Analysis from the Bundesbank shows strong economic effects from climate change, while a Danmarks Nationalbank study finds an investor premium for green equities. All this and more from this week in green central banking.
Bundesbank analysis shows strong climate effects
A multi-sector, multi-country analysis by Deutsche Bundesbank has found significant climate-related effects on economic performance and financial stability. This includes some effects beyond those envisaged in scenarios developed by the Network for Greening the Financial System.
Published in the bank’s monthly report, the study analysed the effects of a heating climate and climate-related policies on economic growth, individual sectors of the economy and the stock market. It found that listed fossil fuel companies, as well as other carbon-intensive businesses, could experience severe losses in value, and that climatic effects would be most severe in southern countries.
The Bundesbank said that by lowering equilibrium real interest rates, climate change and the resulting policy response could also make monetary policy transmission more difficult. It also warned that “the question of climate-caused stranding of particular assets will likely play an important role on financial markets.”
Investor premium for green equities
Companies with lower emissions have a higher equity price, according to a new analysis from Danmarks Nationalbank. The study found that future earnings of companies with lower emissions are seen to be less exposed to rising carbon tax and other climate-related risks than comparable companies with higher emissions, resulting in a lower risk premium.
On average, investors price a stock 6% higher if the company lowers its CO2 emissions by just 1%, the Danish central bank said. While equity risk premiums naturally vary across industries, the results are not driven by CO2 emissions in individual industries, such as energy companies, but apply across all sectors.
Call for green discount rates
Reducing inflation using traditional interest rate policy would effectively make green energy investments more expensive, write Positive Money Europe’s Stanislas Jourdan and Sustainable Finance Lab’s Rens Van Tilburg in a recent blog post.
Given the urgency of the climate crisis and the slow green transition, this presents a dilemma for the European Central Bank (ECB), they say. However the ECB can avoid such counter-productive outcomes by clearly signalling that any effort to fight inflation will also maintain favourable funding conditions for green spending or investments.
In practice, this might mean a ‘dual rate’ policy in which the ECB sets a different price signal for different actors, for example offering a preferential ‘green discount rate’ through its TLTRO programme for banks. The authors suggest that such a green interest rate might be proportional to bank portfolios of loans for energy-efficient home renovation or renewable energies.
Hong Kong looks to new ISSB standards
The Securities and Futures Commission of Hong Kong may include the standards of the newly-created International Sustainability Standards Board (ISSB) in the city’s audit and listing rules in late 2022 or early 2023, writes Eric Ng in the South China Morning Post.
By replacing the current “alphabet soup” of climate and environmental standards and regulation, a common set of rules would facilitate cross-border capital flows from lenders and investors to green project developers, says Ng. Hong Kong, positioning itself as an Asian leader in sustainable finance, would be a major beneficiary.
Announced during Cop26 and supported by the Basel Committee, the ISSB will oversee the development of global sustainability disclosure standards for financial markets and will work closely with the existing International Accounting Standards Board.
10 climate promises the financial system must keep
Central banks and financial supervisors will need to upgrade their efforts to support the net-zero transition, respond to rising climate-related physical risks, and integrate the loss of biodiversity into plans to green the financial system, write Nick Robins and Danae Kyriakopoulou for Omfif,. Offering 10 climate promises the financial system must keep, Robins and Kyriakopoulou set out an agenda for 2022, calling for mandatory net-zero transition plans to accompany climate-related disclosures, and for fossil fuel finance to be phased out.
Omfif, an independent think tank for central banking, economic policy and public investment, will hold a panel discussion on emerging trends in banks’ climate and environmental integration on 24 February.
This page was last updated January 28, 2022
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