Fed scenario analysis, World Bank reform push and ECB deadline: 2023 in green central banking

January 19, 2023|Written by |Securities & Exchange Commission, World Bank, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, People's Bank of China

The year ahead is likely to bring a plethora of new announcements and initiatives as climate action by central banks continues to gather pace. Although this will inevitably include some surprises, certain key events have already been set in train.

The Federal Reserve’s first foray into climate scenario analysis, a battle over the future of the World Bank and a European Central Bank (ECB) deadline regarding banks’ climate risk management are among the upcoming milestones.

Fed to conduct climate stress scenario pilot

Early in 2023, the Fed will commence an inaugural climate scenario analysis exercise aimed at assessing long-term, climate-related financial risks to the largest banks in the US. Details of the scenarios to be used have recently been released.

The exercise is expected to conclude by the end of the year and the results published in 2024.

Fed officials have made clear that they regard the initiative as distinct and separate from its routine stress tests, pointing out that the climate scenario analysis will not have supervisory consequences or affect banks’ capital requirements.

Nevertheless, experts such as JP Morgan chief Jamie Dimon have predicted that such exercises could have regulatory implications in the future. With the Fed and other agencies, such as the Office for the Comptroller of the Currency, finalising draft principles on climate risk, it is possible climate scenario analysis could ultimately inform such guidance.

The exercise will analyse the impact of the climate scenarios on specific bank portfolios and business strategies. The Fed has said it will review firms’ analyses and engage with them to build capacity to manage their climate-related financial risks.

However, the Fed says it will not publish firm-specific results from the exercise, but will release high-level insights.

SEC climate rule expected soon

The Securities and Exchange Commission (SEC) is set to finalise its climate disclosure rule, after it missed an initial pledge to complete the process by the end of 2022.

Despite the delay, the Financial Times has reported that the agency has already been in touch with dozens of large companies, asking them to prepare climate risk reports.

The SEC rule has been attacked by right-wing lawmakers and dark money corporate lobbyists over its plans. The rule could still face legal obstacles, and there has been speculation that the agency may be considering abandoning some of its key provisions.

ECB deadline looming for euro area banks

The ECB has given banks until the end of the year to reflect climate risks in their governance, strategy and risk management frameworks.

The bank announced in November that it had begun applying capital charges to banks that failed to effectively manage climate-related risks, and warned it would take enforcement action if lenders do not meet its requirements within a given timeframe.

The ECB has set a March deadline for lenders to catalogue their climate and environmental risks and assess how such risks could impact their businesses. It then wants banks to act on that assessment by the end of December.

Frank Elderson, vice chair of the ECB’s supervisory board, said recently that 96% of banks assessed by the ECB were failing to adequately identify climate-related and environmental risks. He said that actual shifts in revenue based on climate considerations “remain rare”.

Push for World Bank to step up climate support

A deal struck at the UN Cop27 climate summit in November mentioned central banks for the first time, alongside a call for rapid and far-reaching changes to the world’s financial system to fund the transition to a low-carbon economy.

What this means in practice may become clearer in the coming months.

A key focus of discussion at the summit was a move to revamp the business model of the World Bank so it can provide long-term support for climate adaptation and mitigation.

World Bank staffers have since drawn up a draft “evolution roadmap” which would make climate action more central to its mission. But experts have called the plans timid and slow, criticising its plans to hold off key policy decisions until the bank’s annual meeting in October 2023.

PBoC and BoJ continue to ramp up green lending

Both the People’s Bank of China (PBoC) and Bank of Japan (BoJ) are expected to ramp up their green lending schemes, which have so far dispersed loans worth over $31bn and $26bn respectively.

The BoJ is due to conduct further auctions in July and December and its one-year loans can be rolled over until at least 2030. The bank’s facility provides zero-interest financing towards loans and investments for sustainable projects.

PBoC governor Yi Gang last year credited the bank’s climate policies with supporting emissions reduction of over 60mn tonnes of carbon dioxide, equivalent to 0.6% of China’s total output. A senior official recently confirmed that the PBoC’s climate programmes will be extended into 2023 and said the bank’s monetary stimulus will be at least as strong as last year.

BoE due to reveal climate capital plans

The Bank of England (BoE) is due to publish an update on its thinking regarding the implications of climate change for banks’ capital requirements, following a landmark conference in October.

Deputy governor Sam Woods and climate lead Sarah Breeden stressed during the conference that the bank has a “completely open mind” on whether and how it will integrate climate considerations into its capital framework.

The conference heard from experts arguing for the use of systemic risk buffers and concentration limits as part of a holistic approach towards addressing climate risk.

The BoE had previously committed to release guidance on climate change and capital requirements by the end of 2022, but this has not yet been published. Green Central Banking has reached out to the BoE for comment.

This page was last updated January 19, 2023

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