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

Transcription

1 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

2 Overview What is this paper about? Objective Article examines the impact of climate change and related energy transition effects on financial stability and monetary objectives of central banks Main points Buildig on earlier work of BoE, paper derives number of channels by which climate change affects central banks. Most importantly: o Physical risks that have the pottential to trigger financial and macro economic instability o Transition risks which arise from unexpected tightening of carbon emissions Article provides options for sector and regulators on how to deal with these risks. o Disclosure o Stresstesting 2

3 Overview What is the strength of this paper? Relevance Paper is consistent with work from a.o.: Multilateral innitiatives, such as FSB TCFD, G20 Green Finance Study Group Central Banks Financial sector Overarching view and focus on interlinkages Paper provides easy accasible overview of the topic, including relevant literature Interlinkages between banks and insturers are explored Discussion on policy options Exploration of benefits and limits of regulatory and policy options, particularly stress testing and disclosure 3

4 Risk drivers Comments structure From a conceptual point of view this paper might benefit from a division between risk drivers and financial risks Framework paper Alternative framework Physical Financial risk Business Credit Market Legal / liability Transition Physical Liability Transition Source: G20 GFSG Synthesis report 4

5 Risk drivers Comments physical risk Article could pay more attention to physical market risks run by investors Market risks is mentioned (fig 2) But lacks elaboration Climate linked natural disaster Financial risk Business Credit Market Legal / liability Increased uncertainty for investors Physical Asset fire sales Transition Source: G20 GFSG Synthesis report 5

6 Percentage of total assets Comments transition risks The authors could explore the transition channel on financial stability further (1/2) Authors miss out on how different asset classes and different type of institutions are differently affected by an energy transition. 6% 9% 37,8 bln 5% 23% 4% 68% Other Commodities 3% < 1 Year 1 < 5 Year Stocks 2% 39,7 bln Securities Loans 9,3 bln 1% 0% Banks Insurance companies Pensionfunds Source: Schotten et al. (2016) 6

7 Comments transition risks The authors could explore the transition channel on financial stability further (2/2) Paper focusses on impact of energy transition on the energy sector, while effects are most likely broader Banks Fossiel 2,0% Fossil fuels 39,7 bln Power generation 11,7 bln 1953 mld Materials industry 24,2 bln CO 2 -intensief 7,7% Transport Agriculture 48,6 bln 66,4 bln Insurers Fossiel 1,2% Fossil fuels Power generation 9,3 bln 10,9 bln 794 mld Materials industry 5,5 bln CO 2 -intensief 3,2% Transport 2,7 bln Agriculture 5,9 bln Pension funds Fossiel 5,4% Fossil fuels Power generation 16 bln 37,8 bln 699 mld Materials industry 13,5 bln CO 2 -intensief 7,0% Transport Agriculture 6,9 bln 12,4 bln 0% 1% 2% 3% 4% 5% 6% Exposure (in % and bln ) Loans Bonds Equity Commodities Alternative 7

8 Comments on tools and measures for mitigating risks Considerations on disclosure, stress testing and prudential measures Stress testing & data 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 Disclosure Are there negative sides to more disclosure on this topic? Prudential policies Section 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? 8