Call for central banks to use own climate risk ratings

A Reserve Bank of New Zealand consultation on climate and monetary policy, a call for central banks to use their own climate credit ratings, a Fed review of central bank climate communications and more from this week in green central banking.

NGFS vice-chair calls on central banks to use own ratings

The vice-chair of the Network for Greening the Financial System (NGFS) has called on central banks to apply their own analysis to climate risk and not just rely on private credit rating agencies. Sabine Mauderer, also an executive board member of the Deutsche Bundesbank, said that there is still a lack of transparency surrounding both the methodologies used by rating agencies to incorporate climate risk factors and how these factors contribute to the final rating. “I therefore encourage central banks to apply their own analysis to complement traditional credit ratings,” she said.

Civil society groups have also recommended this measure, while the European Central Bank (ECB) has said that it will assess how agencies incorporate climate change risk in their ratings later this month, with a view to amending the requirements of the Eurosystem Credit Assessment Framework.

Mauderer’s remarks follow the publication of an NGFS report on credit ratings and climate change that recommended the introduction of “appropriate modifications” to central banks’ operational frameworks in order to properly address climate change-related risks.

RBNZ consults on climate and monetary policy

Te Pūtea Matua, the Reserve Bank of New Zealand (RBNZ) is seeking comments on the relevance of climate change for monetary policy as part of its legally mandated 5-year review of its monetary policy remit. In a consultation paper issued as part of the review, the central bank said that physical climatic effects could affect households through potential losses of wealth leading to lower overall consumption. Higher prices and lower employment in high-carbon sectors is also possible, it said, but could be offset by expansion of the renewable sector and lower-emission industries. While the influence of monetary policy on climate change is not fully known, the RBNZ said that it is clear there is a need to understand how climatic changes will affect price and financial stability.

The public consultation is open until 15 July and contributions will be used to inform an initial assessment. Following a further round of consultations later this year, the RBNZ’s advice will go to the minister of finance in 2023 for a final decision.

Fed study reviews central bank climate communications

A Federal Reserve study has outlined an explosion in central bank communications on climate change following former Bank of England governor Mark Carney’s pivotal “Tragedy of the Horizon” speech in 2015. Natural language processing was applied to a large body of central bank speeches to identify those related to climate change. From a total sample of 108 central banks, 50 have given at least one speech on climate change, with climate-related topics representing just over 3% of all speeches in the dataset.

The study also found that central banks in advanced economies are more active and outspoken on climate compared to those of emerging markets, and that central banks tend to use speculative language more frequently when talking about climate change relative to other topics.

Disclosure was by far the most popular climate-related topic for central bankers, followed by scenario analysis and stress tests and climate risk management. Green monetary policy, capital allocation and climate research were the least popular topics.

Canadian regulator issues draft guidelines on climate risk

Canada’s Office of the Superintendent of Financial Institutions (OSFI) has issued draft guidelines on climate risk management for federally regulated financial institutions. The proposed prudential framework, released as part of a public consultation, sets out the OSFI’s expectations for climate-related governance, risk management and disclosures and includes the requirement that institutions “maintain sufficient capital and liquidity buffers for [their] climate-related risks.”

“Ensuring that the financial system remains resilient in the face of climate change demands that we address its threats with a greater sense of urgency, vigour and effort,” said OFSI superintendent Peter Routledge. “With the release of this draft Guideline, we are taking deliberate steps towards addressing climate-related risks in our broader regulatory and supervisory activities.”

BdF study finds link between regulation and storm-related finance premium

A Banque de France working paper has outlined how stringent macro-prudential regulation improves the financial response to natural disasters. An original set of geophysical indicators was used on a sample of 88 countries over the period of 1996-2016 to assess the impact of natural disasters on the external finance premium (the difference between firms’ external and internal finance costs). The study found a strong correlation between this premium and macroprudential regulation, rising significantly when regulation is weak and falling when it is robust. The effect was strongest for storms, but less pronounced in the case of floods, which are more predictable.

IMF holds policy dialogue on climate risk and finance

Green Swan 2022 was not the only conference this week to focus on climate change and the financial sector. On Wednesday the International Monetary Fund (IMF) held a policy dialogue on climate-related financial risks and green finance in Asia and the Pacific, focusing on the implications of climate change for financial stability, central bank and regulatory policies, and the greening of financial markets. Introducing the event, IMF financial advisor Tobias Adrian set out seven areas of climate finance and financial stability that need more “vigorous attention” by central banks and financial regulators and said that the IMF “have prioritised gaining a more holistic understanding of the implications of climate change for the global financial system and financial stability.”

The dialogue included a panel discussion with Maiava Atalina Ainuu-Enari, governor of the Central Bank of Samoa, Ravi Menon, managing director of the Monetary Authority of Singapore and chair of the NGFS, Tan Sri Nor Shamsiah binti Mohd Yunus, governor of the Bank Negara Malaysia, and Bo Li, deputy managing director of the IMF.