisks.Banxicodoesnothaveanexplicitresponsibleinvestmentpolicy.However,itemploysenvironmental,socialandgovernanceconsiderationswithinfixed-incomeassetsinitsportfolio.Itdoesthis,forinstance,bybuyingbondsfromsupranationalorganisationsthatcontributetosustainableeconomicgrowthanddevelopment.In2016,Banxicobroadeneditsresponsibleinvestmentuniversetoincorporategreenbondsandincludedthemaseligibleassetsforitsforeignreservesportfolio.However,duetothelackofsecondarymarketliquidityingreensecurities,aswellasinconsistenciesinsustainabilitystandardsandratings,BanxicohasnotyetimplementedamandatoryESGthresholdforitsportfoliotofollow.

Morocco ● ● BANK AL-MAGHRIB AND MOROCCAN CAPITAL MARKET AUTHORITYSincethe2016UNclimatechangeconferenceinMarrakech,BankAl-MaghribandtheMoroccanCapitalMarketsAuthority(AMMC),thecountry’smainfinancialregulators,havecommittedtocatalysinggreenfinancecapabilitiesalongsideotheragencies.Thisisguidedbytwopolicyroadmaps:thecentralbank’s‘roadmapforaligningtheMoroccanfinancialsectorwithsustainabledevelopment’,andamultiparty‘roadmapforthealignmentofthefinancialsectorwithclimatechangecommitments’.BankAl-Maghrib(amemberoftheNGFSsteeringcommittee)andtheAMMC(partoftheInternationalFinanceCorporation’sSustainableBankingNetwork,alongsidethecentralbank)areintroducinggreenfinanceprinciplesandcapacitybuildingprogrammesfollowingtheseroadmaps.BankAl-Maghribisdraftingregulationsthatwillintroducedisclosureandstresstestrequirementsforfinancialinstitutionsonenvironmentaltopics.TheAMMC,likewise,hasendeavouredtoharmoniseanddeepencapitalmarketsforgreenfinancialproducts.Itfirstpublishedgreenbondguidelinesin2016,whichwereupdatedinJune2018toincludesocialandsustainabilitybonds.

� Netherlands ● ● DE NEDERLANDSCHE BANK DeNederlandscheBankisoneofthefoundingmembersoftheNGFS,withExecutiveDirectorFrankEldersonservingasthenetwork’schair.DNBhasbeenattheforefrontofaddressingclimaterisksaspartofcentralbanksupervisoryresponsibilities.In2011itupdateditsmissionstatementtoconsiderlong-termfactorsbysafeguarding‘financialstability’andcontributingto‘sustainableprosperity’.DNBhasdevelopedanalyticaltoolstounderstandbettertheclimate-relatedrisksfacingtheNetherlands,giventhecountry’svulnerabilitytonaturalhazardssuchasrisingsealevels.Ina2017report,DNBlaidthefoundationsforincorporating

climate-relatedriskfactorsintoitsassessmentframeworksanddialoguewithinstitutions.ThestudyfocusedontheDutchfinancialsector’sexposuretocarbonintensivesectors.Buildingonthis,inOctober2018DNBbecamethefirstcentralbanktoundertakeclimatestresstestsforbanks,insurersandpensionfundsunderitssupervision.ThestresstestsconsideredtheimplicationsofenergytransitionriskstotheDutchfinancialsectoroverafive-yearperiodandconcludedthatlosseswere‘sizeablebutalsomanageable’.Thebankhasbeenmorecautiousofemployingtoolssuchasgreen-supportingfactorsandbrown-penalisingfactorsthatwouldalterbanks’capitalrequirements.Withnoconclusiveevidenceofclearriskdifferentialsbetweengreenandconventionallending,DNBconsidersitprematuretousemicroprudentialpolicydirectlyforsustainablefinance. InNovember2019,DNBissuedguidancetoinsurersforintegratingclimaterisksintheir‘ownriskandsolvencyassessments’.Laterthatmonthitlaunchedaconsultationonthedraft‘goodpracticeguide’onintegratingclimateriskconsiderationsintobanks’riskmanagement. DNBhasrevampedtheinternalmanagementofitsreserveportfolio(nearly€19bn)tobemoresustainable.DNBisnotableforbeingthefirstcentralbanktosignup,inMarch2019,totheUNPRI.Itlaunchedanewcorporatesocialresponsibilitycharterthesamemonth,committingtointegrateenvironmental,socialandgovernancecriteriaintoitsreservesinvestmentprocess,promotinggreenfinanceandtransparentlyreportingonitsresponsibleinvestmentapproach.Withitsresponsibleinvestmentmandate,DNBhopestoinspiretheDutchfinancialsectorandothercentralbankstoundertakesimilarmeasures.

� Poland POLISH FINANCIAL SUPERVISION AUTHORITYIn2016,Polandbecamethefirstsovereigntoissueagreenbond,withatermoffiveyearsandvalueof€750m.Therehavesincebeenthreemoresovereigngreenbondissuances.In2018,Polandissuedagreenbondworth€1bnwithaneight-and-a-half-yearterm.In2019,twogreenbondswereissued,thefirstat€1.5bnwitha10-yeartermandthesecondat€500manda30-yearterm.ThechallengeofstrandedassetsandtransitionrisksisofgreatrelevancetoPoland’sregulatoryentities,sincecoalisthecountry’sprimaryenergysource.A2015studyassessingtheexposureofthefivelargestPolishbanksandpensionfundstohigh-carbonsectorspeggedtheircombinedvalueat€5bn.ThePolishFinancialSupervisionAuthority(KNF)isthemainregulatoryauthorityresponsibleformonitoringthestabilityofthecountry’sbanking,capitalmarkets,insuranceandpensionssectors.TheKNFalreadyemploysstresstestsfortheinsurancesectorinseveralscenariossuchasfloodanddraughtrisks,aswellasreinsurancecoverageforcoal-relatedrisks.However,climatestresstestsarenotappliedsystematically,noraretheyappliedtothebankingandcapitalsectors.A2018reportbyresearchinstituteWiseEuropaontransitionrisksinthePolishfinancialsectoremphasisedtheneedforsector-widedisclosuresandstressteststoaddresshighfossil-fuelexposuresadequately.


3 3

� Singapore ● ● MONETARY AUTHORITY OF SINGAPORETheMonetaryAuthorityofSingaporeleadsthecountry’sgreenfinanceactionplanandisamemberoftheNGFSsteeringcommittee.Thecentralbank’sgreeninvestmentsprogrammeisintendedtobothstrengthenitsunderstandingofclimatechange-relatedrisksandbetterpositiontheMAS’sowninvestmentportfolioforlong-termsustainablereturns.DesignatedinsurersinSingaporearemandatedtoconductassessmentsofrisksassociatedwithclimatechangeandnaturalcatastropheinindustry-widestresstests.AsamemberoftheAseanCapitalMarketsForum,theMAShelpeddevelopthe‘Aseangreenbondstandards’.Athome,theMASinitiatesagreenbondgrantsscheme,whichdefraysthecostofexternalreviewforqualifiedissuers.Thiswasexpandedtoincludesocialandsustainabilitybonds.Thecentralbankhassetoutplanstopublishin2020aconsultationpaperdetailingenvironmentalriskmanagementguidelinesforthebanking,insurance,andassetmanagementsectors.

� Sweden ● ● SVERIGES RIKSBANK AND THE FINANSINSPEKTIONENTheSverigesRiksbankandFinancialSupervisoryAuthority(FI)arethemainentitiesinSwedenresponsibleforfinancialstabilityandprudentialregulation.BotharemembersoftheNGFS.TheFIisafoundingmemberandpartofthenetwork’ssteeringcommittee,andtheRiksbankjoinedinDecember2018.In2016,theFIconductedapreliminaryassessmentofthefinancialrisksthatclimatechangeposestoSweden.ItsreportnotesthatwhileSwedenisgenerallylessexposedtophysicalandtransitionrisks,itsfinancialsystem’sexposuretoEuropeandtheglobaleconomymaybechannelsforinstability.ThroughitsactivitieswithinternationalplatformsliketheNGFS,theFIisworkingtointegratesustainabilityinitssupervisionbydevelopingappropriatetoolstoassessandquantifyclimaterisks.TheRiksbanklikewiseseesclimatechangeaffectingSwedeninasystemicmanner.Itsfirstfinancialstabilityreportof2019classifiedclimaterisksasglobalphenomenaaffectingSwedenthroughtheinternationalfinancialsystem.Inaddition,inJanuary2019theRiksbankinstitutedarevisedfinancialriskandinvestmentpolicy.Underthis,theRiksbankwillbeabletotakeintoconsiderationsustainabilityaspectsinthemanagementofitsforeignreserves.

� UK ● ● BANK OF ENGLAND TheBankofEnglandisafoundingmemberoftheNGFS,withseniorleadershipbeingstaunchproponentsoftheneedforcentralbankinvolvementintacklingclimatechange.MarkCarney(governoroftheBankofEngland,2013-20)firstoutlinedthe‘tragedyofthehorizon’in2015,andcontinuestobeaprominentadvocateforgreenfinanceandawarenessonclimateriskstothefinancialsystem.TheBoEchairsthesecondNGFSworkstreamon

macrofinancialrisks.Thisworkstreamisfocusedondevelopingappropriateanalyticalframeworkstomeasureclimateriskstothemacroeconomy.In2015thePrudentialRegulationAuthority–throughwhichtheBoEhasaregulatoryresponsibilitycoveringinsurers–conductedapreliminarystudyontheimpactofclimateriskstotheUKinsurancesector.Subsequently,a2017reportfromtheBoEhighlightedtherelevanceofphysicalandtransitionriskchannelstotheBank’ssupervisoryobjectives. Basedonthesestudies,theBankhasadoptedseveralmeasurestosupportanorderlymarkettransitionwithinthefinancialsectortoacarbon-neutraleconomy.InApril2019itbecamethefirstcentralbankregulatortooutlinesupervisoryexpectationsforUKbanksandinsurerstoembedthefinancialrisksfromclimatechangeintotheirgovernanceframeworks,riskmanagement,scenarioanalysisanddisclosures.ThePRAalsorecommendstheseinstitutionstoadopttheTCFDframework. ThePRA’s2019insurancestresstest,conductedinJune,includedforthefirsttimean‘exploratoryexercise’,askingmajorinsurerstoconsiderhowvariousclimatescenarioswouldaffecttheirliabilitiesandinvestments.WhiletheBankisyettoimplementcomprehensivestresstestsforthebankingsectorandoverallfinancialsystem,ithasrevealedplanstodosoby2021throughutilisingitsbiennialexploratoryscenarioexercisetoexplorethefinancialrisksposedbyclimatechange. Internally,theBankhascommittedtoreducingitscarbonfootprintbytwo-thirdsby2030.

� US FEDERAL RESERVEUnlikeothermajorcentralbanks,theFederalReservedoesnotparticipateformallyinofficialinter-centralbankinitiativesrelatedtoclimatechangesuchastheNGFS.ThefirstUSregulatortodatetojointheNGFSwastheNewYorkStateDepartmentofFinancialServices,whichbecameamemberinSeptember2019.TheFed’spositiononclimatechangehasbeenlargelyambiguous.InJuly2019,FedChairJeromePowellsaidthatwhilethecentralbankemploys‘cutting-edgeresearch’ontheeconomicimpactofclimaterisks,climatechangewasperceivedasmoreasa‘longer-runissue’unlikelytoaddvaluetoday-to-daysupervision.SomespeculatethattheFed’sreticencetobemorevocalaboutthisstemsfromclimatechangebeingapoliticallypolarisingtopicintheUS.PoliticiansarealreadyscrutinisingtheFed’sprerogativesanddecision-making,sotakingastrongstanceonclimatechangecouldgeneratefurtherantagonism.Despitetheseobstacles,therearesignalstheFedisprioritisingraisingawarenessaboutandresearchonclimateriskstothefinancialsystem.InMarch2019,theSanFranciscoFedbecamethefirstregionalbranchtoacknowledgethattheeffectsofclimatechangeare‘relevantconsiderationsfortheFederalReserveinfulfillingitsmandateformacroeconomicandfinancialstability’.Buildingonthis,inNovember2019theSanFranciscoFedorganisedthecentralbank’sfirstconferenceontheeconomicsofclimatechange.LaelBrainard,memberoftheboardofgovernors,saidattheconferencethat‘increasingly,itwillbeimportantfortheFederalReservetotakeintoaccounttheeffectsofclimatechangeandassociatedpoliciesinsettingmonetarypolicy.’❖

©2 0 2 0


34 omfif.org

APPENDIX: Profile of survey respondentsThe report findings were informed by 33 central banks and supervisory authorities across six regions representing 77% of global GDP, which participated in an OMFIF survey conducted between August-December 2019.

Europe

Asia Pacific

Middle East

Considering

Members of the Network for Greening the Financial System*

6%

9% 6%

45%

3% 27%

100%

Latin America – Carribean

North America

Regional and income profile (% of respondents)

67%

24%

9%

0%

High income

Upper middle income

Lower middle income

Low income

No12%

Paris climate agreement signatories*

*IncludescountrieswhicharecurrentlypartoftheParisClimateAgreementdespitestatedintentionstowithdrawinthefuture

*Insomejurisdictionsresponsesweresubmittedjointlybythecentralbanksandsupervisoryauthorities.Wehavelistedtheseas‘NGFSmembers’whereatleastoneoftheinstitutionswhoparticipatedfromthejurisdictionisamemberofthenetwork.

Africa

9%


82%Yes

Mazarsisaninternationallyintegratedpartnership,specialisinginaudit,accountancy,advisory,taxandlegalservices*.Operatingin 91 countries and territories aroundtheworld,wedrawontheexpertiseof40,400 professionals–24,400intheMazarsintegratedpartnershipand16,000viatheMazarsNorthAmericaAlliance–toassistclientsofallsizesateverystageintheirdevelopment.

*Wherepermittedunderapplicablecountrylaws

www.mazars.comwww.linkedin.com/company/mazarstwitter.com/mazarsgroup

Dialogue on World Finance and Economic Policy

TheOfficialMonetaryandFinancialInstitutionsForumisanindependentforumforcentralbanking,economicpolicyandpublicinvestment—aneutralplatformforbestpracticeinworldwidepublic-privatesectorexchanges.

Formoreinformationvisitomfif.orgoremail [email protected]

This report was produced by:

MAZARS:

Rudi Lang,RudiLang,PartnerandLeader,GlobalFinancialInstitutionsGroupLeila Kamdem-Fotso, Partner,FinancialServicesVirginie Mennesson, HeadofRegulatoryAffairs,FinancialServicesConsultingAudrey Ngouadje,Manager,FinancialServicesConsultingLaure Dall’Ava,SeniorConsultant, Financial ServicesConsulting

OMFIF:

Research and report authorsDanae Kyriakopoulou,ChiefEconomistandDirectorofResearchBrandon Chye,EconomistLevine Thio,ResearchAssistant

EditorialSimon Hadley,Director,ProductionJulian Frazer,SeniorEditorWilliam Coningsby-Brown, AssistantProductionEditorJulie Levy-Abegnoli, Subeditor

©2020OMFIFLimited.AllRightsReserved.

Strictlynophotocopyingispermitted.Itisillegaltoreproduce,storeinacentralretrievalsystemortransmit,electronicallyorotherwise,anyofthecontentofthispublicationwithoutthepriorconsentofthepublisher.Whileeverycareistakentoprovideaccurateinformation,thepublishercannotacceptliabilityforanyerrorsoromissions.Noresponsibilitywillbeacceptedforanylossoccurredbyanyindividualduetoactingornotactingasaresultofanycontentinthispublication.Onanyspecificmatterreferenceshouldbemadetoanappropriateadviser.

CompanyNumber:7032533.ISSN:2398-4236

30CrownPlace,London EC2A4EBUnitedKingdomT:+44(0)2030085262omfif.org@OMFIF

www.mazars.comwww.linkedin.com/company/mazarstwitter.com/mazarsgroup

Documents

TACKLING CLIMATE CHANGE · 2020-02-19 · Tackling climate change: The role of banking regulation and supervision Sabine Mauderer Deutsche Bundesbank Sustainable investment needs