Lets talk about the weather: the impact of climate change on central - - PowerPoint PPT Presentation

Let’s talk about the weather: the impact of climate change on central banks

Sandra Batten, Rhiannon Sowerbutts and Misa Tanaka

Discussed by Martijn Regelink – DNB Supervisory Strategy London – 14 November 2016

Views expressed in these slides are those of the individual presenter and do not necesarilu refilect official positions of De Nederlandsche Bank

What is this paper about?

Overview

2

• Article examines the impact of climate change and related energy transition

effects on financial stability and monetary objectives of central banks

Objective Main points

• Buildig on earlier work of BoE, paper derives number of channels by which

climate change affects central banks. Most importantly:

• Physical risks that have the pottential to trigger financial and macro

economic instability

• Transition risks which arise from unexpected tightening of carbon

emissions

• Article provides options for sector and regulators on how to deal with these

risks.

• Disclosure
• Stresstesting

What is the strength of this paper?

Overview

3

Paper is consistent with work from a.o.:

• Multilateral innitiatives, such as FSB TCFD, G20 Green

Finance Study Group

• Central Banks
• Financial sector
• Paper provides easy accasible overview of the topic,

including relevant literature

• Interlinkages between banks and insturers are explored
• Exploration of benefits and limits of regulatory and policy
• ptions, particularly stress testing and disclosure

Relevance Overarching view and focus on interlinkages Discussion on policy

• ptions

From a conceptual point of view this paper might benefit from a division between risk drivers and financial risks

Comments structure

4

Business Credit Market

Legal / liability

Physical Transition

Financial risk Risk drivers

Source: G20 GFSG Synthesis report

Physical Transition Liability Framework paper Alternative framework

Article could pay more attention to physical market risks run by investors

Comments physical risk

5

Business Credit Market

Legal / liability

Physical Transition

Financial risk Risk drivers

Source: G20 GFSG Synthesis report

Climate linked natural disaster Increased uncertainty for investors Asset fire sales Market risks is mentioned (fig 2) But lacks elaboration

The authors could explore the transition channel on financial stability further (1/2)

Comments transition risks

6

68% 23% 9% < 1 Year 1 < 5 Year

Source: Schotten et al. (2016)

0% 1% 2% 3% 4% 5% 6% Banks Insurance companies Pensionfunds Percentage of total assets

Other Commodities Stocks Securities Loans

39,7 bln € 9,3 bln € 37,8 bln €

• Authors miss out on how different asset classes and different type of institutions are differently affected by an

energy transition.

The authors could explore the transition channel on financial stability further (2/2)

Comments transition risks

7

0% 1% 2% 3% 4% 5% 6% Agriculture Transport Materials industry Power generation Fossil fuels Agriculture Transport Materials industry Power generation Fossil fuels Agriculture Transport Materials industry Power generation Fossil fuels

Exposure (in % and bln €)

Loans Bonds Equity Commodities Alternative

€39,7 bln €11,7 bln €24,2 bln €48,6 bln €66,4 bln €9,3 bln €10,9 bln €5,5 bln €2,7 bln €5,9 bln €37,8 bln €16 bln €13,5 bln €6,9 bln €12,4 bln Fossiel 2,0% CO2-intensief 7,7% 1953 mld € Fossiel 1,2% CO2-intensief 3,2% 794 mld € Fossiel 5,4% CO2-intensief 7,0% 699 mld €

Banks Insurers Pension funds

• Paper focusses on impact of energy transition on the energy sector, while effects are most likely broader

Considerations on disclosure, stress testing and prudential measures

Comments on tools and measures for mitigating risks

8

• Are there negative sides to more disclosure on this topic?

Disclosure

• Authors raise lack of sufficient data on relevant exposures (bonds, credit)
• Our experience is that it is possible to gain more insights into these

exposures

Stress testing & data

• Section 2.1.1. discusses the effects of prudential policies as a way to mitigate

climate change.

• Wouldn’t that fit better together with the discussions on stress testing and

disclosure as a way to mittigate transition risk?

Prudential policies