Climate risk impacts on sovereign bonds may be ‘sizeable’

August 23, 2022|Written by

The transition impact on sovereign bonds, the BdF reviews scenario analysis, GOP opposition to SEC disclosure proposals, the Jackson Hole Economic Symposium and more from this week in green central banking.

Study shows climate transition impact on sovereign bonds

Climate transition risks can have a “sizable” effect on government bond portfolio performance, according to a study from MSCI, a provider of global equity indices. The analysis found that risk for US five-year treasury bond yields could rise by almost 100 basis points in the short term under a scenario of net zero by 2050, with risks increasing as the scenarios became more disorderly.

The study found that country-specific dynamics and the maturity composition of portfolios are the main factors determining how shocks associated with the transition away from carbon might affect sovereign yield curves. The authors also noted that long-term impacts on GDP could also intensify in emerging markets or in delayed or disorderly scenarios.

BdF reviews scenarios analysis

The summer bulletin of the Banque de France (BdF) contains a review of its experience with climate-related scenario analysis, including an overview of a 2021 pilot exercise carried out by the Autorité de Contrôle Prudentiel et de Résolution, France’s prudential supervision authority.

The review focuses on the scenarios developed by the Network for Greening the Financial System (NGFS) and now used by 31 members to identify, assess and understand the climate risks that their economies and financial systems face. It also offers a new BdF methodology that combines three NGFS transition scenarios with IPCC physical scenarios.

The paper concludes that overall risk exposure is “moderate, but far from negligible”, but also warns that “the results should be put into perspective in view of the uncertainties associated with the speed and impact of climate change”.

The paper ends by highlighting the limitations of scenarios, including problems with granularity, classifications, the models used, the data sources available and the many assumptions underlying the scenarios themselves.

UAE banks slow to face climate risk

The Central Bank of the United Arab Emirates (CBUAE) has released the results of a climate risk survey of the country’s banks, finding limited data and a lack of human capital as the main barriers to implementing climate risk policies.

However, only 45% of bank boards discuss climate change risks and only 22% have climate risks integrated into their management frameworks. Released as part of the CBUAE’s financial stability report, the survey also showed that 72% of financial institutions had plans to integrate climate risks into their overall management.

ECB’s Schnabel to speak at Jackson Hole

High-level representatives from central banks around the world are due to participate in this year’s Jackson Hole Economic Symposium. These include European Central Bank (ECB) executive board member Isabel Schnabel, Bank of Korea governor Rhee Chang-yong, Bundesbank governor Joachim Nagel and Bank of Japan board member Toyoaki Nakamura.,

The symposium, held annually by the Federal Reserve Bank of Kansas City, will run from 26 to 28 August and is organised around the topic of reassessing constraints on the economy and policy.  However, it will likely focus largely on inflation as investors drive down US Treasury yields in anticipation of a significant announcement in Fed chair Jerome Powell’s Friday speech on the economic outlook.

Expectations for meaningful climate-related announcements or discussion are much more limited, although a full agenda for the symposium is not yet available from the Kansas Fed’s website. While Schnabel can be expected to review the ECB’s climate policy work in her panel discussion on the outlook for policy post-pandemic, the almost complete absence of climate issues in last year’s symposium and the lack of Fed participation in June’s Green Swan conference suggests that any discussion of climate risk or mitigation will be tangential at best.

This page was last updated August 23, 2022

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