Weekly roundup: climate scenarios fail to capture full risks, says World Bank

April 1, 2022|Written by |Financial Stability Board, Network for Greening the Financial System, Bank Negara Malaysia, Magyar Nemzeti Bank, European Central Bank

Climate-related scenarios and physical shocks, a call for ECB targeted green financing, the MNB’s climate-related financial disclosure, and more from this week in green central banking.

Scenarios do not fully capture physical climate shocks

Climate-related scenarios developed by key financial bodies do not fully capture the risks from sudden and severe physical shocks such as hurricanes and flooding, finds a new study from the World Bank.

The paper identifies five risk drivers that make a material contribution to physical climate risks affecting the financial sector and that are not consistently included in current scenarios and tools produced by the Network for Greening the Financial System and other organisations. These include extreme weather events, uncertainties in climate models, compound scenarios, indirect economic impacts of shocks, and feedback between the real economy and the financial sector.

These deficiencies could lead financial institutions to underestimate the physical climate risks they face, the paper warns. To remedy this, it proposes a new framework for generating scenarios based on disaster scenarios used in risk management and insurance supervision.

MEP calls for targeted green financing from ECB

An Irish member of the European Parliament has written to Christine Lagarde, president of the European Central Bank (ECB), calling for targeted green lending in response to the European energy crisis and the climate emergency.

“Reaching our climate targets without decarbonising our living and working spaces is not possible,” said Sean Kelly, who leads the European delegation of Irish governing party Fine Gael. Renovation of the EU’s building stock is a key green new deal priority, he said, but there is a funding gap of €214bn a year for doing this. Kelly suggests providing finance under the ECB’s targeted long-term finance operations to close this gap.

“I would propose that the ECB consider implementing future refinancing operations in a way that provides additional incentives for banks to set energy efficiency as a criterion for lower interest rates on green mortgages or renovation loans for households,” Kelly told Lagarde. “It is in the interest of the ECB’s price stability mandate to prioritise energy efficient investment.”

Malaysian banks exposed to a range of nature-related risks

Malaysian banks are exposed to a broad range of nature-related physical and transition risks, according to a new joint report from the Bank Negara Malaysia (BNM) and the World Bank.

Of the commercial loan portfolios analysed, 54% are exposed to sectors that depend to a high extent on ecosystem services, with wide differences between individual banks and bank types. An average of 40% of investment banks’ commercial loan portfolios  are exposed, rising to 55% among Islamic banks. The report warns that, due to data limitations, it is possible these exposures may be higher.

MNB publishes climate-related financial disclosure

Hungary’s Magyar Nemzeti Bank (MNB) has published its first climate-related financial disclosure, identifying and measuring climate risks related to the central bank’s operational activities and financial instruments.

Organised according to the recommendations of the Task Force on Climate-related Financial Disclosures, the report discloses the weighted average carbon intensity and other metrics associated with the MNB’s assets, lending and other activities. It shows that the carbon intensity of sovereign assets held was 495 tonnes CO2e per million euro of GDP, while foreign exchange reserves incorporated 287 tonnes CO2e.

The MNB also assessed the climate change risks in its collateral management framework, and found the carbon intensity for pledged collateral to be 395 tonnes CO2e per million euro of value added. CO2e is a measure that includes non-carbon greenhouse gasses, expressed in their carbon equivalent.

The carbon footprint of the MNB’s own operations has fallen by 30% over the past five years, the disclosure shows, although much of this drop is due to the change in work patterns due to the Covid-19 pandemic.

NGFS releases 2021 annual report

The Network for Greening the Financial System (NGFS) has released its annual report, outlining its activities during 2021.

The group attracted 22 new members and three new observers, with membership now including supervisors from 100% of global systemically important banks. It published nine reports and two occasional papers during the year, as well as organising more than 20 high‑level meetings, workshops and conferences.

Consisting largely of a timeline of activities and significant events, the report also focuses on the six core NGFS recommendations and on the Glasgow Declaration released at last year’s Cop26.

FSB publishes work programme for year ahead

The Financial Stability Board (FSB) has published its work programme for 2022, including a substantial agenda on addressing financial risks associated with climate change.

Guided by its roadmap for addressing climate-related financial risks, the international body charged with protecting global financial stability will support the development of global baseline standards by the newly-formed International Sustainability Standards Board, as well as assisting jurisdictions and firms to implement and improve sustainability disclosures. It will also strengthen its analysis of climate-related risks to financial stability and will work with the NGFS to improve scenario analysis and associated financial metrics.

Much of the FSB’s work programme was previously outlined by its chair, Klaas Knot, at a meeting in February of the G20 finance ministers and central bank governors in Jakarta, Indonesia.

This page was last updated April 5, 2022

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