Weekly roundup: climate change, risk and price stability

November 19, 2021|Written by Graham Caswell|Bank of International Settlements, European Central Bank, Federal Reserve

ECB economists find evidence of climatic effects on price stability, US regulators begin to face climate risk, Biden’s nomination for Fed chair and more from this week in green central banking.

Climate change and inflation

Extreme temperatures have noticeable effects on price developments even in the medium term, according to three European Central Bank (ECB) economists.

Writing in the Vox policy portal of the Centre for Economic Policy Research, the economists present evidence from an upcoming ECB working paper. They show that higher temperatures in recent decades have played a “non-negligible” role in driving price developments, especially for emerging economies. However, the effect on prices depends on the time horizon.

Short term inflation can come from carbon pricing or higher food prices as a result of weather events, the study shows. However it also finds clear evidence of negative inflationary pressure over the medium term, including for advanced economies. The authors suggest this is because short-term supply disruption in agriculture can result in longer-lasting downward pressure on demand.

US regulators on climate risk

US Securities and Exchange commissioner Caroline Crenshaw expects companies to examine the risk that their fossil fuel and other high-carbon assets will become “stranded” in the transition to a sustainable economy.

Speaking at a PepsiCo-PwC professional education conference, Crenshaw said that internal corporate accounting controls are critical for evaluating and responding to climate and other ESG risks. She ended with a list of the climate and ESG information she would like to see from public companies.

Also this week, the New York State Department of Financial Services issued final guidance to New York-regulated domestic insurers detailing expectations related to their management of climate-related financial risks. Announced by acting superintendent of financial services Adrienne Harris, the guidance is aligned with the recommendations of the Task Force on Climate-related Financial Disclosures.

The Federal Reserve is currently catching up with other major central banks in responding to climate-related risks to financial stability, with Wall Street analysts expecting climate change scenario analysis and disclosure to be required by 2024. In a recent Reuters interview, JPMorgan CEO Jamie Dimon said that climate requirements from the Fed were “unavoidable” and would eventually lead to additional capital requirements.

Basel Committee climate risk principles

The climate risk principles proposed this week by the Basel Committee on Banking Supervision have many good ideas but say nothing about curbing bank financing of the fossil fuel industry, writes Climate Risk Review’s Louie Woodall.

In a comprehensive review of the suggested principles, Woodall criticises an over-reliance on scenario analysis and warns of the potential for lots of information but little action. In the hands of forward-thinking banks and regulators these principals could bring about important changes in how banks deal with climate risks, he says. But there is also a lot of room for interpretation.

Biden decision on Fed chair due

The week ended in suspense after US president Joe Biden told reporters on Tuesday to expect the announcement of a nominee for Fed chair in “the next four days”.

Democratic senators Sheldon Whitehouse and Jeff Merkley made a final argument for Powell to go on Friday, criticising his failure to recognise climate change as an urgent and systemic economic threat. “President Biden must appoint a Fed chair who will ensure the Fed is fulfilling its mandate to safeguard our financial system and shares the administration’s view that fighting climate change is the responsibility of every policymaker,” they said. “That person is not Jerome Powell.”

The leading alternative for nomination is Fed governor Lael Brainard, whom Biden interviewed earlier this month. Brainard is favoured by many commentators, largely because of her concerns about climate change and its financial and economic impact.

This page was last updated November 19, 2021

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