BoJ releases results of climate scenario analysis

The BoJ releases climate scenario analysis results, CEBRA focuses on the green transition, how the ECB’s climate strategy increased green bond issuance, new E-axes policy briefs and more from this week in green central banking.

BoJ releases results of climate scenario analysis

The Bank of Japan (BoJ) and the Japanese Financial Services Agency (FSA) have released the results of a joint pilot scenario analysis exercise on climate-related risks facing six major financial institutions. The analysis involved three scenarios published by the Network for Greening the Financial System (NGFS) covering current policies, a transition to net zero by 2050 and a delayed transition. It found that the estimated increase in banks’ annual credit costs due to transition and physical risks was “considerably” lower than their average annual net income, but that results depended significantly on the analytical models used, the selection of variables for the models and the assumptions made by each bank.

However the BoJ and FSA warned that the exercise was not intended to assess quantitative impacts of climate change on the financial system and financial institutions and that the results should not be interpreted as a definitive assessment of the impacts of climate-related risks. The analysis, which involved only three banks and three insurance companies, was instead intended as a learning exercise designed to improve the application of scenario analysis, understand data constraints, and assess the validity of analytical assumptions and methods.

CEBRA conference focuses on green transition

The 2022 Central Bank Research Association (CEBRA) conference has concluded with a plenary session on central banking and the green transition. Held over three days at the Universitat Pompeu Fabra in Barcelona, the event also included a parallel track of discussions on “stability, monetary policy and climate change” with speakers from the Federal Reserve, European Central Bank (ECB) and many other central banks.

Highlights included a session on climate change and central banking organised by the BoJ and featuring papers on the effects of climate change on labour and capital reallocation, climate-related risks and monetary policy transmission, and the expectations of US consumers on the short-run economic impact of global heating.

The New York Fed’s Hyeyoon Jung presented a paper on climate stress testing featuring a new measure of systemic climate risk while the ECB’s Alexander Popov reviewed research showing that banks reallocate a relatively larger share of their fossil loan portfolio to countries with less strict environmental regulation and bank supervision. Other presentations covered climate risk attention and cryptocurrencies, climate risk pricing in European financial markets, and climate change and foreign direct investment.

Although several of the events were livestreamed during the conference, selected recordings will not be available until a later date.

E-axes Forum adds policy briefs to webinar series

The E-axes Forum, an independent research organisation focusing on macroeconomic policies and sustainability, has released the first of a series of policy briefs based on its popular programme of webinars focusing on key issues in climate change and related fiscal and monetary policies. The brief, covering the proceedings of a high-level policy panel on inflation and climate change, summarises discussion on the impact of extreme weather events on inflation among senior economists and researchers from the ECB, Bank of England, Fed and Bank for International Settlements.

This will be the first of an ongoing series of briefs that will not only summarise the conclusions from the bi-monthly webinars and panel discussions, but also review the most important recent papers related to the subject. The briefs will be published on a dedicated web page, along with digests in which recently published authors curate the most important papers related to their own publications.

All E-axes Forum webinars are recorded and are available for viewing at any time.

More green bonds issued after ECB announcement

A study from two researchers from the Swiss Finance Institute has found that eurozone firms reacted to the ECB’s 2021 monetary policy strategy review by increasing the amount of green bonds issued. The announcement of the review results had a significant effect on the pricing and issuance of green bonds in the Eurozone, the analysis showed, and caused the yield-to-maturity ratio of ECB eligible green bonds to fall. “Overall, our results suggest that by communicating its intention to green its monetary policy strategy, the ECB has managed to influence markets,” the authors said in a blog post published by the London School of Economics. “As such, they represent good news for any central bank aiming to support the adoption of green finance.”

‘Trickle-down’ climate regulation won’t work

A “trickle-down” approach to climate-related financial regulation that focuses only on large banks obscures a financial crisis that is already underway and is an inadequate response to scientific evidence on climate risk and impacts, according to a guest editorial published in the current issue of Science magazine. Instead, US banking regulators must reduce threats to bank safety and soundness at every level of the financial system, argue Georgetown University’s Gaël Giraud and Public Citizen’s Anne M. Perrault.

“By focusing on threats to big banks, draft climate risk guidance by the US Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation is treating climate risks like the financial risks that spurred the last global financial crisis,” they say. The authors call for mandatory and science-based transition plans, restrictions on the financing of coal and new fossil fuel developments, and the double materiality disclosure of bank contributions to climate-changing emissions.