measure transition risks from global net zero challenge, say central bankers and policymakers at Green Swan conference
Central bankers and policymakers are wondering how to account for the risks associated with the transition to a net zero economy as they seek to cope climate change and integrate these risks into their future planning of monetary policy.
The so-called physical risks of climate change – the economic costs associated with more extreme weather events – are relatively measurable, but transition risks are a more complicated calculation, according to Kristalina Georgieva, managing director of the International Monetary Fund (IMF).
“It would play out over time and it would show itself as we move towards lower carbon intensity,” Georgieva said at the Green Swan 2021 conference. “We already need to look at this risk today.
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“Dirty assets: how will they evolve. Their value will drop, would be replaced by others. How to integrate is a question we are struggling with.”
Policymakers, advisers and business leaders gathered virtually last week at the Green Swan conference to discuss how to tackle the climate crisis and integrate climate goals into financial policy. The conference was co-sponsored by the Bank for International Settlements, the Bank of France, the IMF and the Network for the Greening of the Financial System.
The co-signatories of the 2015 Paris Agreement agreed to work together to cap maximum greenhouse gas emissions and seek to limit global warming to less than 2 degrees Celsius above pre-industrial levels.
As a result, countries from China to United States have announced their intention to achieve net zero emissions over the next three to four decades. For example, Chinese President Xi Jinping promised last September that China would cap its emissions by 2030 and achieve carbon neutrality by 2060.
To better manage the economic risks associated with market-based carbon reduction policies such as emissions trading, China – the world’s largest emitter of greenhouse gases – should accelerate the establishment of roadmaps for each of the 24 major industries identified, as soon as possible. said Zhou Xiaochuan, former governor of the People’s Bank of China.
“We did not have sufficient preparation for this in terms of planning and data [collection] when the climate goals were announced, ”Zhou, currently president of the China Society for Finance and Banking, said on Friday. “There are great risks to be expected from carbon markets, we can make mistakes that we will have to correct later. , and that can get expensive. “
Zhou Xiaochuan, former governor of the People’s Bank of China, in Beijing in 2018. Photo: Simon Song alt = Zhou Xiaochuan, former governor of the People’s Bank of China, in Beijing in 2018. Photo: Simon Song
China is expected to start trading carbon emissions in the spot market on a newly established national exchange in Shanghai to fund carbon emissions projects as early as this month. Seven pilot regional stock exchanges in operation will eventually be integrated into the national stock exchange.
Zhou urged other major developing economies to also create carbon emissions markets to show their determination to implement their climate commitments. At some point, connections between international carbon markets should be considered to provide channels that facilitate financial support and transfer of technology from developed to developing countries, he said.
This could be achieved by implementing mechanisms similar to cross-border Stock Connect programs that helped control the flow of funds into and out of stock markets between China and other jurisdictions, he added.
One of the important questions for world leaders is how to deal with older, high carbon-emitting industries that could see their assets “stranded” due to the shift to a net zero economy.
A disorderly transition to a low-carbon economy could lead to increased credit risk in some industries, including reducing the ability of some companies to service and repay debts, according to the Financial Stability Board.
Kristalina Georgieva, Managing Director of the International Monetary Fund. Photo: AFP alt = Kristalina Georgieva, Managing Director of the International Monetary Fund. Photo: AFP
“Credit risk could also arise from the reduction in the value of collateral against which transactions are secured, especially when such collateral takes the form of real estate or capital-intensive infrastructure which could be particularly affected by the associated risks. climate, “the FSB said in a statement. November 2020 Report.
The financial effects of the transition to a low carbon economy remain difficult to pin down.
A study has estimated that the loss of global wealth due to stranded assets could range from $ 1,000 billion to $ 4 trillion, according to the FSB. However, reductions in the value of stocks and bonds held in financial sector portfolios could amount to US $ 2 trillion alone, which would be less important for financial stability if they occur gradually, according to the FSB.
The american president Joe biden joined the Paris climate agreement after taking office in January and said meeting emissions targets could create millions of jobs for middle-class Americans as part of the transition.
Mark Carney, the former Governor of the Bank of England, speaks at a meeting of G20 finance ministers and central bank governors in Buenos Aires in 2018. Photo: EPA-EFE alt = Mark Carney, the former Governor of the Bank of England speaks at a meeting of G20 Finance Ministers and Central Bank Governors in Buenos Aires in 2018. Photo: EPA-EFE
Climate activists are pushing companies and their lenders to rethink how they use and support the fossil fuel industry, with activists gaining key support from ExxonMobil and Chevron shareholders in May.
The best bankers, such as HSBC CEO Noel Quinn and Standard Chartered CEO Bill Winters has resisted pressure to outright abandon clients in industries labeled as “dirty,” saying they wanted to support clients in the transition and see it as a business opportunity. However, they said they would withdraw from customers who do not demonstrate a willingness to change.
“We see our mission as helping our customers understand their sustainability and climate stance, their stance on greenhouse gases to help them make the transition themselves,” Winters said at the annual meeting of the company on May 12. “Where we have clients who are unwilling or simply unable to make the transition, they will not be able to call on Standard Chartered.”
Achieving these climate goals, in part, will require mandatory disclosure by the private sector of climate risks for their companies in accordance with standards set by the Climate-Related Financial Disclosures (TCFD) Task Force, according to Mark Carney, the former governor. from the Bank of England. and United Nations Special Envoy for Climate Action and Finance.
Standard Chartered CEO Bill Winters. Photo: Xiaomei Chen alt = Bill Winters, CEO of Standard Chartered. Photo: Xiaomei Chen
More than 1,500 private sector companies with a market capitalization of over US $ 17 trillion report their climate risks in accordance with the TCFD Recommendations and many central banks have also followed suit, Carney said.
“We know that climate risks are different from traditional financial risks. They affect the whole economy. They affect every consumer, every business, every industry. They are global,” Carney said. “They are longer term and exceed the usual three to five year planning horizon for most companies.”
All major jurisdictions are expected to adopt “paths to full and comparative climate disclosure” based on these recommendations from the 2021 United Nations Climate Change Conference, known as COP26, in November, he said. he declares.
Yi Gang, governor of the People’s Bank of China, said the central bank will release climate-related stress tests the country’s financial sector in the future, without giving a specific date.
Gang also said China was “positive” about TCFD, asking the Industrial and Commercial Bank of China to become a member.
“Our goal is to create a uniform disclosure standard, and in the future we will move towards mandatory disclosure of climate-related information.” Gang said during a panel at the conference Friday.
The Bank of England, for example, outlined a proposal in May to “green” its £ 20 billion (US $ 28 billion) corporate bond buying program, in which it buys corporate debt as a monetary stimulus. Under the proposal, the central bank would align its corporate bond portfolio with the UK’s net zero targets.
“There is no model of a comprehensive framework for greening a portfolio of assets held for monetary policy purposes,” Andrew Bailey, Governor of the Bank of England, told the Green Swan conference. “We know that awareness and engagement are key to getting it right, so we are currently seeking feedback on our proposed framework.”
One of the challenges is that there is no universal framework for climate reporting, although TCFD standards go a long way in standardizing the process, policymakers said.
“We are not yet quite on a solid footing to standardize standards. [There are] 200 executives. It’s a little too much to manage, “said Georgieva, Managing Director of the IMF.” We must strive to reduce and accept that the obligation can only be fulfilled when we have in common a standardized exposure and frames accepted. “
Additional reports from Finbarr Birmingham
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