New ESG directive from Egyptian central bank
The week began with a report of a recent Central Bank of Egypt (CBE) circular directing banks to take measures in line with sustainable finance principles. Much of the statement outlined the importance of the banking sector to emissions reduction targets and SDG goals, along with the growing international focus on climate change by central banks and international forums. The CBE has developed a general framework to define green finance and to provide more details of the central bank’s expectations regarding the new requirements.
Empathy for central bankers
Tuesday saw a plea for empathy for central bankers from Climate Safe Lending Network Executive Director James Vaccaro. Inquisitive, passionate and analytical, central bankers are invisible to the public until something goes wrong and are often blamed for not seeing the future clearly enough, he says. And now they must respond to climate change too.
Climate change clearly threatens stability and thus central banks have a mandate and duty to act, Vaccaro makes clear, arguing for a ‘precautionary approach’ and reiterating his recent call for a Taskforce for Finance-Related Climate Impact (TCFI) examining the impact finance has on the world and the contribution of the sector to long term systemic risks. Inaction and the continued pretense of neutrality, on the other hand, risks litigation and a potential loss of legitimacy, he says.
But central bankers have within them “the chance to be the unlikely standard-bearers for long-term positive change,” Vaccaro concludes, calling on them to “discover the heroes inside themselves, to cast off the ‘technocrat’ identity, and to embrace their position as leaders.”
New US climate risk disclosure rules
The US Securities and Exchange Commission (SEC) will “develop a mandatory climate risk disclosure rule proposal” by the end of the year, says Chair Gary Gensler. In a speech to the Principles for Responsible Investment (PRI) on Wednesday, Gensler said the SEC would ensure that climate risk disclosures are “consistent and comparable” by making them compulsory. Significantly, the SEC is exploring whether climate-related financial risk disclosures should be included in companies’ annual 10-K filings – the documents most used by investors. The disclosures, which will be aligned with the TCFD framework, will require “a variety of qualitative and quantitative information” and the requirements may be extended to fund managers.
Banxico Governor on climate risk
Bank of Mexico (Banxico) Governor Alejandro Díaz de León delivered a comprehensive review of how central bankers and supervisors can support green finance and manage climate risks at an online panel convened by the Toronto Centre on Wednesday. Responding to questions, León outlined four dimensions in which climate change will be disruptive to the financial system and four areas for central banks and supervisors to concentrate on in leading financial institutions. He also spoke on the role of the IMF and multilateral development banks in promoting the green agenda.
“This is not hypothetical; physical and transition risks are already occurring and are part of the financial authorities’ agenda,” León said, warning that “small changes in temperature could have severe non-linear consequences for our well-being, and delayed action is likely to significantly increase risks and costs.”
Mexico is currently experiencing above-target inflation, partly as a result of an extended drought and associated rise in food prices.
Covid lowers Bank of Italy carbon footprint
The Bank of Italy (BOI) has published its 2021 environmental report, outlining its efforts to green its own organisation. The central bank’s carbon footprint fell by 28% last year, the report shows, largely as a result of working from home and the reduction in business trips as a result of the Covid-19 pandemic. The BOI’s consumption of paper, drinking water and electricity also decreased substantially, although the corresponding increase in domestic consumption due to home working was not measured.
The report also referenced ECB and Eurosystem efforts to reduce the environmental impact associated with euro banknotes, but did not address the climatic effects of monetary policy and financial regulation. Under the Italian G20 Presidency the BOI is coordinating the work of the G20 Finance Ministers and Central Bank Governors Meetings in the run up to the upcoming G20 Summit and COP26, widely seen as being crucial to global efforts to respond to the climate crisis.
UNFCCC releases climate action pathway for global finance
The week ended with the release of a climate action pathway for global finance by the UN Convention on Climate Change (UNFCCC), the global body coordinating action on climate change. Produced in collaboration with the Marrakech Partnership established at COP22, the comprehensive framework outlines a path for the decarbonisation of the financial system by 2050 and for the funding of the transition away from fossil fuels. Presented in a ‘Vision and Summary’ report and ‘Action Table’ series of slides, the framework begins with an imaginary look at 2050 in which the global financial system has become carbon neutral, and then works backwards to develop a set of policies and an implementation timeline.
The new framework focuses on aligning finance with a resilient 1.5 ºC future as well as financing the transition towards that future, and addresses market failures and unpriced externalities, the short-term ‘tragedy of the horizon’, systemic transformation tools, and “new market norms.” Central banks are identified as key actors in the growing effort.
Calling for the disclosure of carbon transition plans as well as risk assessment, the new framework is an ambitious attempt to bring coherence and direction to global efforts to green finance and to reduce aspirational climate-related goals to practical and implementable policies.
This page was last updated July 31, 2021
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