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Central banks across the globe now have a "how-to guide" for
assessing and disclosing climate risk across their own operations,
as well as for the financial systems they oversee.
Released 14 December by the Network for Greening the Financial
System (NGFS), the "Guide on climate-related disclosure
for central banks" recognizes the material risks that
climate-induced events pose to financial sector balance sheets and
impose on monetary policy.
The guide walks central banks through steps they need to assess
and disclose direct and indirect climate-related impacts through
governance, risk management, and strategy. The guide recognizes
that there is no one-size fits all approach and encourages each
bank to tailor these recommendations to its financial systems.
At the same time, the guide emphasizes how important it is "for
central banks to seek to lead by example and to demonstrate
accountability by disclosing climate-related risks and, where
relevant, opportunities in a progressively wider scope and
increasing detail."
Formed at the Paris One Summit in December 2017 with just eight
members, the NGFS now represents about 102 central banks and
supervisors across five continents that have come together
voluntarily to share best practices on climate and environmental
risk management.
The guide demonstrates the NGFS' commitment to a declaration made at the UN
COP26 climate summit in November to "improve the resilience of the
financial system to climate-related and environmental risks, and
encourage the scaling up of the financing flows needed to support
the transition towards a sustainable economy."
Raise public awareness, investor
confidence
Chris Varvares, IHS Markit US economics co-head, said the report
is a further effort on the part of NFGS "to raise public and
investor confidence that central banks are on the job."
The report specifically notes that "greater transparency in this
regard could enhance public confidence that central banks are
adequately addressing the economic and financial consequences of
climate change and the transition to a net-zero economy," Varvares
told Net-Zero Business Daily 15 December.
The NGFS members recognize that they play a key role in
monitoring and controlling the risks that would threaten the
stability of a country's financial system and potentially imperil
the stability and sustainability of an economy.
They also are now acknowledging that the banking sector is
potentially exposed to the risks posed by climate-driven severe
weather events, which, for instance, have caused billions of
dollars in damage to properties, businesses, and infrastructure
which, in turn, has affected the portfolios of banks and other
institutions.
These risks can either be felt directly through severe weather
events or as indirect transition risks driven by changes in policy,
advances in technology, or a combination of both.
'Warning signal' for investors
"The network of central bankers, which includes the US Federal
Reserve and the People's Bank of China (PBOC), is now recommending
that central banks incorporate climate risk into their core risk
functions, impacting what assets they will take as collateral and
how they will treat climate risk in overseeing private banks under
their jurisdiction," IHS Markit Climate and Cleantech Executive
Director Peter Gardett said.
For investors holding financial instruments with unclear climate
risk, Gardett added the guide is "a warning signal to get their
portfolio strategy in order."
As Steven Rothstein, managing director for Ceres' Accelerator
for Sustainable Capital Markets, noted, "there are probably no
institutions around the world that are more central to the future
of the capital markets and more respected than central banks."
While not prescribing a particular approach for disclosure for
central banks, the guide is essentially saying climate change can
no longer be treated as side project.
Forward-looking assessments
In other words, the traditional approach of assessing risk by
identifying the emissions gap between the present and future levels
won't be enough to monitor and measure the full spectrum of
risk.
This shortcoming in assessing climate risk also was pointed out
in an April report by the Basel
Commission on Banking Supervision (BCBS), the primary global
standard-setting organization for central banks.
The BCBS report said central banks generally were measuring
near-term risk drivers arising from policy changes in terms of bank
exposure because of the uncertainty of when and where climate
impacts would be felt and with what frequency.
Recognizing there is no one-size-fits all approach as all
central banks operate differently, the guide presents a variety of
disclosure options that central banks may follow based on their
specific circumstances, such as mandates, disclosure obligations,
balance sheet composition, and resources.
Citing examples of central banks that already have incorporated
the direct physical risks posed by climate change into their core
operations, the guide recommends central banks disclose "whether,
and how, they have assessed the ability of monetary policy
counterparties [banks], as well as issuers in their portfolios, to
prevent, withstand, or recover from impacts of natural disasters
and substantially higher average temperatures."
The guide said six banks—Bank Negara Malaysia, Bank of
England, Bank of Russia, the Central Bank of Brazil, De
Nederlandsche Bank (central bank of The Netherlands), and Monetary
Authority of Singapore—have issued reports describing how they
have incorporated climate risk disclosures into their
strategies.
US, Chinese central banks
However, the guide didn't mention the steps the PBOC is taking
to tackle climate risk. During the climate finance day at the UN
COP26 meeting, PBOC Governor Yi Gang said China's central bank has
"recently released guidelines on disclosure which asks financial
institutions to disclose carbon emissions and other environmental
information largely consistent with [Task Force on Climate-Related
Financial Disclosure] recommendations." He said the bank also is
conducting climate stress tests for its financial system based on
the scenario analysis encouraged by NGFS.
It also didn't mention that the US Federal Reserve Board, which
joined NGFS a year ago, plans to include climate change risk as
part of its framework to assess the financial stability of banks
that it oversees. And that it is in the process of developing "scenario analysis"
to assess the possible risks associated with climate change to the
resiliency of individual financial institutions and the financial
system as a whole.
The NGFS guide does encourage central banks to include relevant
analyses that identify risk under varying global warming scenarios.
As part of its mandate to be transparent, the guide urged central
banks to disclose any changes to operational frameworks for
monetary policy, asset management, and financial stability embedded
in climate-related strategies. It also encouraged central banks to
report any "evaluations of their strategies' resilience to
climate-related scenarios that differ from the scenarios underlying
the central bank's baseline disclosure requirements."
Posted 16 December 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst
