NGFS chair calls climate change ‘the mother of all supply-side shocks’

The NGFS chair on climate change supply shocks, the ECB’s Frank Elderson on the biodiversity risks threatening financial markets, an ISSB requirement for scope 3 emissions disclosure and more from this week in green central banking.

Menon: supply-side effects of pandemic and war will pale in comparison to climate change

Ravi Menon, chair of the Network for Greening the Financial System (NGFS), has called climate change the “the mother of all supply-side shocks” with implications ranging from disruption to agricultural production to computer chip manufacture.

Speaking at the autumn meetings of the International Monetary Fund and World Bank earlier this month, Menon called climate change “a classic example” of the failure to take a longer term view with consequences that are apparent today and will grow significantly worse in the future. “What we have seen by way of the pandemic and war, unfortunately, will probably pale beside the effects of climate change on a whole range of supply equations,” he said.

Menon, also managing director of the Monetary Authority of Singapore, was blunt about the lack of effective action in reducing emissions. The reality is that limits to 1.5ºC temperature increases agreed under the Paris climate agreement could be exceeded as early as 2030 or 2035, he said, resulting in a “very strong likelihood of catastrophic climate change”.

Half of global GDP at risk, says ECB’s Elderson

Around €40tn of global income relies on nature, the European Central Bank’s Frank Elderson has told a conference on integrating biodiversity into financial markets. In a speech titled Natura Artis Magistra (nature is the teacher of the arts), Elderson said that human activities are destroying this natural capital, with resulting risks for individual financial institutions and for financial stability. Nature is hurting, he said, and we are responsible for that hurt.

Referencing a report from NGFS and Inspire on biodiversity, Elderson contrasted the biodiversity-related work of central banks and financial regulators with their efforts on climate change. Reviewing the ECB’s contribution to both, he emphasised that eurozone banks must comply with all ECB supervisory expectations on climate risks by the end of 2024 at the latest.

“Nature makes finance thrive,” he concluded. “This is what ultimately needs to become fully embedded in the work of central banks, supervisors, regulators and international standard setting bodies, within their mandate. Because nature-related risks are part of our mandate.”

BoE analysts review steps needed to integrate climate into risk weights.

An article from two Bank of England analysts asks how UK regulators might approach including climate-related risks into the risk-weighted asset framework. Their conclusion is that substantial research is needed to determine whether such measures are needed and, if so, how risk weights might change.

Published on the BoE’s Underground blog ahead of the central bank’s recent climate and capital conference, the post calls for an examination of how risks are already caught by the existing regulatory framework, and of the time horizon over which climate-related risks should be considered. The authors also call for further study on which risk weights to change and how to calibrate them.

Noting that risk weights are just one part of the capital framework, the article makes clear that it is important for prudential regulators to work through the issues involved carefully and with reference to their mandates. “It is clear that a better understanding is needed of how banks’ risk weights will change as transition risks from climate change build over time,” it concludes.

ISSB confirms scope 3 emissions disclosure requirements

The International Sustainability Standard Board (ISSB) will require that companies reveal their scope 3 emissions as part of the international standards it is developing for climate-related disclosures.

While draft standards circulated by the body had already included the disclosure of direct emissions caused by corporate activities, the addition of scope 3 values will also require firms to identify and report the indirect emissions associated with their value chains. All emissions reporting will be required to conform to the Greenhouse Gas Protocol corporate standard.

The decision was made unanimously at the ISSB’s October meeting and was the result of feedback received during an extensive public consultation exercise held earlier this year. However the board also said it would develop “relief provisions” to help firms meet their scope 3 reporting obligations. These provisions may include more time to identify emissions and possible “safe harbour” rules protecting reporting companies from investor lawsuits.

US Treasury proposes climate data rule for insurers

The US Treasury has opened a consultation on a proposed new rule to collect data on climate-related risks from property and casualty insurers. In a notice published by the Treasury’s Federal Insurance Office, the regulator said that it was seeking zip-code level details to provide it with “consistent, granular, and comparable insurance data needed to help assess the potential for major disruptions of private insurance coverage in regions of the country that are particularly vulnerable to the impacts of climate change.”

The move comes as a series of climate-related wildfires, hurricanes and other disasters have caused billions of dollars in both uninsured and insured damage, pushing some insurers to forecast substantial financial losses.