IMF staff warn of ‘climate Minsky moment’

June 24, 2022|Written by Graham Caswell

IMF staff warn of a “climate Minsky moment”, Elderson expects banks to meet climate expectations by 2025, a new biodiversity standard is launched and more from this week in green central banking.

‘Climate Minsky moment’ could cause rapid valuation reassessment, say IMF economists

Perceptions about the likelihood of an ambitious decarbonisation scenario could change rapidly and lead to a widespread reassessment of market asset valuations, three senior IMF staff suggest in a piece for the Centre for Economic Policy Research’s VOXEU policy platform. The trigger for such a shift could be a societal or political tipping point, such as political pressure following climate-related extreme weather events or electoral results in major countries that suddenly make the path towards net-zero emissions more credible and irreversible.

Such an event could also become a turning point for asset valuations, they say, “leading to a collapse like that of Lehman Brothers during the global financial crisis”.

Drawing from a recent IMF assessment of financial stability conditions in the UK, the analysis examines the risks for UK financial institutions stemming from an abrupt switch from a business-as-usual to an ambitious (but “orderly”) decarbonisation scenario. It is one of the first studies to characterise a climate-related ‘Minsky moment’, the authors say, reconciling the very long-term horizons of climate-related risks with the typically shorter horizon of financial stability assessments.

Popularised following the 2008 financial collapse and named after the theories of economist Herman Minsky, a Minsky moment refers to a market tipping point and collapse as a result of regulatory blind spots in which risks are not recognised or mitigated.

Euro most resilient to climate change

Climate change could be advantageous to the euro relative to other currencies, according to a report from Barclays. The study mapped the effects of climate change on the exchange rates of eight currencies, saying that rising temperatures and associated economic costs could pose “rising and costly risk, with tangible foreign exchange impact”.

China’s yuan is set to suffer the most without greater efforts to mitigate the effects of global warming, the analysis suggests, falling by as much as 10% per decade. In contrast, the euro could appreciate by up to 3.9% under the most extreme scenario used, largely as a result of the eurozone’s trade openness.

Singapore’s financial assets exposed to climate risk

Nearly a third of Singapore’s financial assets are exposed to climate-related transition risk, according to the latest financial stability review from the country’s central bank.

In a special feature on the climate transition risk exposure of Singapore’s banking and insurance sectors, the Monetary Authority of Singapore outlined an assessment exercise based on ”climate policy relevant sectors” and using the European Union’s Nace (non-financial corporations by economic activity) classification. The exercise found that an estimated 30% of the country’s financial assets are in sectors substantially affected by climate policy.

New standard measures biodiversity impact of loans and investments

The Partnership for Biodiversity Accounting Financials (PBAF) has released a standard for measuring the impact of loans and investments on biodiversity.

Aligned with the Taskforce for Nature-related Disclosures and other similar initiatives in the financial sector, the new standard offers a way for financial institutions to measure, manage and report on the impacts – both positive and negative – of their loans and investments on biodiversity. It also offers a variety of methodologies and tools which financial institutions can use to map out their impact.

The PBAF is a Netherlands-based independent foundation aiming to contribute to a standardised and transparent biodiversity impact and dependency assessment approach, and supports financial institutions in their assessment of biodiversity impacts.

ECB survey finds expectation of increased transition costs and prices

A recent European Central Bank (ECB) survey of leading firms on the impact of climate change found they expect an increase in investment, costs and prices, especially during the transition phase towards a net-zero economy.

Nearly half of respondents said their selling prices had already increased as a result of climate change or climate policies, but only a small proportion said that these increases were already significant. However, only 10% expect a significant increase in costs and prices after the transition to a low-carbon economy.

Asked about the biggest impact of climate change on their business, two-thirds of respondents described transition risks while only half pointed to physical climate risks. Around 40% of respondents also described climate-related opportunities for their businesses, either because the firms have already invested in low-carbon products, or because the goods and services they provide help other companies to reduce their emissions.

Elderson expects banks to meet ECB climate expectations by 2025

ECB executive board member and supervisory board vice chair Frank Elderson has said that over 80% of eurozone banks intend to complete their climate action plans before the end of 2023. He also expects all banks to be compliant with ECB expectations “by the end of 2024 at the latest”.

Speaking at a bank steering and management conference at the Frankfurt School of Finance and Management, Elderson reviewed progress by the Basel Committee and the ECB on climate-related banking supervision. In addition, he presented preliminary findings from thematic review by the ECB, assessing the evolution of the soundness, effectiveness and comprehensiveness of banks’ climate and environmental risk management practices.

While more banks are reporting action to become aligned with the ECB’s expectations, many “do not fully consider how the misalignment of their clients with the Paris Agreement affects their own risk exposures”, he said. Banks’ strategies account much more for transition risks than for physical risks, he added, and there are banks that have still not performed a materiality assessment of the climate and environmental risks they face.

Many banks are still lagging behind in at least one part of the ECB’s expectations on climate and environmental risks, he concluded, but many also already comply in at least one other area.

This page was last updated June 24, 2022

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