Weekly roundup: new climate capital tool and call for sustainability baseline

April 8, 2022|Written by Graham Caswell|Bank of Mongolia, Bank of England, European Central Bank

An environment risk weight tool that regulators can use immediately, Omfif calls for global sustainability baseline, a Mongolian sustainable finance roadmap, and more from this week in green central banking.

New tool allows immediate application of climate capital requirements

Italian researchers have developed an environment risk weighted assets tool that financial regulators could use almost immediately. It will help banks green their portfolios by lending to households to reduce energy use and emissions.

Outlined in a comprehensive paper published last week, the tool draws on EU taxonomy technical screening criteria and existing building energy performance data to connect environmental costs to financial risks and calculate prudential capital requirements for mortgages. “The point is to pass from the general discussions on a green regulatory environment to change the rules of the game,” the paper concludes. “The main policy implication of our work is that there is a quick and effective way to incentivise banks to fund the green transition.”

Omfif calls for global sustainability baseline

A new report says financial regulators and policy makers must work together to set common standards and expectations on green products, investments, disclosures and reporting.

The Official Monetary and Financial Institutions Forum, an economic thinktank, has found that as more jurisdictions develop green taxonomies and implement mandatory disclosure frameworks, there is a risk of fracture in the international financial sustainability architecture. This includes jurisdictional and sector differences, and varying principles, objectives, benchmarks and metrics in taxonomies and disclosure frameworks.

As a result, calls are growing for a global baseline, common taxonomy and the convergence of standards. Based on interviews with experts across the financial sector and real economy, this report focuses on what is required for standardisation, examining the Taskforce on Climate-related Financial Disclosures, Sustainable Finance Disclosure Regulation, the corporate sustainability reporting directive. It also looks at the expected role of the newly created International Sustainability Standards Board in transitioning the global financial sector and wider economy to net zero by 2050.

Mongolia approves sustainable finance roadmap

Mongolian financial regulators have approved a national sustainable finance roadmap intended to accelerate the development of a sustainable financial system in the country by 2030.

Organised around six pillars and 26 strategic actions, the plan aims to deliver an integrated, multi-stakeholder, strategic approach to transitioning Mongolia’s financial system away from carbon. Targets include increasing the banking sector’s green loan portfolio to 10%, and that of non-banking financial institutions to 5%, providing at least 15% of Mongolia’s financial needs in order to meet its Nationally Determined Contribution under the Paris Agreement.

The Financial Stability Council consists of the Bank of Mongolia, the country’s Ministry of Finance and financial and insurance regulators. It is expected to approve sustainability reporting guidance for Mongolian companies next week.

EU banks need assertive transition guidance

An analysis of current EU-level initiatives to decarbonise the banking system has called for more assertive guidance from regulators to provide “fine-grained” advice on the future policies and situations banks should anticipate.

Published in the Journal of Financial Regulation, the study outlines two ways forward, each with their own challenges. The first is a “deferential transition”, which sees policy makers rely on banks and external rating providers to develop adequate internal risk management procedures. Challenges involved in this approach include incentives for banks to downplay risk, the advantage given to large financial institutions, and a blurring of responsibility between banks and supervisors.

The second, “guided transition” approach would be more detailed and prescriptive, with regulators providing more explicit detail on how they see the transition away from carbon unfolding. While this approach is favoured by the authors, they also warn that it will force regulators to face political choices. This means EU lawmakers will need to consider issues of legality, legitimacy and accountability, it concludes.

Climate risk threatens UK financial system

The latest systemic risk survey conducted by the Bank of England (BoE) has found that 24% of respondents see climate risk as a threat to the UK financial system, while 15% consider it to be one of the most challenging risks to manage.

However, climate-related worries were far behind concerns about cyber-security, inflation, geopolitical events and the pandemic, with these risks seen as more likely to materialise. The biannual survey is completed by UK banks and building societies, large foreign banks, asset managers, hedge funds, insurers and pension funds, generally by executives responsible for firms’ risk management or treasury functions.

BoE told to support fossil fuels

UK chancellor Rishi Sunak has asked the BoE to support the government’s new energy strategy, including investments in North Sea oil and gas.

In a letter to governor Andrew Bailey updating the remit of BoE’s financial policy committee, Sunak said the committee “should have regard to the government’s energy security strategy… including through investment in transitional hydrocarbons like gas”. A second and similar letter also updated the remit of the BoE’s prudential regulation committee.

This page was last updated February 20, 2024

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