Drought poses increasing risk for Brazil’s financial system

December 5, 2022|Written by Graham Caswell|Financial Stability Board, Network for Greening the Financial System, International Monetary Fund, Bank of International Settlements, Banco Central do Brasil, European Central Bank

A growing drought risk to Brazil’s financial stability, a climate skills deficit among central bankers, a new initiative on data gaps and more from this week in green central banking.

Banco Central do Brasil examines growing drought risk

As a prolonged drought continues to impact Brazilian agriculture and electricity generation, the Banco Central do Brasil (BCB) has examined how changing rainfall patterns will affect the country’s financial system.

Debtors engaged in activities with intensive water usage and located in areas with high or medium drought risks currently account for around 16% of loans within the Brazilian financial system, according to an analysis published in the BCB’s latest financial stability report. The study finds that this exposure may increase to 19% by 2030 as droughts become more intense and frequent due to climate change, with the southeast region most exposed.

Southern Brazil experienced severe drought conditions during the 2021–22 growing season, resulting in harvest failures for crops such as soya, wheat and corn along with an associated increase in inflation. Drought-related effects also resulted in significant losses for the insurance industry as well as an 8% reduction in Brazil’s agricultural GDP during the first quarter of 2022.

BIS identifies climate skills deficit

A Bank for International Settlements (BIS) review of supervisory capacity development has identified significant challenges in establishing a structured curriculum or learning path to guide supervisory staff responding to the physical and transitional effects of climate change.

The report finds that senior officials at central banks and supervisory authorities acknowledge the need to quickly improve skills on climate issues, and that capacity development in the area of climate-related and environmental risks is “at the top of the agenda”. It identifies a growing number of training providers and materials, as well as a lack of globally accepted standards, as major barriers to understanding climate risk.

In conjunction with the Network for Greening the Financial System and other international bodies, the BIS has already taken steps to address the deficit in climate knowledge and skills among central bankers and supervisors through an online climate training portal. Launched last year, the portal is accessible through the BIS tutorials and training platform.

Climate a priority in new data gaps initiative

Climate change is one of four statistical and data priorities to be covered by a new data gaps initiative from the International Monetary Fund (IMF), the Financial Stability Board and the Inter-Agency Group on Economic and Financial Statistics.

The initiative is the third in a series launched in the aftermath of the 2008 financial crisis and is the first to focus on the climate crisis and its impacts. It will examine energy accounting, green debt and equity financing, physical and transition risk indicators and other metrics associated with the climate emergency and the transition to net zero. G20 leaders welcomed the move in their declaration following the recent Bali summit.

“Global policy action is required to address the escalating climate crisis,” IMF deputy managing director Bo Li said announcing the measure. “Monitoring progress towards achieving climate goals and tracking developments in financial innovation and economic inclusion is needed for policymakers to take decisive actions to bolster resilience and foster inclusive growth”.

Calls for improved sustainability focus in EU insurance framework

A coalition of European advocacy and civil society groups has called on the European Parliament and European Council to add further sustainability requirements to the legislative framework for EU insurers, known as Solvency II.

Sustainability expertise should be expected at board level for all insurers, they say, and risk management systems should explicitly cover sustainability risks. The coalition, which includes ShareAction, Better Finance, the German Association of the Insured, Urgewald and WWF, also argued for capital requirements to be included in the prudential framework, including one-for-one requirements for new fossil fuel projects.

Noting that global insured climate-related losses in the first half of 2022 were 22% above the 10-year average, they also said mandatory climate change scenario analyses, stress tests and transition plans for insurers should be adopted.

Europeans seek ECB support for energy transition

Europeans want to see ambitious intervention from the European Central Bank and European governments in support of energy efficiency measures and the development of renewable sources, according to a poll conducted by Reclaim Finance and polling firm YouGov.

The survey of over 5,000 people in France, Germany, Spain and Italy found that 76% want the ECB to support reducing energy consumption and transitioning to renewable energies, especially by facilitating the renovation of buildings to reduce energy use and cost.

The need for ECB intervention was particularly pronounced among those who face difficulties in meeting their heating and electricity bills this winter, with cost identified as a major obstacle to energy-saving home improvements.

New climate financial risk center for Latin America

A new climate financial risk centre for Latin America has been launched at the Central Banks Conference on Environmental Risks in Mexico City.  The project is intended to “encourage a deeper understanding of the consequences of climate-related risks across the Latin American economies and financial systems and to assist in taking immediate action to safeguard the financial system.”

Based around an online platform, it will promote open discussion, build capacity, and share knowledge and best practice on how central banks and supervisors can identify and manage climate-related financial risks.

The initiative is a collaboration between the United Nations Environment Programme, the Association of Central Banks of Latin America and the Caribbean, the Latin American Association of Insurance Supervisors, and the Association of Supervisors of Banks of the Americas, with financial support from the European Commission.

This page was last updated December 8, 2022

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