Weekly roundup: Climate risk weighting and Lagarde on price stability

Climate risk weighting in capital allocations

The risk weighting of climate change in capital allocations is just a fraction of what it should be, according to Finance Watch’s head of research and advocacy Thierry Philipponnat.

In an interview with Christopher Walker of Impact Investor, Philipponnat was clear that, with recent reports showing that most fossil fuels must remain unextracted to avoid temperature rises above 1.5°, climate risk is a reality that is already here. “Any future investment in fossil fuel extraction is therefore inevitably doomed to failure and capital allocated to that should have the appropriate risk rating,” he said.

Philipponnat proposes that Article 128 of the EU Capital Requirements for Credit Risk, which already requires a risk weighting of 150% for risky assets in private equity and real estate, should also apply to fossil fuel exposures. “There is too much reliance by regulators generally on the provision of information as if this in itself will change things,” he said.

Green finance in Bangladesh

Green loans to Bangladeshi banks and non-bank financial institutions increased by over 7% in the past year, according to data from the Bangladesh Bank. The increase would have been much higher without disruption from the pandemic and more dramatic growth is expected in the year ahead, an official from the central bank told the Daily Star newspaper.

The data also shows the ratio of non-performing green loans is far less than for loans in general. Only 0.83% of green loans were in default last year, compared to 8.18% in the Bangladeshi banking sector as a whole.

Fed Chair climate controversy continues

Discussion surrounding the fate of Federal Reserve chair Jerome Powell continued this week with widespread commentary on his suitability to lead the Fed in facing and acting on the systemic financial risks associated with climate change.

Writing in the New York Times, Neil Irwin says that President Biden’s upcoming choice on whether to replace Powell or not will depend on his theory of change, contrasting forceful action with bipartisan compromise. Irwin also looked at the record of Fed governor Lael Brainard, tipped as a possible replacement for Powell. However he does not explicitly back either candidate.

The Washington Post, on the other hand, firmly supports bipartisan compromise and the reappointment of Powell. A Monday editorial called for continuity over climate action, saying “the best thing the Fed can do to help the planet is… to create the conditions for national economic prosperity so Congress has the fiscal and political capacity to enact policies that tackle major issues such as global warming”.

New chair of Financial Stability Climate Committee at the Fed

In further Fed climate news, Dr Adele C Morris has been appointed chair of the central bank’s Financial Stability Climate Committee. Previously the policy director for Climate and Energy Economics at the Brookings Institution, Morris has worked on climate change, energy, natural resources, and associated tax policy and public finance. Her extensive experience includes positions at the White House, Department of State, Treasury Department and in Congress. Morris is also a leading expert on the design of carbon pricing policies.

Bank of Finland sets 2050 carbon neutrality target

The Bank of Finland has set a 2050 target for decarbonising its own investment activities, the central bank announced in a press release on Tuesday. The goal is to achieve carbon neutrality in foreign exchange reserves and other own-funds investments, as well as assisting in the management of investment portfolio risks, the Bank said. A full climate roadmap and intermediate targets are currently being prepared and initial thresholds, asset class intermediate targets, and timing of intermediate targets will be specified.

Call for global sustainable data hub

Bundesbank executive board member Sabine Mauderer called for the development of global sustainable finance data in a speech on Wednesday to the International Conference on Statistics for Sustainable Finance.

“The availability of rich and up-to-date data is key to good policy making,” Mauderer said, pointing to work by the Eurosystem and the Network for Greening the Financial System and highlighting the Green Finance Dashboard, recently published by the Bundesbank.

But “scattered data sources and cumbersome access further complicate the situation”, she said. “We need to build a sustainable finance data universe.”

US bank regulators developing climate risk guide

US banking regulators are coordinating on the development of climate risk management guidance for the country’s largest banks, the head of the Office of the Comptroller of the Currency (OCC) revealed on Wednesday.

In a speech to the Exchequer Club, Michael Hsu said the OCC “is working with inter-agency peers” to develop the guidance – a likely reference to the Federal Reserve, the Federal Deposit Insurance Corporation and other members of the US Financial Stability Oversight Committee. “Climate change poses an existential risk to society,” he said, warning that “climate change’s impacts, which can already be felt today, are going to get much worse”.

Green bonds linked to carbon trajectory

The European Securities and Markets Authority has found a link between green bond issuance and carbon trajectories, finds a new report from the EU market regulator.

“Between 2009 and 2019, energy firms, utilities and banks that issued a green bond were much more likely to disclose emissions data, and they have on average reduced their carbon intensity to a larger extent than other firms,” the study found. This confirms the view that green bonds act as a signal of firms’ climate-related commitments.

Although green bond liquidity appears to be slightly tighter than that of conventional bonds, the study finds that the differential has remained small and broadly constant during the pandemic, “suggesting no particular vulnerability for the green segment of the corporate bond market.”

Lagarde on price stability and the ECB’s collateral framework

“Climate change has profound implications for price stability through its impact on the structure and cyclical dynamics of the economy and the financial system,” Christine Lagarde, president of the European Central Bank (ECB) has said.

In a letter to MEP Martin Schirdewan released on Friday., Referring to the ECB’s climate plan, Lagarde said: “The ECB’s governing council is committed, within its mandate, to ensuring that the Eurosystem fully takes into account the implications of climate change and the carbon transition for monetary policy and central banking,” she said, pointing to the ECB’s climate plan, released in July.

The ECB will introduce disclosure requirements for corporate assets as a new eligibility criterion or as a basis for the differentiated treatment of collateral and asset purchases, Lagarde said, with detailed plans to be announced in 2022. The ECB will also consider relevant climate change risks when reviewing the collateral framework, she said, emphasising “the valuation and risk control frameworks for assets mobilised as collateral by counterparties for Eurosystem credit operations.”