Weekly roundup

New York Fed report recommends lower rates for energy efficiency

October 31, 2022|Written by Graham Caswell|Bank of International Settlements, Bank of Finland, Banque de France, Federal Reserve

The New York Fed on funding energy efficiency renovations, the BdF’s deputy governor on tipping points and transformative change, a prototype BIS green bond platform, and more from this week in green central banking.

Energy upgrade investment must grow to $30bn by 2050, says New York Fed report

The New York Federal Reserve Bank has released a comprehensive report on strategies for financing projects to increase the energy efficiency of affordable housing. The report, based on a series of roundtable discussions held over the summer, offers 27 discrete recommendations including lower interest rates for loans used to upgrade building systems to meet climate goals.

Buildings account for 33% of New York state’s greenhouse gas emissions and up to 60% of emissions from cities. To comply with upcoming state laws, 6.8mn households will need to transition to electric heating or low-carbon fuels, the report finds, including one million low and moderate-income households. To achieve this, annual investments in energy upgrades must grow to around $5bn in 2030 and $30bn in 2050.

The report calls for “pricing for risk reduction for loans to decarbonise buildings and projects meeting minimum energy performance standards or achieving energy efficiency certifications”, and for the provision of financial “rewards” to owners for reducing lenders’ climate-related financial risks. It also recommends mandatory disclosure of carbon emissions in loan portfolios and securitised assets, and “report cards” for lenders based on the carbon intensity of their loan portfolios. Other proposed actions include longer amortisation periods for loans used in decarbonisation, awareness and education campaigns, building code changes and a series of fiscal measures.

Although the report does not represent the formal position of the New York Fed, it was heavily promoted by the regional reserve bank.

BdF deputy governor calls for ‘paradigm change’ on nature

Banque de France deputy governor Sylvie Goulard has delivered a powerful speech outlining the scale of the climate and biodiversity crises, calling for central bank action towards re-embedding economic and financial systems within planetary boundaries. “What is actually at stake here is civilizational, and I am carefully choosing my words,” she told a conference on climate and nature in macroeconomics and finance, adding that “we cannot even imagine human life as we know it” without a stable climate.

Goulard was clear about the responsibility of central bankers to act in the face of accelerating climate, biodiversity and other ecological threats. “What we need to understand as central bankers is that the best risk mitigation strategy is to do everything in our power, early enough, to ensure that we remain within planetary boundaries,” she said. “If you think that this is too political for central bankers, let me strongly oppose this view,” Goulard said. “What would be too political is to deny all the evidence gathered by natural and social scientists for the past decades.”

Goulard was also direct about the urgency of the ecological crisis, reviewing the tipping points at which the climate and other earth systems can irreversibly shift toward a new state, with potentially devastating consequences for human populations. “We cannot afford to lose time or to wait until we have elaborated ‘perfect’ tools” she said. “We need to seek how transformative changes can be implemented as soon as possible and if needed, develop and revise our scenarios, metrics and approaches.”

BoE warns of more regulation if climate expectations not met

The Prudential Regulation Authority (PRA), part of the Bank of England (BoE), has warned that financial firms falling short of supervisory expectations on managing climate risk will be asked to provide a “roadmap explaining how they intend to overcome the gaps”.

In a letter to finance CEOs, PRA deputy governor Sam Woods set out the regulator’s climate-related expectations for financial institutions and outlined resources they could use to meet them. However, an annex to the letter reviewing the progress of firms so far identified numerous deficiencies, particularly in climate-related risk management and scenario analysis. “In general, the PRA’s findings indicated that scenario analysis capabilities were not sufficiently well developed to support effective decision-making,” he said.

Woods also told finance CEOs that “supervisors will determine whether additional steps need to be taken to ensure risks are adequately being addressed”, adding that “we may exercise the use of our wider supervisory toolkit”.

Responding to the letter, Fran Boait,  executive director of campaign group Positive Money, said that while the BoE is ramping up its expectations of financial firms, “we can’t wait for the sector to move of its own accord”.

“We need regulators to act on what we already know, that there is no room for oil and gas expansion in any credible net zero transition pathway,” Boait continued. “With fossil fuel exposures of the world’s 60 biggest banks exceeding £1.2tn, the bank must not delay any further in setting higher capital charges for fossil fuel investments to force banks to cover their own losses when loans go bad, instead of falling back on the public purse.”

BIS showcases pilot green bond platform

The BIS Innovation Hub and the Hong Kong Monetary Authority have developed two prototype digital platforms allowing investors to download an app and invest any amount into safe government bonds that finance green projects. The prototype platforms, together known as Project Genesis, allow investors to see accrued interest over the bond’s lifetime, while also tracking how much clean energy is being generated in real time along with the consequent reduction in CO2 emissions. Investors can also sell the bonds in a transparent market.

The technology behind the platforms uses a number of technologies – including blockchain, smart contracts, the internet-of-things and digital assets – to track, deliver and transfer digitised carbon forwards, a form of carbon credit. A new structure for green bonds is proposed, appended with carbon forward instruments that the bond issuer owes to the holder. The bond’s future repayment is made using carbon credits that must be largely generated by activities financed by the original green bond.

Project Genesis is the BIS Innovation Hub’s first green finance project. It was developed in conjunction with six partners and guided by a multi-disciplinary panel of experts in environmental, social and governance, green finance, bond markets, law and regulation.

BoE reviews macroeconomic implications of climate change

An article in the BoE’s latest quarterly bulletin examines the possible macroeconomic implications of climate change, concluding that “monetary policy clearly cannot solve climate change, but climate change may have macroeconomic implications that could be relevant for monetary policy makers”.

Written by staff from across the BoE’s climate hub, international directorate and monetary analysis research hub, the analysis examines what the longer-term changes associated with climate change might mean for the macroeconomic landscape within which monetary policy operates. Focusing particularly on the UK economy, it explores the macroeconomic effects of both physical and transition impacts from climate change and looks at climate-related effects on the long-run equilibrium interest rate.

“Climate change is likely to be a source of shocks to inflation and activity, lead to structural changes in the economy and reshape the longer-term macroeconomic landscape in which the monetary policy committee operates,” the authors say. It may also involve new trade-offs for monetary policy, they conclude, and may also change the channels through which monetary policy affects inflation and economic activity.

This page was last updated October 31, 2022

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