Weekly roundup: BoJ candidate looks to green capital spending for growth

A candidate for Bank of Japan governor discusses green capital spending as a solution to Japan’s anemic growth, an ECB paper on the importance of double materiality, the NGFS on credit ratings and more from this week in green central banking.

BoJ candidate looks to green capital spending for growth

A leading candidate for governor of the Bank of Japan (BoJ) has said that capital spending on green projects would help lift Japan’s anemic growth rate, complementing monetary and fiscal stimulus to reflate the economy.

Hiroshi Nakaso – who is also a former BoJ deputy governor – said in a Reuters interview that green capital spending would act as the “third arrow” of former Japanese premier Shinzo Abe’s “Abenomics” policies. “Steps to achieve carbon neutrality would be a breakthrough for Japan, which had struggled to raise potential growth,” he added, pointing to Japan’s huge savings as a source of investment in green innovation.

Nakaso is widely considered to be a strong candidate to succeed current governor Haruhiko Kuroda when his term ends next April.

First Chinese ESG standards published

China’s first set of corporate environment, social and governance standards has been published. Developed by the China Enterprise Reform and Development Society in conjunction with dozens of leading Chinese companies, the Guidance for Enterprise ESG Disclosure specifies disclosure principles, indicators, requirements, applications, responsibilities and supervision for enterprises of different types, industries, and sizes. The voluntary standards reflect their context and are based on Chinese laws, regulations and standards.

The guidance incorporates the CN-ESG rating system developed by insurer Ping An, one of the corporate contributors to the project. The system includes 134 mandatory general indicators and 260 optional indicators. Spread across the four dimensions of environment, social, governance and business, it also includes an industry matrix and public opinion modules.

FSB Asia group meets on climate risk

Members of the Financial Stability Board’s (FSB) consultative group for Asia have met to discuss how the perspective of emerging market economies’ on climate-related financial risks could be best addressed in the board’s work.

In a meeting dominated by financial market developments related to the Russian invasion of Ukraine, members also reviewed progress within the region on addressing climate-related financial risks and explored areas in which Asia could contribute to the FSB’s roadmap for addressing financial risks from climate change.

FSB consultative groups bring together regional financial authorities to exchange views on vulnerabilities affecting financial systems and on initiatives to promote financial stability.

ECB paper confirms importance of double materiality in disclosures

Understanding how climate-adjusted financial risk assessment affects firms’ investment decisions is crucial to assessing the double materiality of climate-related financial risks across different possible climate futures. To fill this knowledge gap, European Central Bank researchers used a tailored Eirin Stock-Flow Consistent model with climate scenarios from the Network for Greening the Financial System (NGFS) to provide dynamic balance sheet assessments of climate physical and transition risks for the euro area.

An orderly transition has important co-benefits in the mid term in terms of GDP, emissions, and financing conditions, the study found, with a disorderly transition associated with financial instability and a reduction in the capacity of firms to adapt. Across the NGFS scenarios, the study found that expectations of firms on carbon pricing play a key role for smoothing the transition in the economy and finance.

“The results make the case for financial supervisors, central banks and financial regulators to embed endogenous macrofinancial feedback loops and firms’ expectations in their climate stress tests exercises,” the study concludes. “Our paper not only confirms the importance of the double materiality principle to enhance disclosures, but could also support the calibration of prudential instruments to account for and internalise such principle.”

NGFS publishes reports on climate risk differentials and credit ratings

The NGFS has published two new documents on climate-related risk differentials and credit ratings. The first offers an update on existing analyses and practices in relation to classification frameworks and the methodologies used to assess and quantify financial risk differentials. The second finds that credit ratings agencies already consider material climate-related risks in their assessments, but face challenges in adopting a more systematic approach to climate-related risk integration.

“These two reports shed light on the extent to which climate risks are taken into account by financial institutions and affect credit ratings by rating agencies,” said NGFS chair Ravi Menon. “This provides insights on how climate related risks in turn affect financial institutions’ pricing decisions and central banks’ monetary policy operations and reserve management activities.”

Ukraine war shows need for renewable energy supplies, says Carney

Former Bank of England governor Mark Carney has warned governments not to derail climate progress in their efforts to respond to the energy crisis resulting from Russia’s invasion of Ukraine.

“Russia’s war underscored that a resilient system needs more diversified and reliable suppliers – the price of greater security of supply in the near terms will be more stranded assets over the medium term,” he told the Net Zero Delivery Summit in London. “Once built, clean energy systems are more affordable, efficient, resilient and reliable. No one owns the wind or the sun and hydrogen is literally everywhere.”

The climate crisis is building future costs that will dwarf current hardships, Carney said. “The more we emit now, the more radical action will be needed later. We need to speed up, not slow down.”