Weekly roundup: ECB paper warns of carbon price risk

April 29, 2022|Written by Graham Caswell|Network for Greening the Financial System, Central Bank of Ireland, Bank of England, Banque de France, European Central Bank

The ECB on carbon price risk, a new UK transition plan taskforce, calls for a precautionary approach to address radical uncertainty and more from this week in green central banking.

ECB paper warns of carbon price risk

A European Central Bank (ECB) working paper has warned of a major financial shock from abrupt increases in carbon prices as a result of a sudden and disorderly transition to a low carbon economy.

The study combined a unique granular dataset with a banking sector contagion model in which firms are negatively impacted by an increase in carbon prices. It found that early policy action, a gradual rise in carbon prices, and effective emissions reduction by companies would lead to minimal impacts on the banking system. However, if no action is taken then abrupt and large increases in carbon prices may lead to severe banking system losses.

In order to hedge themselves from these transition risks, the analysis suggests that banks should restrict their lending to less polluting firms, lend to firms with ambitious emissions reduction targets, and help their clients to transition to low carbon business models. It also finds that regulators may need to implement further prudential measures to prevent the build-up of banking system losses.

In a separate study, published as part of the ECB’s Economic Bulletin, researchers examined the role of speculation during the recent increase in EU emissions allowance prices. Allowances traded under the EU’s emissions trading system (ETS) have increased from under €10 per tonne of carbon in 2018 to over €80 today. The study found that speculation played a limited role in this increase, and is well below the levels seen during earlier phases of the ETS.

ECB releases annual report

The ECB has also published its annual report for 2021, reviewing its activities over the last year. The report includes a dedicated chapter on the central bank’s work towards environmental sustainability, including its efforts at integrating climate change considerations into its monetary policy framework, financial supervision and own portfolio management.

It also includes details of the governance, organisation and responsibilities of the ECB’s climate change centre, established last year with the goal of coordinating and planning ECB activities on climate change.

Transition plan taskforce launched

The UK Treasury has launched a Transition Plan Taskforce (TPT) tasked with developing a gold standard for firm-level climate transition plans.

The initiative will bring together regulators, industry leaders and academics to develop guidance and a set of templates setting out both generic and sector-specific disclosures and metrics, including for financial institutions. Its work is intended to inform the implementation of the UK’s sustainability disclosure requirements, influence international standard setting and support efforts to tackle greenwashing.

The UK’s Financial Conduct Authority will be actively involved in the taskforce and Sarah Breeden, Bank of England executive director for financial stability, will also participate as an observer. The TPT will have a two-year mandate and is expected to make recommendations on its outputs by the end of 2022.

Precautionary approach needed to address uncertainty

Environment-related financial risks are characterised by “radical uncertainty”, making them difficult to assess using traditional financial risk management practices. A new paper from the London School of Economics and the Inspire research network examines these challenges and proposes adopting a precautionary approach to addressing the uncertain and potentially catastrophic nature of environment-related threats.

No environmental-financial policies have been deployed explicitly under this approach, the study finds, but there is now greater awareness and acceptance of the pre-emptive role of central banks and supervisors in mitigating environmental risks and impacts. The report recommends that central banks and financial regulators focus less on quantifying the impacts on individual institutions and more on proactively avoiding the macrofinancial and macroeconomic risks associated with ecological tipping points.

NGFS reviews market transparency in green finance

The Network for Greening the Financial System has published a technical document examining market transparency in green and transition finance. The report examines current practices and key challenges regarding taxonomies, external reviews, climate transition metrics, frameworks and market products.

It concludes that policymakers and investors must carefully assess the tools that are available, and that environmental practices and products in green equity investment strategies need further assessment and scrutiny. The report also finds that taxonomies and climate transition frameworks are most effective when they have clear objectives, and science-based net zero targets.

Central Bank of Ireland launches sustainable finance forum

The Central Bank of Ireland has launched a climate risk and sustainable finance forum, bringing together representatives from financial sector firms and industry representative bodies. It aims  build capacity and share best practices in advancing the Irish financial sector’s response to climate change.

The new body is intended to “build a shared approach” to understanding and managing climate-related risks and opportunities. A call for interest in membership of the new forum has been made, with applications open until 20 May 2022. The body will be chaired by deputy governor Sharon Donnery and will hold its inaugural meeting on 29 June 2022

Asset managers fuelling climate chaos

A scorecard ranking 30 major asset managers on their climate commitments has found that they hold over $82bn in companies developing new coal projects, and $468bn oil and gas companies with massive upstream expansion plans.

Although 25 out of the 30 asset managers assessed have pledged to follow a 1.5ºC pathway to achieve carbon neutrality by 2050, the analysis by four climate focused NGOs found that most do not restrict investments in companies launching new coal projects and none of them restrict investments in companies developing new oil and gas projects.

“Leading asset managers are kicking the can down the road without even asking companies to stop worsening the climate crisis,” said Lara Cuvelier, campaigner at Reclaim Finance and one of the report’s authors. “Let’s be clear: drilling a new oil well or opening a new coal mine is not a normal thing to do in a widespread climate catastrophe.”

The Sunrise Project, which funds Green Central Banking, also contributed to the report.

Webinar on sustainable investment for central banks

Green Central Banking is partnering with thinktank and advocacy group Reclaim Finance to hold a webinar for central bankers focusing on best practices in sustainable investment.

Speakers Alexandre Gautier, deputy general secretary at Banque de France, and Christophe Menigault, ESG practice leader at US financial cooperative Desjardins Group, will offer key examples of responsible investment policies for non-monetary policy portfolios, including own funds, pension funds and funds managed for third parties.

The webinar will take place on 25 May 2022 and registration is now open.

This page was last updated April 29, 2022

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