Weekly roundup: Gasflation, a ‘climate Minsky moment’ and the energy of freedom

Gasflation and ‘the energy of freedom’, a ‘climate Minsky moment’, how climate denial has left the Fed’s board as a ‘ghost ship’ and more from this week in green central banking.

War focuses Europe on “the energy of freedom”

As Russia’s invasion of Ukraine pushed EU fossil gas prices to an all-time high over 1,000% beyond historical norms, analysts expect eurozone inflation to exceed 6% as soon as this month. Despite the war, the EU is currently sending the Putin regime nearly €1 billion per day in payment for Russian fossil fuels. This has been prompting growing calls from EU leaders to stop these imports and end this flow of revenue, a move that could push energy and associated inflation much higher.

“It is to be expected that the conflict through the macroeconomic channel and the channel of confidence and sentiment in the markets will end up having an impact from the point of view of higher inflation and lower economic growth,” European Central Bank (ECB) vice president Luis de Guindos said.

Caught between this price instability and slower growth, pressure is growing on the ECB to accelerate its plans to support the EU’s movement away from fossil fuel dependency. “It is clear that this war machine has been funded, fed, and fuelled by the coal, oil and gas industries that are driving both the invasion that threatens Ukraine and the climate crisis that threatens humanity’s future,” Ukrainian climate campaigners said in a statement released this week. Meanwhile a coalition of over 75 climate concerned NGOs and campaigning groups called for an end to all financial services to Russian energy companies.

Many civil society proposals to the ECB aimed at mitigating the accelerating effects of climate change are also directly applicable to addressing the price instability flowing from the war in Ukraine, including the targeting of the central bank’s Targeted Longer-Term Refinancing Operations (TLTRO) programme and quantitative easing towards energy efficiencies and alternative sources. While substantial gaps remain in data and research related to these moves, the immediate urgency of the humanitarian crisis and threat to European security may demand that the perfect not be the enemy of the good.

As the climate crisis threatens the medium and long-term future, and Russia’s war on Ukraine threatens the present, it is becoming increasingly and urgently clear that renewables are what German finance minister Christian Lindner has called ‘the energy of freedom’.

Study warns of a ‘climate Minsky moment’

Amid the upheaval caused by the war in Ukraine, a new study from the London School of Economics’ Grantham Research Institute has warned of a sudden collapse in carbon-intensive asset values in a ‘climate Minsky moment’. Released just days after the IPCC warned that the window to avoid runaway global heating is rapidly closing, the study shows that the mitigation actions of transition-sensitive industries are badly out of line with policy targets. A sudden collapse in the values of assets associated with these sectors threatens the banks that lend to them and the entire financial system, the analysis finds. While relevant to all financial regulators, the authors focus on the Bank of England, recommending the placing of soft limits on banks’ exposures to transition-sensitive sectors.

Named after the theories of economist Herman Minsky, a ‘Minsky moment’ refers to a market tipping point and collapse as a result of regulatory blind spots in which risks are not recognised or mitigated.

BSP seeks a banking culture of environmental consciousness

The pandemic recovery presents an opportunity to scale up investments in green projects and activities, the governor of Bangko Sentral ng Pilipinas (BSP) has told Asia-Pacific ESG investors meeting in Manila. Outlining the key elements of the Filipino central bank’s Sustainable Finance Framework, Benjamin E Diokno said that he expects banking boards and senior management ‘to promote a culture that embeds environmental and social risk consciousness in business decisions and in the overall strategic thrusts of the organization’. The BSP also expects banks to adopt an environmental and social risk management system encompassing policies, procedures, and tools to identify, assess, monitor, and mitigate exposures to environmental and social risks. Banks will also be required to disclose their sustainability plans and strategy in their annual reports.

Global south leading on regulatory response to climate

Financial regulators are split on the nature of their role in the transition to a sustainable economy, writes James Vaccaro, executive director of the Climate Safe Lending Network. While central banks and supervisors in the global north are adopting an almost exclusively market and risk-based approach, their counterparts in the global south are increasingly seeing themselves as ‘active agents in the struggle for 1.5C’. Vaccaro contrasts the pioneering work of the People’s Bank of China, Banco Central do Brasil and others with the slow pace of US, Canadian and Australian regulators, saying that “climate risk will be unmanageable unless we address the ways in which finance is driving the climate crisis.”

The assumptions of financial sector neutrality underlying the economic and climate models used by central banks to analyse climate risk could be dangerous and misleading, he suggests, pointing to recent research showing that the difference between an enabling and hampering financial sector has a massive impact on climate outcomes. Arguing for climate-related capital requirements and other active interventions, Vaccaro points to investor support for regulatory changes to ‘level up’ the market. “It is time to recognise that part of the duty [of financial regulators] includes proactively protecting the environment (and the societies and economies that it supports) from the impacts of finance,” he concludes. “Doing so will save more than just financial stability.”

Fossil fuel companies stonewall Raskin Fed nomination

Fossil fuel companies have contributed more than $8 million to the Republican senators blocking five nominees to the Federal Reserve, according to data cited in a New Yorker article. The companies are using this leverage to ‘send a message that it will not tolerate the Fed, or any other financial regulators, treating climate change as a potential systemic economic risk,’ writes Jane Mayer in a comprehensive overview of the partisan division that has left the Fed’s board of governors as a ‘ghost ship’. While the Senate committee responsible for confirming the nominations is evenly split between Democrats and Republicans, a Republican boycott has deprived the committee of the quorum necessary for a vote on Biden’s nominees.

Republicans have focused their obstruction on Sarah Bloom Raskin, a highly qualified and experienced candidate who has recognised climate change as a potential threat to global economic security.

Facing market turmoil from Russia’s invasion of Ukraine and the highest inflation in forty years, commentators are outraged at the GOP tactics. “It’s an enormous dereliction of duty,” said Nobel laureate Joseph Stiglitz, quoted in the article. “The Federal Reserve is the most important economic institution in the U.S., and the U.S. is the most important economy in the world. To leave this many vacancies is just mind boggling to the rest of the world. It is just amazingly irresponsible.”