Sovereign green bonds could fund transition, says BIS

The BIS on sovereign green bonds, the ECB on climate fiscal policies, a conference on greening monetary policy in times of soaring inflation and more from this week in green central banking.

BIS says sovereign green bonds could help governments meet emissions targets

Sovereign sustainability-linked bonds with meaningful climate targets and penalties for non-compliance could help issuers make progress towards carbon emission reduction targets, according the Bank for International Settlements (BIS).

An analysis published in the latest BIS quarterly review shows that while the fungibility requirements of public debt can conflict with the prescribed requirements of green bonds, these tensions can be partially overcome through refined reporting standards and external review. Attaching bonds to sustainability performance targets, with accompanying penalties for failing to meet them, would allow proceeds to be used freely by sovereign issuers, thus resolving the issue of fungibility.

The volume of sovereign issuances has increased in recent years, but still makes up only 7.5% of the US$2.9tn sustainable bond market.

ECB warns against incentivising fossil fuel consumption

The European Central Bank has offered advice to EU governments on how to address high energy prices in a way that avoids incentivising the increased consumption of fossil fuels.

In an article on fiscal policies to mitigate climate change in the euro area, published in the economic bulletin that follows monetary policy meetings, it focuses on carbon pricing, public green investment and compensatory measures to ensure a more equitable green transition.

Direct support to consumers should be unrelated to individual energy consumption and instead targeted to the most impacted groups, the analysis suggests, while subsidies to public transport and other alternatives to energy consumption should be considered.

“Energy measures should remain temporary and incentivise energy saving while efficiently addressing the short-term challenges and protecting the most vulnerable households,” it says. The authors predict that emissions will fall faster towards the end of the decade as proposed energy efficiency and renewable energy measures are fully implemented.

Conference on greening monetary policy in times of soaring inflation

A short conference on how monetary policy can address fossil fuel-driven inflation without threatening the green transition will take place on Wednesday 28 September.

Sponsored by the Green-European Free Alliance group from the European Parliament, the hybrid event features a keynote speech by Frank Elderson, ECB board member and former chair of the Network for Greening the Financial System. Two panel discussions will be held, one on the current price stability crisis and another on central banking in the face of the climate emergency. Participants include the head of the ECB’s monetary policy strategy division Katrin Assenmacher, Positive Money Europe executive director Stanislas Jourdan, and Daniela Gabor, economics professor at the University of the West of England.

The event begins at 5pm CET and registration is free.

Sierra Club welcomes Fed’s climate risk exercise

US environmental group the Sierra Club has welcomed the recent announcement by the Federal Reserve of a pilot climate risk exercise to take place in 2023.

The move is a “promising sign” that the agency is finally beginning to take steps to address climate risk, the NGO said in a recent article, while noting that the step is long overdue. The group also welcomed proposed guidance from the Office of the Comptroller of the Currency and Federal Depository Insurance Corporation which would require US banks to plan for the long-term impacts of climate change.

However, the article also made clear that these moves are just the beginning and that further bold and immediate intervention is required. Calling for climate considerations to be included in existing stress tests and higher capital requirements for riskier high-carbon assets, the group warned of another financial crash if climate-related issues continue to be sidelined.

“We know that the severity of the 2008 crash was a product of lax oversight of risky bank activities,” it said. “Now, we’re watching it all happen again. Big banks continue to make risky investments in fossil fuels for short-term gain, without considering the consequences of climate change.”

Research shows physical climate risk impact on monetary policy

A literature review published by the E-axes Forum research network suggests that central bank policymakers should factor physical climate risks into their monetary policy frameworks.

Curated by ECB senior economist Miles Parker, the review summarises six recent papers focusing on the increasing impact of acute physical risks and the potential for demand and supply shocks as a result. In particular, the research highlights the need for “careful thought” surrounding the size and nature of the shocks, and what the implications may be for available policy space.

The paper notes that negative supply shocks as a result of extreme weather events pose a dilemma for central banks, since reacting to the inflationary impact can worsen the negative impact on demand. In contrast, negative demand shocks are better addressed through more accommodative policy.

BNM committed to supporting new funding models for green housing

The Bank Negara Malaysia (BNM) is committed to supporting the development of new business and funding models for green housing, deputy governor Jessica Chew Cheng Lian has said at a recent meeting of the National Mortgage Corporation of Malaysia.

“With climate change, we are not simply pursuing an aspirational goal,” she told the meeting. “We are dealing with an existential threat for which bold and decisive actions are needed to correct what has been described as the greatest market failure the world has ever seen.”

Outlining the BNM’s work on mandatory climate disclosures and its carbon transition lending facility, Puan Jessica stressed the importance of reducing greenhouse gas emissions from existing homes on the books of financial institutions, increasing their resilience to climate hazards.

“Experience in other markets would suggest that there is much more that financial institutions in Malaysia can do to unlock the potential to scale up green housing finance,” she said.