Central banks must examine effects of climate change on monetary policy, says Bundesbank

Central banks should look at the role of climate change in monetary policy decisions, the German central bank has said in a report published today.

Tackling Climate Change: The role of banking regulation and supervision surveyed 33 central banks and supervisory authorities across six regions, representing 77% of global GDP, to establish their views and efforts on the topic. It was conducted by global auditor Mazar and financial think-tank OMFIF.

82% of respondents are members of the Network for Greening the Financial System (NGFS), the central banking coalition created in 2017 and whose members have ballooned nine-fold to 54.

"From a financial stability perspective, climate-related risks might have a systemic impact. However, these risks are not well understood yet and from our very preliminary results we do not judge climate change as a major risk for financial stability, at least at this stage" -European central banker.

In the report, Sabine Mauderer, Executive Board of the Deutsche Bundesbank and Chair of the Network for Greening the Financial System’s workstream on scaling up green finance, warns: “Central banks must take responsibility in their role as financial supervisors and guardians of financial stability. We must examine the effects of climate change and climate policy for our own operations, including monetary policy”.

Just 27% of central banks and regulators say that they “actively responding” to climate risks, despite 70% regarding the issue as a “major threat to financial stability”.

Gaps in data and fragmentation of regulatory frameworks are identified in the report as two of the biggest obstacles to action on climate risks.

“From a financial stability perspective, climate-related risks might have a systemic impact. However, these risks are not well understood yet and from our very preliminary results we do not judge climate change as a major risk for financial stability, at least at this stage”, a European central banker is quoted as saying.

The report also found that only a minority (15%) of respondents include “climate-related considerations” in their routine stress tests of financial bodies.

But, more positively, nearly four-fifths (79%) said that they intend to do so in the future.

In December, the Bank of England announced pioneering plans to make climate change the focus of its 2021 ‘biennial exploratory scenario’ (BES) – the two-yearly assessment of UK banks that addresses “emerging threats to financial stability and individual banks [that] may not necessarily be linked to the financial cycle”.

The Banque de France, which acts a secretariat for the NGFS, and the European Banking Authority also announced late last year that they will run climate stress tests on banks from 2020.

Only 13% of respondents to the survey supported the need for changes to capital requirements – known as a ‘green supporting factor ’ or ‘brown penalising factor’ – to incentivise banks’ lending activities. The report cites a wariness over the lack of data indicating a correlation between ‘greenness’ and credit risk, and mirrors a broader push back against the European Commission’s plans to introduce a green supporting factor as part of its Action Plan on Sustainable Finance.

39% of respondents expressed concerns about using “more interventionalist ‘market shaping’ micro-prudential tools for climate purposes”, believing that such interventions “could create market distortions, and might involve policy trade-offs with central banks’ other goals”.

84% of respondents raised the issue of data quality and gaps – including firm level-data – as a key issue, although most participants (55%) do not require institutions under their supervision to disclose climate-related risks and 48% favour voluntary engagement with financial institutions. 34% are considering introducing disclosure requirements in the future, however.

Unsurprisingly, many respondents called for more harmonisation of frameworks such as sustainable taxonomies, with 31% raising concerns about “comparability and consistency”. Several jurisdictions are currently working on such green investment classifications, including the EU, Canada, China, Japan and the UK. The European Commission is currently leading an international ‘platform’ to map such efforts, in a bid to avoid confusion.