TACKLING CLIMATE CHANGE The role of banking regulation and supervision
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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
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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
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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.
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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
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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.
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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
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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:
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Tacklingclimatechange:Theroleofbankingregulationandsupervision
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.
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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.
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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
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Tacklingclimatechange:Theroleofbankingregulationandsupervision
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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
Source: OMFIF Central Banks and Climate Change Survey 2019
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
Tacklingclimatechange:Theroleofbankingregulationandsupervision
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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
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Tacklingclimatechange:Theroleofbankingregulationandsupervision
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.
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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
Tacklingclimatechange:Theroleofbankingregulationandsupervision
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
Source: OMFIF Central Banks and Climate Change Survey 2019
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
Source: OMFIF Central Banks and Climate Change Survey 2019
0% 20% 40% 60% 80% 100%
Yes
No, but we are looking toimplement in future
No and we are notconsidering including them
CHAPTER TWO
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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
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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
Source: OMFIF Central Banks and Climate Change Survey 2019
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
Tacklingclimatechange:Theroleofbankingregulationandsupervision
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
Source: OMFIF Central Banks and Climate Change Survey 2019
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
Source: OMFIF Central Banks and Climate Change Survey 2019
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.
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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
Source: OMFIF Central Banks and Climate Change Survey 2019
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
Source: OMFIF Central Banks and Climate Change Survey 2019
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
Tacklingclimatechange:Theroleofbankingregulationandsupervision
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
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● 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.
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Figure 8: Growing appetite for taxonomies‘Aretheregreenandbrowntaxonomiesbeingdevelopedinyourjurisdiction?’,shareofresponses
Source: OMFIF Central Banks and Climate Change Survey 2019
Tacklingclimatechange:Theroleofbankingregulationandsupervision
Figure 2.5: Growing appetite for taxonomies
‘Are there green and brown taxonomies being developed in your jurisdiction?’, share of responses
Source: OMFIF Central Banks and Climate Change Survey 2019
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.❖
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‘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
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Figure 9: Central banking community divided on role of monetary policy‘Doesyourinstitutionseearoleformonetarypolicytosupporttheclimateagenda?’,shareofresponses
Source: OMFIF Central Banks and Climate Change Survey 2019
FOCUS ON: Climate risks and monetary policy
‘Climatechangeriskwouldbebetteraddressedthroughgovernmentpoliciesandregulatorymeans.’Regulatory authority from the Middle East
Tacklingclimatechange:Theroleofbankingregulationandsupervision
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
Source: OMFIF Central Banks and Climate Change Survey 2019
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
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Facing the future
CHAPTER THREE
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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
Source: OMFIF Central Banks and Climate Change Survey 2019
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
Source: OMFIF Central Banks and Climate Change Survey 2019
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
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Figure 10: Supervision focus on negative risk‘Whenassessingfirms’exposuretoclimaterisk,doyouevaluateandtakeintoaccounttheirapproachestoleveragegreenfinanceopportunitiesandinnovateinproductdevelopment?’,shareofresponses
Source: OMFIF Central Banks and Climate Change Survey 2019
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
Source: OMFIF Central Banks and Climate Change Survey 2019
0% 20% 40% 60% 80% 100%
Yes
No
employmicroprudentialtools,somecentralbanksidentifiedothermeanstobolstergreenfinance.OneAsiaPacificcentralbanksaidthat‘whilewedonottakeintoaccountthesefactorsinassessingafinancialinstitution’senvironmentalorclimate-relatedrisksonitsbalancesheet,wedomonitorsuchdevelopmentsaspartofourholisticsupervisoryassessmentofthefirmpertainingtoitsbusinessstrategies.’Regulatoryandsupervisoryregimesthatsupportgreen
financehaveofteninvolvedcollaborationbetweencentralbanksandcommercialbankingassociations.In2017theCentralBankofKenyaworkedwiththeKenyaBankers
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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.❖
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� 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.
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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.
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� 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.
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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
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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.
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� 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.’❖
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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%
Tacklingclimatechange:Theroleofbankingregulationandsupervision
82%Yes
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OMFIF:
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