Weekly roundup: Three reasons to support double materiality

Three reasons to support double materiality from BdF staff, Eurosystem work to improve climate modelling, a call for regional Federal Reserve banks to act on climate, and more from this week in green central banking.

BdF staff outline three reasons to support double materiality

A policy briefing written by BdF employees and published by inspire distinguish three reasons to support the rapidly emerging concept of double materiality. The briefing is part of Inspire’s central bank toolbox series and authors include deputy governor Sylvie Goulard and financial stability deputy director Jean Boissinot.

Double materiality considers the impact of a company or bank’s activities on the environment as material to decisions made by users of its financial statements, alongside the impact of environmental effects on the company’s financial position. This paper reviews three rationales supporting the use of this concept, involving organisational risk, systemic risk, and a “beyond risk” change of practices and values, looking at the distinct policy implications and challenges of each.

Eurosystem working to improve climate modelling

The integrated assessment models used to link the climate system and economic developments are extremely simplified representations of the economy, says a new BdF Eco Notepad post reviewing Eurosystem efforts to improve climate modelling for central banks.

These models do not include most transmission channels or feedback effects between the climate and the macroeconomy, says the brief. These models also tend to specify physical risk and transition channels independently and do not capture the macroeconomic effects on the essential variables of inflation and employment.

In the longer term, changes to the main reference models and to certain dynamic stochastic general equilibrium models are needed, it suggests, notably the semi-structural models at the heart of forecasting and scenario analysis.

Call for regional Federal Reserve banks to act on climate

Although the US Federal Reserve System is not proactive on climate change, the 12 regional Federal Reserve banks can still integrate climate considerations into their work through research, data collection, and public outreach, suggests a new report from the Natural Resources Defence Council.

With chapters focusing on hurricanes, rainfall extremes and wildfires, the report outlines the significant climate risk to the US financial system and to individual banks. It and makes clear that the Fed and the regional Federal Reserve banks have a duty to address this risk.

The report also calls for the economic effects of climate change to be highlighted in the Beige Books, a collection of qualitative reports from all Fed districts published eight times each year. “Historically, the Beige Books’ reporting of climate change impacts on the different districts has been spotty at best,” it says.

The report also calls for the regional Feds to address the disproportionate impact of climate change on low-income communities and communities of colour.

Senior BoE staff review climate capital requirements

In advance of an upcoming conference on adjusting the international capital framework to take account of climate-related financial risks, three senior Bank of England BoE staff members have reviewed some of the outstanding issues surrounding this policy.

Writing on the central bank’s Bank Underground website, they suggest that setting capital requirements or buffers based on market-based climate risk measures is problematic because of self-referencing market feedback and a reliance on investors pricing climate risks.In contrast, setting requirements or buffers based on climate stress tests is conceptually similar to basing these on other types of stress tests, as long as financial institutions have the necessary granular data.

Lack of data is a persistent theme in the review, which includes several calls for further research to explore appropriate time horizons, the use of forward-looking information, and model uncertainty and validation.

Climate and nature in macroeconomics and finance

The Banque de France, Sustainable Macro and Inspire are organising a conference on  frontiers of climate and nature in macroeconomics and finance. The in-person event will be held in Paris on 24-25 October 2022 and will address the challenges posed by environmental risks and impacts for finance, monetary policy and financial supervision.

A call for papers for the conference has been issued seeking 250-word abstracts by 1 August. Submissions from early career researchers and advanced PhD students are particularly welcomed, and travel and accommodation expenses will be covered for PhD students and young scholars.