Dutch regulator to ramp up climate scrutiny as it dismisses regulatory incentives

The Dutch central bank and pensions regulator DNB, is preparing to “take additional steps to embed climate-related risks more firmly into the supervisory approach”, hinting support for mandatory climate disclosure and warning against regulatory incentives.

“We will incorporate climate-related risks in our assessment frameworks and address them as well in our interviews with supervised institutions,” the bank announced in its latest report on the topic: Waterproof? An exploration of climate-related risks for the Dutch financial sector.

The report addresses the risks posed to the country’s financial sector from transitioning to a low-carbon economy and from physical damage to assets. It acknowledges risk to the insurance sector – exacerbated by inadequate risk modelling; risk to real estate portfolios; and policy risks; as well as broader risks such as lower economic growth, political instability from increased migration and higher mortality from heatwaves. Flooding, the bank says, could cause up to €60bn in damages in the Netherlands – a country with a significant amount of its land below sea-level.

It also points to risks arising from a growth in green finance – including a heightened likelihood of greenwashing and an over enthusiasm from investors resulting in a crash similar to the ‘dot com’ technology bubble.

To secure financial stability, the DNB has echoed the growing number of calls from investors for countries to develop national climate transition strategies. “We support drawing up a Climate Act, setting out clear agreements concerning the transition path towards a low-carbon economy,” it said, adding that this would enable financial institutions to “take appropriate action”.

The report also suggests that “policymakers could encourage financial and non-financial corporations to be more transparent around climate-related risks,” proposing that this move could be “supported by legislation”. In this context, it highlights the work done by the Taskforce on Climate-related Financial Disclosures around how to standardise reporting efforts.

The bank uses the report to wade in on the discussion around incentivising green finance though regulation – a topic which has been gaining traction on the back of the European Commission’s High Level Expert Working Group on Sustainable Finance, which is looking at how European regulators and policymakers can incentivise climate-aligned finance and reduce climate risks in financial markets.Proposals have been put forward by some investors and other market players that low-carbon assets and products could be subject to tax benefits or more generous capital controls and risk weightings.

“Neutrality is an important principle of the Eurosystem’s operational framework”, and it is important not to favour particular financial instruments over others. “Thus, to avoid opening Pandora’s box, we should not award preferential treatment to green bonds, for example, either in the Corporate Sector Purchase Programme or in the collateral framework. The Eurosystem’s mandate is to maintain price stability. And in order to safeguard its ability to maintain price stability, monetary policy should not be overburdened by other policy objectives.”

“[But] green investments also bear risks which could lead to financial losses if they are not addressed appropriately,” DNB warns. “To safeguard the soundness of financial institutions, it is therefore important to not give a preferential status to certain asset classes.”

The statement mirrors a similar comment made by the President of the German central bank in July. Speaking at an event, Dr Jens Weidmann said “to avoid opening Pandora’s box, we should not award preferential treatment to green bonds, for example… The Eurosystem’s mandate is to maintain price stability. And in order to safeguard its ability to maintain price stability, monetary policy should not be overburdened by other policy objectives.”

DNB also said it would continue to work on the implementation and further development of climate stress tests.

NGO Shareaction welcomed the report, saying it “clearly states that financial institutions are expected to have a thorough understanding of the climate-related risks that are relevant to their own balance sheets”. But it said that there must be more focus on the actions being undertaken by financial institutions, rather than just awareness of the risks.

The DNB’s working group on the Sustainable Development Goals has also released its first report on impact measurement. The group includes PGGM, ABN AMRO, Achmea, Actiam, ASN, ASR, APG, FMO, ING, Royal Phillips, Kempen, Van Lanschot, MN, NN Group, Rabobank, Robeco, TKP Investments, Triodos, Unilever and Unilever’s pension fund. Link