G7 examines cross-border impacts of net-zero push

G7 examines cross-border impacts of net-zero push, SEC reopens comment period on climate disclosures and more from this week in green central banking.

G7 to study cross-border spillover effects of climate policies

G7 finance ministers and central bank governors have pledged to examine the spill-over effects their countries’ climate policies are having elsewhere in the world.

“We acknowledge the significant impact of climate change and the transition to net zero on macroeconomic outcomes and fiscal sustainability, including the uneven impacts for many low and middle-income countries,” said the group following its latest meeting.

Some G7 members are currently working to raise the ambition of their carbon pricing measures. For example, the EU is finalising a new levy on high-carbon goods imported from outside the bloc. Experts have warned that poorer countries could be harmed as carbon-linked tariffs prevent them from exporting to richer countries, unless they are given assistance to decarbonise their own production processes.

The meeting heard from the economist Nicholas Stern, who proposed a rationale and design for a climate club, through which countries would collaborate on climate action in the areas of investment, technology, policy and finance. Stern stressed that such an initiative should be an inclusive effort, and not be launched by G7 countries alone.

The G7 finance chiefs also reiterated their commitment to mandatory climate-related financial disclosures, and to creating a global baseline of reporting standards currently under development by the International Sustainability Standards Board.

They encouraged the pursuit of a baseline that is “practical, flexible and interoperable”, but which can also be incorporated into more ambitious disclosure requirements.

Rising interest rates won’t stall green transition, say economists

Rising interest rates will not have a serious impact on the world’s ability to reach net-zero emissions by 2050, according to a survey of economists.

With the Federal Reserve, ECB and most other central banks moving to tighten monetary policy, some commentators have expressed concern that the pool of capital available for green investments will diminish.

Experts have warned that rising rates could impede businesses’ ability to invest in electrification and the decarbonisation of production processes, as well as hinder public investment in green infrastructure projects.

But a Reuters poll of climate economists from around the globe found they are optimistic that the effect will be limited. Of the 68 economists the agency spoke to, 51 predicted rising borrowing costs would have a mild or negligible impact on the net-zero transition. Only 17 said it would be severe.

Brian Davidson, head of climate economics at Fathom Consulting, pointed out that inflation is still much higher than benchmark interest rates across most economies. He said green investment has not become any more expensive relative to investment in fossil fuels.

New briefing makes case for climate capital requirements

A new briefing from Inspire and the LSE Grantham Institute makes the case for green differentiated capital requirements (GDCRs) as a tool to decarbonise the financial system and reduce the buildup of physical environmental risks.

The authors argue that GDCRs can be used to address the presence of macrofinancial feedback loops, whereby the financial system contributes to the proliferation of systemic environmental risks to which it is then exposed. They say tools like GDCRs can help ensure the financial system has positive impacts on the environment, which can in turn promote long-term financial stability.

The briefing offers several insights regarding the implementation of GDCRs in practice. For example, it suggests financial regulators should identify the environmental footprint of bank assets using both borrower-level environmental metrics and information about the types of activities that borrowers engage in.

The paper also suggests that adjustments to capital requirements should be combined with other financial and monetary interventions, in order to avoid regulatory arbitrage where firms seek to circumnavigate unfavourable regulatory conditions. This could include greening central bank corporate bond purchases and collateral frameworks to avoid polluting firms using bond markets to finance their spending.

Inspire is an independent research network and a designated stakeholder of the Network for Greening the Financial System, a group of climate-focused central banks and supervisors.

SEC reopens comment period on climate disclosures

The US Securities and Exchange Commission (SEC) has reopened the public comment period for its proposed rule on climate-related financial disclosures, after a technological error meant the commission failed to receive some input received online.

The regulator will accept comments for an additional 14-day period up until 1 November following a reopening release in the Federal Register.

Although SEC chair Gary Gensler had said he hoped to finalise the new rule by the end of this year, the delay could mean it will not be ready until 2023. The rulemaking process could also be subject to legal challenges, while Republican lawmakers have signalled their intention to defund the SEC’s climate disclosure programme if the party wins control of Congress in November’s midterm elections.