Six banks to participate in Fed climate analysis

October 3, 2022|Written by |Australian Prudential Regulation Authority, Banque de France, European Central Bank, Federal Reserve

Details of the Fed’s climate scenario analysis exercise, an ECB study on inflation and the green transition, Lagarde on green targeted lending and more from this week in green central banking.

Six banks to participate in Fed climate scenario analysis

The Federal Reserve has announced that its upcoming pilot climate scenario analysis exercise will include six of the nation’s largest banks: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.

Further details on how the exercise will be conducted and the scenarios that will be used will be made public in the coming months, while the climate, economic, and financial variables that make up the scenarios will be published when the pilot is launched in early 2023. The Fed will engage with the banks during the exercise, which is expected to be completed towards the end of the year.

In a statement the Fed said that, while no firm-specific information will be released, it “anticipates publishing insights gained from the pilot at an aggregate level, reflecting what has been learned about climate risk management practices and how insights from scenario analysis will help identify potential risks and promote risk management practices”. Those insights should be available some time in 2024.

The Fed also emphasised that the climate scenario analysis exercise is “distinct and separate” from bank stress tests.

PRI criticises lack of clarity, guidance and tools from Australian regulators

The investor group Principles for Responsible Investment (PRI) has said that “investors in Australia lack clarity, guidance and tools from policy makers and regulators to effectively influence the sustainability outcomes of their activities”.

In a statement, the UN-affiliated group cited its report exploring existing policy barriers and gaps in Australia that may limit institutional investors’ ability to pursue sustainability objectives. The analysis identified uncertainty over investor duties, limited disclosures and a “lack of regulatory stewardship” as barriers to investors seeking to green and protect their portfolios. The paper also highlighted regulations that incentivise short-term focus.

The PRI offered five policy recommendations, asking policymakers for updated standards and guidance on investors duties, a “comprehensive” corporate sustainability reporting framework and an Australian sustainable finance taxonomy. It also called for a “[strengthening of] regulatory support for effective stewardship” and for treatment of sustainability outcomes in investment management agreements to be addressed.

Expectations key to transition’s effects on inflation

A study outlined in a new European Central Bank (ECB) working paper suggests that expectations are crucial to the inflationary effects of the green transition.

Modelling a gradual increase in carbon tax, the exercise found that while the immediate application of a tax exerts inflationary pressures, expectations of future carbon tax increases have a larger and deflationary effect. The credibility of an expected carbon tax progression may therefore determine the overall inflationary effect of the green transition. Similar results were found using both a simple two-period New Keynesian model and a medium-scale dynamic general stochastic equilibrium model.

NGOs call for immediate energy efficiency financing

A group of six major civil society and campaigning groups have written to the Banque de France governor warning that rising energy prices threaten both economic and financial stability. The solvency of people living in poorly insulated housing is at risk, they told Villeroy de Galhau in an open letter, making energy efficiency renovations an economic necessity as well as a climatic imperative. Signatories to the letter include Agir Pour le Climat, the Rousseau Institute, the Abbé Pierre Foundation, négaWatt, the Shift Project and Positive Money Europe.

The letter is part of a recently launched campaign to “unleash” affordable financing for energy-efficient homes. The coalition of leading European NGOs is seeking a combination of loans, grants and regulations to incentivise demand for home renovation, including preferential ECB refinancing rates for energy efficiency purposes. These measures would not only ease the cost of living, they say, but would also lift millions out of energy poverty, end the funding of “petrocratic” states, and ensure a stable and sustainable future.

Buildings in the EU are responsible for 36% of greenhouse gas emissions, while three quarters of European homes are energy inefficient and dependent on fossil heating.

Feasibility of green targeted lending depends on data and verification, says Lagarde

Responding to a query about refinancing operations, ECB president Christine Lagarde has said that ”the feasibility of refinancing operations with a green target crucially hinges on the availability of a proper definition of [green] criteria and the ability to measure them reliably”.

Two members of the European Parliament, Rasmus Andresen and Ernest Urtasun, asked about the potential of a green targeted lending facility or a green discount interest rate on future refinancing operations. In her response, Lagarde said that “significant challenges persist in relation to data coverage and quality, as well as verification processes and capacities”.

Earlier this year, Lagarde appeared to support the ECB targeting its refinancing operations for green purposes. “Japan is doing it. China is doing it. Why wouldn’t we have an open mind about it?” she told the Green Swan conference in June. “I know it’s not squarely in the mandate and it is not necessarily in what we consider as the prime objective but, you know, if we don’t try then we have no chance of succeeding. So count on me.”

This page was last updated October 3, 2022

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