Weekly roundup: South Korean oil & gas financing and the financialisation of food

September 3, 2021|Written by GCB News|International Monetary Fund, Bank of England, Banque de France, European Central Bank

Biodiversity risks to the French financial system

The week began with a landmark Banque de France working paper examining the biodiversity-related risks to the French financial system. The study used the ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) methodology developed by the Natural Capital Finance Alliance. It found that 42% of the shares and bonds held by French financial institutions are issued by companies highly or very heavily dependent on at least one ecosystem service. The paper also suggests avenues for further research, including the development of biodiversity-related scenarios tailored to financial risk assessment.

Central bankers are guardians of the future

Central bankers should embrace the role of guardians of the future, said Annelise Riles, Executive Director at Roberta Buffett Institute for Global Studies, writing in The Hill. Central bankers must be independent guardians of our collective future, Riles says, but this requires longer term thinking. “An intergenerational perspective requires planning for how long-term climate change will impact the global economy,” she says, asking: “What if securing the planet for the next generations were just as important a goal for central banks as keeping interest rates low over the next five to ten years?”

Price stability is a “pipe dream” on a burning planet

“Central bank leaders must face the reality that price stability, financial stability and job security will all be a pipe dream on a burning planet in social turmoil,” said David Barmes, Senior Economist at Positive Money, in a Bloomberg editorial letter, published Monday. Writing in response to recent concerns that climate action will compromise central bank independence, Barmes suggests that this independence is a myth, as central bank mandates and many appointments are decided by elected officials. “Concerns about independence from government miss the real issue that central banks are far too cozy with, and dependent on, private financial interests,” Barmes says, calling for central banks to adopt a precautionary approach to climate risks.

South Korean public financing of oil and gas

Tuesday saw the release of a major report examining South Korea’s public financing for oil and gas. Accompanied by an interactive web page and a brief summary video, the report finds that South Korean public financial institutions provided US$127bn in support for global oil and gas projects over the past decade. This exposure poses a significant stranded asset risk, the study finds, with the Korean construction and shipbuilding industry particularly exposed to substantial transition risk. Published by climate advocacy group Solutions for Our Climate, this is the first country-level report on Korea’s public financing on oil and gas.

The ECB’s Schnabel on climate change and monetary policy

Central banks must do their part in fighting global warming, writes Isabel Schnabel, Executive Board member of the European Central Bank (ECB), in an article for the International Monetary Fund’s magazine Finance and Development. Reviewing the ECB’s economy-wide stress test to quantify the consequences of climate change on European companies and banks, Schnabel reveals that the average default probability of the credit portfolios of the 10% of euro area banks most vulnerable to climate risks could rise by – up 30 percent by 2050, representing considerable climate risk to the EU’s financial system.

The consequences of climate change might impair the transmission of central banks’ monetary policy measures, lower the equilibrium real rate of interest and directly impact inflation dynamics, Schnabel warns. “Adherence to the market neutrality principle is likely to perpetuate pre-existing market failures or even exacerbate market inefficiencies that give rise to a suboptimal allocation of resources,” she says, calling for “a replacement of the market neutrality principle with one of market efficiency that more fully incorporates the risks and societal costs associated with climate change.”

EU banks to report on 30-year climate risk to balance sheets

EU banks will need to provide data on how their balance sheets might be affected by climate change through 2050, according to unnamed sources quoted by Bloomberg on Wednesday. The ECB is working on a methodology for banks that will require them to supply information that shows how their portfolios might evolve over periods of 10, 20 and 30 years, the sources say, suggesting that this may be published as early as October. The ECB also plans to study the link between profits and carbon risk in banks’ portfolios, they said.

The ECB is stepping up pressure on lenders to prepare for stress tests next year after a July assessment found that almost no euro-zone banks were adequately prepared for climate-related risks.

Financial regulation vital to sustainable food system

Financial policies and regulations to reshape global finance are needed to ensure a rapid, fair and safe transition of the current unsustainable food system, finds a detailed analysis from Finance for Biodiversity released Wednesday. Prepared in collaboration with the Food System Economics Commission, the report explores how food and finance can be better aligned to deliver an inclusive, healthy and environmentally sustainable food system. “Today’s global US$8 trillion food system is fundamentally unviable, contributing to poor nutritional outcomes, climate change, destruction of biodiversity, unstable food prices and security, and providing low quality, low paid jobs,” the study finds, offering recommendations to financial regulators on how global finance can be shaped to support the needed transition.

Australian Prudential Authority climate vulnerability assessment

The Australian Prudential Regulation Authority published an information paper on Friday with details of its ongoing Climate Vulnerability Assessment of the country’s five largest banks. Using two climate scenarios published by the Network for Greening the Financial System, the assessment was designed in consultation with participating banks and the Australian Banking Association. However, the work is still in its early stages, with the paper focusing on objectives, design, international comparisons and future steps. The first results from the assessment are expected sometime in 2022.

This page was last updated September 6, 2021

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