Weekly roundup: war and climate may require higher rates, says ECB’s Schnabel

Isabel Schnabel warns of climate effect on rates, the Fed finds lower ratings for high-carbon companies, the Bank of Jamaica expands climate risk supervision and more from this week in green central banking.

War and climate may require higher rates, says ECB’s Schnabel

The war in Ukraine and the response to the climate crisis are creating a new macroeconomic environment in which higher interest rates may be needed to keep inflation under control, European Central Bank (ECB) executive board member Isabel Schnabel has said.

Speaking on Bloomberg’s Stephanomics podcast, Schnabel reiterated comments she made in a speech earlier this year and said that policy makers no longer have the luxury to ignore rising energy prices because there is a risk that inflation expectations are becoming unanchored.

“If we look at the massive investment that is needed both on the public and on the private side – and this is not just the green transition but also, for example, defense – I would agree that this will tend to lead to higher interest rates going forward,” Schnabel said. “The nature of these shocks has changed. There’s a more persistent or more structural component to these energy price shocks.”

Brainard confirmed as Fed vice chair

Lael Brainard has been confirmed by the US Senate as the next vice chair of the Federal Reserve. Brainard, a Fed governor since 2014 and one the few advocates for climate action by the central bank, received support from a handful of Republicans to have her nomination approved by a 52-43 margin.

Although widely expected, the confirmation follows months of political controversy over the Fed’s role in responding to climate-related risks to the US financial system. Opposition from Republicans and oil and gas lobbyists sank the nomination of Sarah Bloom Raskin, President Biden’s nominee for the Fed’s supervision vice chair and an outspoken proponent of integrating climate risks into supervisory expectations.

To replace Raskin, Biden has nominated Michael Barr, a former assistant secretary of the Treasury for Financial Institutions with no record of support for climate action.

New York Fed finds lower credit ratings for high-carbon companies

A study by the Federal Reserve Bank of New York has found that carbon-intensive companies and those with weak environmental records often have lower credit ratings and higher yield spreads.

Using a data set of 5,548 bonds issued by 830 US companies between 2009 and 2017, the analysis focused on the Paris Agreement as a shock to expected climate risk regulations. The composition of institutional ownership changed after the agreement, it found, and the ratings of firms with facilities located in states with stricter regulatory enforcement were particularly affected.

Bank of Jamaica to expand supervision of climate risks

Jamaica’s central bank will permanently incorporate climate change into its supervision of financial institutions and will conduct climate-related stress tests of the country’s financial system.

In its recent financial stability report, the Bank of Jamaica said that climate risks are material to its mandate and noted that Jamaica – which experienced severe flooding and drought during 2021 – is one of the top 20 countries most exposed to physical climate risk. Financial institutions are exposed to this risk through lending to and investing in vulnerable sectors.

The report also reviewed the results of a 2021 stress test of the financial system’s ability to withstand the effects of a 100-year hurricane. It found that such an event would significantly affect the capital adequacy ratios of banks and security dealers, resulting in a fall of 3.5% and 5.6% respectively.

New ISSB working group to harmonise disclosure standards

The International Sustainability Standards Board (ISSB) has announced it is establishing a working group aimed at aligning its draft disclosure standards with similar initiatives across multiple jurisdictions.

Aimed at delivering a global baseline for sustainability reporting, the group will include members from the Chinese Ministry of Finance, the European Commission, the European Financial Reporting Advisory Group, the Japanese Financial Services Authority, the Sustainability Standards Board of Japan Preparation Committee, the United Kingdom Financial Conduct Authority and the US Securities and Exchange Commission.

Meetings will take place in May and July and meeting summaries will be published on the ISSB website.

EU banking authority supports climate risk buffers

The European Banking Authority (EBA) has expressed support for the use of systemic risk buffers (SyRB) to ensure banks are capitalised against climate related-risks.

In an opinion paper on European Commission proposals to incorporate environmental risks into EU banking regulation, the EBA said that bank exposures to environmental risks “could be given consideration under the sectoral SyRB framework”, and called for an exposure classification system for highly exposed sectors and expanding the SyRB’s scope to include non-EU country exposures.

The intervention follows a recent ECB opinion paper which made clear that the SyRB framework may already be used to address risks related to climate change.

Climate is ‘the ultimate systemic risk’, says BoE’s Stheeman

The Bank of England’s financial policy committee has an important role in ensuring the UK financial system is resilient to climate-related financial risks and supports the transition to net zero, committee member Elisabeth Stheeman has said.

Speaking in Belfast at Queen’s University on the importance of macroprudential policy in mitigating financial stability risks from climate change, Stheeman emphasised that while climate risks are foreseeable, they are non-linear and the timescale of their materialisation is uncertain.

The increase in energy prices following Russia’s invasion of Ukraine has highlighted the climate-related transition risks that businesses face, she said. “Firms cannot diversify away from their exposure to the planet. And in that sense, climate change could be described as the ultimate systemic risk.”