academic.oup.com
Open in
urlscan Pro
52.224.90.245
Public Scan
URL:
https://academic.oup.com/jfr/article/8/2/203/6674753
Submission: On November 16 via api from DE — Scanned from DE
Submission: On November 16 via api from DE — Scanned from DE
Form analysis 1 forms found in the DOM
GET /Citation/Download
<form action="/Citation/Download" method="get" id="citationModal">
<input type="hidden" name="resourceId" value="6674753">
<input type="hidden" name="resourceType" value="3">
<label for="selectFormat" class="hide js-citation-format-label">Select Format</label>
<select required="" name="citationFormat" class="citation-download-format js-citation-format" id="selectFormat">
<option selected="" disabled="">Select format</option>
<option value="0">.ris (Mendeley, Papers, Zotero)</option>
<option value="1">.enw (EndNote)</option>
<option value="2">.bibtex (BibTex)</option>
<option value="3">.txt (Medlars, RefWorks)</option>
</select>
<button class="btn citation-download-link disabled" type="submit">Download citation</button>
</form>Text Content
We use cookies to enhance your experience on our website. By clicking 'continue'
or by continuing to use our website, you are agreeing to our use of cookies. You
can change your cookie settings at any time.
* Continue
* Find out more
We use cookies to enhance your experience on our website.By continuing to use
our website, you are agreeing to our use of cookies. You can change your cookie
settings at any time. Find out more Skip to Main Content
Advertisement
Journals
Books
* Search Menu
*
*
* Menu
*
*
Navbar Search Filter Journal of Financial RegulationThis issue Financial
LawFinancial RegulationBooksJournalsOxford Academic Mobile Microsite Search Term
Search
* Sign In
*
* Issues
* Advance articles
* Submit
* Author Guidelines
* Submission Site
* Open Access
* Purchase
* Alerts
* About
* About Journal of Financial Regulation
* Editorial Board
* Advertising and Corporate Services
* Journals Career Network
* Self-Archiving Policy
* Journals on Oxford Academic
* Books on Oxford Academic
* Issues
* Advance articles
* Submit
* Author Guidelines
* Submission Site
* Open Access
* Purchase
* Alerts
* About
* About Journal of Financial Regulation
* Editorial Board
* Advertising and Corporate Services
* Journals Career Network
* Self-Archiving Policy
Close
Navbar Search Filter Journal of Financial RegulationThis issue Financial
LawFinancial RegulationBooksJournalsOxford Academic Microsite Search Term Search
Advanced Search
Search Menu
Article Navigation
Close mobile search navigation
Article Navigation
Volume 8
Issue 2
September 2022
ARTICLE CONTENTS
* Abstract
* I. A NEW CHALLENGE FOR FINANCIAL REGULATORS
* II. THROUGH A GLASS, DARKLY: MEASURING AND MANAGING CLIMATE-RELATED RISK TO
THE FINANCIAL SYSTEM
* 1. Assessing climate-related risks to the financial system
* 2. Incorporating climate-related risks in macro- and microprudential policy
* 3. Closing information gaps, improving disclosure, promoting standards
* III. BRAVE NEW WORLD: SHOULD FINANCIAL POLICY AND REGULATION PROMOTE
LOW-CARBON TRANSITION?
* IV. TO BOLDLY GO? RISKS AND UNINTENDED CONSEQUENCES
* V. CONCLUDING OBSERVATIONS
* Footnotes
* Author notes
* < Previous
* Next >
Article Navigation
Article Navigation
Journal Article
WALKING A TIGHTROPE: FINANCIAL REGULATION, CLIMATE CHANGE, AND THE TRANSITION TO
A LOW-CARBON ECONOMY
Dimitri Demekas,
Dimitri Demekas
Search for other works by this author on:
Oxford Academic
Google Scholar
Pierpaolo Grippa
Pierpaolo Grippa
Search for other works by this author on:
Oxford Academic
Google Scholar
Dimitri Demekas, Visiting Senior Fellow, School of Public Policy, London School
of Economics and Political Science, Houghton Street, London WC2A 2AE, UK, and
Special Adviser, Bank of England, Threadneedle Street, London EC2R 8AH , UK.
Tel: +1 202 250 9511. Email: d.demekas@lse.ac.uk.
Pierpaolo Grippa, Senior Economist, Monetary and Capital Markets Department,
International Monetary Fund (IMF), 700 19th Street NW, Washington, DC 20431,
USA. Tel: +1 202 378 7586. Email: pgrippa@imf.org. The views expressed in this
article are those of the authors and do not necessarily represent the views of
the Bank of England or of the IMF, its Executive Board, or IMF management.
Author Notes
Journal of Financial Regulation, Volume 8, Issue 2, September 2022, Pages
203–229, https://doi.org/10.1093/jfr/fjac010
Published:
24 August 2022
Article history
Received:
01 January 2022
Revision received:
11 April 2022
Accepted:
08 July 2022
Published:
24 August 2022
* PDF
* Split View
* Views
* Article contents
* Figures & tables
* Cite
CITE
Dimitri Demekas, Pierpaolo Grippa, Walking a Tightrope: Financial Regulation,
Climate Change, and the Transition to a Low-Carbon Economy, Journal of
Financial Regulation, Volume 8, Issue 2, September 2022, Pages 203–229,
https://doi.org/10.1093/jfr/fjac010
Select Format Select format .ris (Mendeley, Papers, Zotero) .enw (EndNote)
.bibtex (BibTex) .txt (Medlars, RefWorks) Download citation
Close
* Permissions Icon Permissions
* Share
* Email
* Twitter
* Facebook
* More
Navbar Search Filter Journal of Financial RegulationThis issue Financial
LawFinancial RegulationBooksJournalsOxford Academic Mobile Microsite Search Term
Search
* Sign In
*
Close
Navbar Search Filter Journal of Financial RegulationThis issue Financial
LawFinancial RegulationBooksJournalsOxford Academic Microsite Search Term Search
Advanced Search
Search Menu
ABSTRACT
As with the global financial crisis, there are once again demands on central
banks and financial regulators to take on new responsibilities, this time for
supporting the transition to a low-carbon economy. Regulators can indeed
facilitate the reorientation of financial flows necessary for the transition.
But they may find themselves walking a tightrope, having to balance exaggerated
expectations against limited capabilities and political economy constraints.
Their diagnostic and policy toolkits are still in their infancy. Expanding their
legal mandates to take on these new, essentially political, responsibilities
should be done through the political process and be accompanied by strengthened
governance and accountability arrangements. Taking on these new responsibilities
can also have potential pitfalls and unintended consequences on financial
markets. Ultimately, central banks and financial regulators cannot deliver a
low-carbon economy by themselves and should not risk being caught again in the
role of ‘the only game in town’.
I. A NEW CHALLENGE FOR FINANCIAL REGULATORS
There is increasing public awareness of the challenge posed by anthropogenic
climate change and a strong political commitment to address it. At the 2015
Paris Agreement, now signed by 196 countries, world leaders agreed the aim of
holding the increase in global average temperature to below 2°C above
pre-industrial levels and pursuing efforts to limit it to 1.5°C. However, a
recent report by the Intergovernmental Panel on Climate Change (IPCC) warned
that, without more ambitious policies beyond those in place by the end of 2020,
median global warming is expected to reach 3.2°C above pre-industrial era by the
end of the 21st century.1 The commitments for reduction of greenhouse gas (GHG)
emissions made by the countries participating in the 26th United Nations Climate
Change Conference of the Parties (COP26), held in Glasgow in November 2021, are
consistent with a median 2.4°C temperature rise above pre-industrial levels by
2100.2
From an economic perspective, climate change is a negative externality of the
production and consumption of carbon-intensive goods, while climate mitigation
is a public good. The market would therefore not reflect the social price of
carbon while, at the same time, the private return of investments in
decarbonization would be lower than their social return, resulting in suboptimal
provision of climate mitigation actions. An extensive literature has explored
the factors behind the market and government failures that prevent an optimal
response to the climate challenge. These include the lack of historical
precedent, extreme uncertainty, non-linearities, and tipping points of climate
pathways;3 the conceptual difficulties associated with fat-tailed distributions
and catastrophic outcomes;4 the endogeneity of technical change;5 time
inconsistency or the ‘tragedy of the horizon’;6 and collective action and free
rider problems.7
The theoretical ‘first-best’ policy to address these failures and stimulate the
massive economic transformation needed to tackle the climate challenge is to get
carbon prices right through carbon taxes (or emissions trading systems with
equivalent effect) and to encourage R&D and investment in climate mitigation
through subsidies.8 These fiscal policies are indispensable for any effective
climate mitigation strategy. But the magnitude and complexity of the challenge,
as well as political economy considerations, argue in favour of a broader policy
effort, and there are calls for central banks and financial regulators to ‘play
their part’.
This article reviews the potential role of financial regulation and policies in
the transition to a low-carbon economy. It focuses on both microprudential
regulation and supervision and macroprudential policies aimed at safeguarding
the stability and orderly functioning of the financial system as a whole. In
order to keep the discussion relevant for a range of different jurisdictions,
the article takes a broad view of financial regulation, encompassing all rules
and policies applying to the financial sector regardless of who is the
rule-maker (legislature, supervisor, or other regulatory agency). Specifically:
* The article reviews ongoing efforts to assess climate-related risks to the
financial system and incorporate relevant considerations into financial
regulation. Despite the progress, it argues that data gaps are still
significant, and the diagnostic and policy toolkits are not yet sufficiently
developed to allow clear visibility of the risks and precise targeting of
policies. For policymakers, measuring and taking steps to mitigate
climate-related risks is—still—like trying to see through a glass, darkly.
* Proposals to assign central banks and financial regulatory agencies explicit
environmental goals in order to promote decarbonization in the financial
system and the economy as a whole would stretch to the limit their current
mandates and legal frameworks. While these can of course be expanded, the
article argues that ‘green’-promoting regulatory action would raise major
governance and operational challenges for regulators while, on the basis of
the available evidence, it is unlikely to have a significant real-world
impact.
* Finally, regardless of whether the legal frameworks for financial policies
change or stay the same, the article argues that entering this new territory
creates risks and may have unintended consequences. These are rarely
discussed, perhaps for fear of being perceived as insufficiently concerned
about climate change. But understanding these risks is crucial if financial
policies are to be effective in supporting the transition to a low-carbon
economy.
II. THROUGH A GLASS, DARKLY: MEASURING AND MANAGING CLIMATE-RELATED RISK TO THE
FINANCIAL SYSTEM
Pressure to adapt financial policies and regulatory frameworks to incorporate
climate-based considerations has come from multiple directions—first and
foremost from the financial industry itself. By the turn of the millennium, it
was clear, especially among insurers, that the rising frequency and severity of
extreme weather events, combined with societal changes (population growth,
demographic shifts, geographic concentration of wealth), was already affecting
their risk profile.9 This was underpinned by the first IPCC report that focused
on the economic and financial impact of climate change.10
Pressure also came from shareholders and the market. During the last two decades
or so, there has been a gradual increase in investor and shareholder interest in
environmental, social, and governance (ESG) issues. After the global financial
crisis, this shift in investor focus accelerated at an unprecedented pace.11 Its
influence is increasingly felt in boardrooms, investment committees, and
shareholder meetings. No less important was a shift in tactics: while the
majority of proposals by ESG advocates until the early 2000s sought that
companies should adopt social or environmental goals or to take specific action
with respect to a business activity, the tone began to change in the middle of
the decade, with an increasing number of proposals seeking disclosure, risk
assessment, and oversight of particular issues.12 This changed the conversation
from an argument about ethics to an economic discussion about how environmental
and social risks can impact the long-term value of a company, an investment
project, or a portfolio.
These shifts in investor focus and tactics have had two notable effects:
* They have increased awareness and discussion of climate-related risks for
financial and non-financial companies.
* They have spurred the rapid growth of ESG-labelled funds and ‘green’ bonds
issued to raise finance for ‘green’ assets and climate mitigation projects
and, relatedly, a proliferation of ESG or ‘green’ scores and standards.13
This, in turn, laid bare the scarcity of relevant data and the difficulties
of measurement, and fuelled concerns about mis-labelling and ‘greenwashing’
and calls for better governance of these standards.
Last but not least, political leaders demanded action. Following the Paris
Agreement, which explicitly called for making finance flows consistent with a
pathway towards low greenhouse gas (GHG) emissions and climate-resilient
development, the G20 Finance Ministers and Central Bank Governors tasked the
Financial Stability Board (FSB) in 2015 to ‘convene public- and private-sector
participants to review how the financial sector can take account of
climate-related issues’.14 The Climate Pact agreed by COP26 in Glasgow in
November 2021 reconfirmed and expanded this expectation on the financial sector
by calling upon ‘multilateral development banks, other financial institutions
and the private sector to enhance finance mobilization in order to deliver the
scale of resources needed to achieve climate plans’.15
Regulators reacted with a lag to market developments and shifting political
priorities, but since the middle of the 2010s, a work programme has gradually
emerged in three areas. First, there are efforts to measure the magnitude and
identify the transmission channels of climate-related risks for the financial
system. Second, this has led to the question of what the appropriate response
should be, both for macroprudential policy that aims to ensure the stability of
the system as a whole and for microprudential supervision that focuses on the
safety and soundness of individual financial institutions. Third, there is a
drive to close data and knowledge gaps, improve the dissemination of relevant
information, and promote common standards for climate disclosures across
institutions, markets, and jurisdictions. These three areas are discussed in
turn below.
1. ASSESSING CLIMATE-RELATED RISKS TO THE FINANCIAL SYSTEM
The interactions between climate and economic systems have been studied for
decades but the focus on the impact of climate-related factors on the financial
system is more recent. Integrated Assessment Models (IAMs), such as William
Nordhaus’s DICE model,16 had been widely used to analyse the potential economic
costs of climate change, as well as the costs and benefits of climate mitigation
actions. But it was not until the previously mentioned pioneering study by the
Finance Initiative of the UN Environment Programme17 that research started
focusing specifically on the impact on financial systems—initially on insurance,
but also on other sectors.
By the middle of the 2010s, a small number of central banks and regulatory
agencies, mainly in Europe, had started studying climate-related risks. In a
landmark speech in 2015, Mark Carney, then Governor of the Bank of England,
outlined the conceptual framework that is still used to classify the impact of
climate-related factors on financial systems.18 This impact can manifest itself
through two different channels: (i) the physical repercussions of climate change
on the economy and financial system, for example from rising sea levels,
changing agricultural production patterns, or the increasing severity and
frequency of extreme weather events—usually referred to as physical risk;19 and
(ii) the economic effects of policies to mitigate climate change, notably
increases in carbon pricing, on asset prices and financial markets—referred to
as transition risk (Figure 1). Carney’s speech was followed by similar
interventions by other central bankers.20 The Bank of England’s Prudential
Regulation Authority (PRA) was the first regulator to publish a detailed
analysis of climate-related risks for the insurance sector and attempt to
incorporate these into stress tests for insurers.21 Similar early initiatives
were undertaken by the Swedish, Dutch, and French regulators and, outside
Europe, by the Brazilian insurance supervisor and the California Department of
Insurance (in the USA, insurance supervision is the responsibility of individual
states).22
Figure 1
Open in new tabDownload slide
Climate-Related Risks and Transmission Channels
Source: Patrick Bolton and others, ‘“Green Swans”: Central Banks in the Age of
Climate-Related Risks’ [2020] Banque de France Bulletin 229/8 (2020) 1
<https://particuliers.banque-france.fr/sites/default/files/medias/documents/820154_bdf229-8_green_swans_vfinale.pdf>.
These initiatives were bolstered by the creation of the Network for Greening the
Financial System (NGFS). The NGFS was established in December 2017 by eight
central banks and financial regulatory agencies as a ‘coalition of the willing’,
whose purpose is to ‘contribute to the development of climate- and
environment-related risk management in the financial sector and mobilize
mainstream finance to support the transition toward a sustainable economy’. The
NGFS, which by now has 100 members and 16 observer organizations, has so far
given priority to the first of these two goals, issuing six recommendations for
central banks and financial supervisors.23 Most of these recommendations focus
on improving data collection and internationally consistent disclosure of
climate- and environment-related risks, and on integrating these risks into
financial stability monitoring and microprudential supervision. In its Glasgow
Declaration on the occasion of COP26, NGFS reconfirmed this priority.24
Climate-related risks for the financial sector are unique and systemic and their
modelling poses fundamental challenges. Their long time horizon; radical
(Knightian) uncertainty about the possible climate pathways and their
probability distribution; and their unprecedented and potentially catastrophic
consequences mean that well-established risk management tools in the financial
industry, such as Value-at-Risk models and stress tests, cannot readily be used
to measure these risks: exploratory scenario-based impact assessments must be
used instead (Figure 2). Although these are methodologically different,25 they
are often also referred to as ‘stress tests’—and in the rest of this article,
these two terms are used interchangeably. In addition, if climate-related risks
materialize, they would affect the economy and the financial system as a whole
and may be amplified by pro-cyclical behaviour of market participants;
self-reinforcing reductions in bank lending and insurance provision; the
bank-sovereign nexus; feedback loops with the real economy; and network and
cross-border effects.26 This means that climate-related risks are best assessed
using system-wide (macroprudential) approaches. Finally, the data required to
perform climate-based stress tests are not always available or sufficiently
granular.27
Figure 2
Open in new tabDownload slide
Analytical Elements of Scenario-Based Impact Assessments
Source: UNEPFI, Changing Course (UNEPFI 2019)
<https://www.unepfi.org/publications/investment-publications/changing-course-a-comprehensive-investor-guide-to-scenario-based-methods-for-climate-risk-assessment-in-response-to-the-tcfd>
A number of central banks and regulatory agencies have endeavoured to develop
novel system-wide scenario-based approaches to capture climate-related risks.
* The Dutch central bank was the first to conduct a scenario-based assessment
focusing on transition risk for Dutch banks, insurers, and pension funds.28
* The Bank of England was the first to announce in 2019 a comprehensive
approach to incorporate both physical and transition risks into its regular
biennial exploratory stress test scenario (BES) in 2021, covering the largest
UK-based banks and insurers.29 The results were published in May 2022.30
* The Banque de France and the French Prudential Supervision and Resolution
Authority (ACPR) launched in 2020 a pilot exercise for banks and insurance
companies that volunteered to participate and published the results in April
2021.31
* The European Systemic Risk Board (ESRB) published estimates of the potential
impact of transition risks for EU banks and insurers under different climate
mitigation policy scenarios,32 followed by a joint report with the European
Central Bank (ECB) that measured climate risks for the European financial
system and performed long-term forward-looking climate risk assessments for
banks, insurers, and investment funds.33
* The ECB conducted in 2021 a top-down eurozone economy-wide climate stress
test that assessed the resilience of banks and non-financial corporates to
physical and transition risks over a 30-year time horizon34 and, more
recently, a bottom-up supervisory stress test focusing on climate-related
risks.35
* The European Banking Authority (EBA) published in 2021 the results of a pilot
exercise that collected granular data from 29 volunteer banks from 10 EU
countries on exposures to large corporates and sought to identify their
sensitivity to climate-related shocks.36
* A number of other central banks and supervisory agencies have announced plans
to incorporate climate-related risks into their financial stability
assessment, including the Bank of Japan, the Australian Prudential Regulatory
Authority (APRA), and the Monetary Authority of Singapore,37 while the US
Federal Reserve has indicated that it is ‘evaluating and investing’ in ways
to incorporate climate risk in its assessment of financial institutions.38
The NGFS has prepared guidelines for climate-related scenarios to help
central banks and supervisors.39
* Finally, though not a regulatory agency, the International Monetary Fund
(IMF) has started including climate-related risks in its Financial Sector
Assessment Programs.40
The experience thus far has highlighted the limitations of these analytical
approaches as guides for policy.
* The scenarios need to incorporate drastic simplifying assumptions in order to
overcome the challenges in modelling climate-related risk, notably the data
gaps, inherent complexity, and long time horizon (which, as in the Bank of
England’s BES and the ECB’s top-down stress test, stretches into decades).
This increases model risk: seemingly minor technical decisions about
functional forms and parameter values can dominate the results. In situations
like this, ‘economists should be less confident…and adopt a more modest tone
that befits less robust policy advice’.41
* The time horizon raises issues of prioritization since, over the long term,
climate is just one of many uncertainties facing the economy and the
financial system, from geopolitical upheavals to technological disruption to
pandemics. Additional arguments are therefore needed to justify policymakers’
and supervisors’ focus on this particular one.42
* Current scenario-based analyses tend to treat the mitigation pathways as
exogenous (typically derived by IAMs that do not model the financial sector),
thus missing the feedback loop between the financial system and those
pathways.43
* In the exercises that have been completed so far, the estimates of the impact
of climate scenarios in terms of losses, regulatory capital, solvency ratios,
etc span a very wide range from negligible to severe. One such exercise
concluded, for example, that ‘between 3.8 percent to 29.9 percent of the
available Common Equity Tier 1 (CET1) capital of the banking system is wiped
out in first-round losses following the implementation of a sizeable carbon
tax of €100, depending on the geographical scope of application and
abruptness of the policy’.44 The 2021 ECB exercise concluded that even in the
most severe (‘hot house’) climate scenario, the increase in probabilities of
default (PDs) for banks’ portfolios would range from 5 to 30 per cent over
the 30-year test horizon.45 Such a wide range of results does not provide a
firm basis for policy action today.
* Even if financial institutions’ potential long-term losses from
climate-related risk were conclusively shown to be high, this would not
necessarily imply risks to financial stability nor, by itself, suffice as an
argument for pre-emptive supervisory action today, since the mission of
supervisors is not to prevent losses for the financial institutions they
supervise.46
These limitations mean that regulators can analyse this important class of risks
only ‘through a glass, darkly’, and help explain why they have so far proceeded
cautiously in incorporating climate-related risks into the supervisory process,
as discussed in the next section.
Nevertheless, there is a more modest but still important role that these risk
assessment exercises can play. This is succinctly summarized in the Bank of
England’s description of the goal of the BES: this exercise will ‘focus on
sizing risks, rather than testing firms’ capital adequacy or setting capital
requirements [and] will allow the Bank to examine how major financial firms
expect to adjust their business models, and what the collective impact of these
responses on the wider economy might be’.47 By translating, however imperfectly,
the long-term and highly uncertain climate-related risks into quantitative
losses and by illustrating the channels of transmission and contagion, these
exercises raise awareness of these risks in the industry; provide incentives for
improving risk management in individual financial firms; and help supervisors
strengthen their own supervisory frameworks.
2. INCORPORATING CLIMATE-RELATED RISKS IN MACRO- AND MICROPRUDENTIAL POLICY
Researchers have outlined a number of ways in which macroprudential policy and
microprudential supervision tools, notably the capital framework, could in
theory be used to mitigate climate-related risks in the financial system. The
cross-sectional dimension of macroprudential policy could incorporate
climate-related risks though exposure or concentration limits to ‘brown’ sectors
of the economy and/or sovereigns with elevated environmental risk, as well as by
considering climate-based factors in the designation of systemically important
financial institutions (SIFIs).48 Incorporating climate-related risks into the
time (counter-cyclical) dimension of macroprudential policy is conceptually more
difficult. But at least one researcher has put forward the notion of a (single,
very long-term) ‘carbon cycle’, with the global economy permanently stuck in its
upswing, characterized by excessive credit growth to GHG-intensive sectors, as a
justification for imposing climate-related systemic risk buffers.49 As regards
microprudential supervision, there have been many proposals for ‘greening’ all
three Pillars of the Basel III capital framework.50Figure 3 provides a
high-level summary of these proposals.
Figure 3
Open in new tabDownload slide
Proposed Adaptations of Basel III to Incorporate Climate-Related Risk
Source: Cambridge Institute for Leadership Development and UNEPFI, ‘Stability
and Sustainability in Banking Reform: Are Environmental Risks Missing in Basel
III?’ (2014) 21
<www.unepfi.org/fileadmin/documents/StabilitySustainability.pdf>.
The idea of incorporating environmental impacts into the calculation of
risk-weighted assets (RWA) has gained some popularity. This could be done by
adjusting risk weights through a Green Supporting Factor (GSF) and a Brown
Penalizing Factor (BPF). The latter would require banks to hold more capital for
loans to ‘brown’ sectors, thus discouraging them from lending to those sectors,
while the former would lower capital requirements in order to encourage lending
to ‘green’ sectors. EU policymakers, in particular, have seriously considered
this step, as the capital framework for EU banks already includes similar ‘SME
supporting’ and ‘infrastructure supporting’ factors.51
However, there is no consensus on how—or indeed whether—to introduce these
factors in RWA in practice.
* Some have argued that the GSF and BPF are complementary and should be used in
tandem, perhaps combined into a Green Weighting Factor (GWF).52 Others have
pointed out that since there is no robust empirical evidence that ‘green’
assets are less risky and can justify lower risk weights,53 the GSF would
result in an unwarranted weakening of banks’ total capital base (and could
also fuel a ‘green’ bubble). Instead, the BPF should be used alone, since
‘the [climate] transition risks will at some point materialise’.54 In either
case, regulators would need non-distortionary criteria to distinguish ‘green’
from ‘brown’ assets—but this turns out to be an extraordinarily difficult
task, as the experience of trying to develop ‘green taxonomies’ demonstrates
(more on this below).
* Still others, at a more fundamental level, have argued that risk weights
should reflect evidence-based and quantifiable economic risks and have
questioned the wisdom of using the regulatory capital framework, which is
supposed to protect financial stability, to finance the transition to
low-carbon economy.55
* In this context, it is worth recalling that it took regulators decades to
agree on a shared standard of risk-based prudential requirements, and ad hoc
departures from this standard—such as the EU’s ‘SME supporting factor’—are
already contentious.56 While some elements of the prudential framework could
be adjusted to differentiate between ‘green’ and ‘brown’ exposures when this
is supported by concrete, risk-based considerations—such as, for example,
exposures secured by assets in high carbon-intensive sectors at risk of
becoming ‘stranded’ in the face of a sharp increase in carbon prices—the
international regulatory community may be reluctant to countenance
introducing generic, non risk-based factors for differentiating risk
weights.57 Further divergence of individual jurisdictions from the global
standard, on the other hand, risks increasing fragmentation and
disincentivizing supervisory cooperation.
Against this background, regulators are proceeding cautiously. Surveys by the
FSB and the Basel Committee of central banks and financial supervisory
authorities in two (largely overlapping) groups of 26 and 27 jurisdictions,
respectively, have shown that the integration of climate-related risks into the
supervisory process is at an early stage compared to other types of financial
risk.58 While no respondents to these surveys reported specific barriers from a
legal or enforcement perspective that prevent them from considering
climate-related risks, most identified major operational and practical
challenges. The three most often-quoted challenges were data availability; the
lack of a robust methodological framework for assessing and measuring
climate-related financial risks, reflecting the discussion in the previous
section; and difficulties in mapping the transmission channels for
climate-related risks (Figure 4).
Figure 4
Open in new tabDownload slide
Key Challenges in Incorporating Climate-Related Risks in the Supervisory Process
(responses by jurisdictions)
Source: Basel Committee on Banking Supervision, Climate-related Financial Risks:
A Survey on Current Initiatives (Bank for International Settlements 2020) 4
<https://www.bis.org/bcbs/publ/d502.pdf>.
Nevertheless, most financial supervisors have acted to build awareness of
climate issues among the firms they supervise through publicly signalling their
concern, undertaking surveys, organizing conferences, or convening industry
fora. One such example is the Climate Financial Risk Forum, formed in 2019 in
the UK, co-chaired by the PRA and the Financial Conduct Authority (FCA).
A number of supervisors have taken a step further and have issued—or indicated
that they are preparing—supervisory guidance on how financial institutions
should monitor and manage climate-related risks. Supervisory guidance is not
always legally binding but is often principle-based guidelines or
interpretations of existing rules. The type of guidance that has been issued—or
is in process of being developed—usually takes one or more of the following
forms: (i) outlining supervisory plans on deliverables and activities related to
climate-related risks; (ii) encouraging financial institutions to strengthen
risk management and the disclosure of climate-related exposures; and (iii)
providing guidance on how to properly integrate climate-related financial risks
within risk management.59 Some regulators have also introduced standards for the
incorporation of ESG risks in banks’ financial disclosures under the third
Pillar of the Basel framework.60
Such efforts are relatively more advanced in the insurance industry, where the
liability risk of climate change-related weather events (physical risk) is most
pressing. A comprehensive Issues Paper published by the International
Association of Insurance Supervisors (IAIS) discussed climate-related risks for
the sector, identified gaps in current supervisory practice, and put forward
‘preliminary insights from practice and initial conclusions relating to the
supervision of climate change risks to the insurance sector’.61 National
insurance supervisors have started taking this agenda forward. The Bank of
England’s PRA, for example, expects insurers to include in their Own Risk and
Solvency Assessment (ORSA) ‘all material exposures relating to financial risks
from climate change, and an assessment of how firms have determined the material
exposure(s) in the context of their business’.62 The European Commission
launched a ‘sustainable finance package’ that includes regulatory measures on
sustainability risks and factors to be considered by insurance and reinsurance
companies and other non-bank financial institutions; as well as a ‘comprehensive
review package’ of Solvency II rules that would introduce sustainability risks
into insurance prudential regulation. The latter is currently under
consideration by EU legislators.63
Work is also ongoing in banking, where a number of supervisors, notably the ECB
and the Bank of England, have set out supervisory expectations for banks to
understand and analyse climate-related risks; incorporate these risks into their
risk appetite framework and overall business strategy; report data that reflect
their exposures to environmental and climate-related risks; and take these risks
into account in all relevant stages of the credit-granting process, as well as
in their operational risk management framework.64 The EBA has also published an
Action Plan outlining its ‘high-level policy direction and expectations’, in
which ‘institutions are encouraged to consider taking steps (strategy and risk
management, disclosure, and scenario analysis) before the EU legal framework is
formally updated and the EBA regulatory mandates delivered’.65 This is a clear
case of banks being guided to take steps voluntarily in anticipation of future
regulatory action.
Regulatory and supervisory action in this area requires striking a fine balance
between opposite risks: at one end of the spectrum (‘deferential transition’),
supervisors could simply push banks to develop better internal capacities to
manage climate-related risk, while limiting their own role to enforcement of the
rules—at the risk, though, of limited effectiveness; at the other end (‘guided
transition’), regulatory authorities could actively specify what types of
investments are compatible with the climate mitigation objectives—but at the
risk of getting drawn into a more political role, as discussed in more detail
below, without the necessary democratic legitimization to do so.66
Efforts in securities supervision are relatively less advanced at this stage. In
a report covering 145 European issuers, the European Securities and Markets
Authority (ESMA) concluded that only a few sectors and companies incorporate
climate-related elements in their corporate reporting and proposed that the
European Commission support the creation of a single set of international
standards for ESG disclosures.67 Along similar lines, the US Commodity Futures
Trading Commission (CFTC), noting that material climate risks must be disclosed
under existing US law, called for financial regulators to clarify the definition
of materiality for disclosing medium- and long-term climate risks; support the
availability of consistent, comparable, and reliable data to advance the
effective measurement and management of climate risk; and, on this basis,
require banks and non-bank financial firms to address climate-related financial
risks through the existing risk management frameworks.68
From a more general perspective, incorporating climate-related risks into micro-
and macroprudential policy also requires a shift in the supervisory approach.
Short-termism does not only afflict financial institutions’ boardrooms.
Financial policymakers and regulators also face the challenge of reconciling the
long-term effects of climate change with the short-to-medium-term horizon that
their risk assessment and supervisory actions have so far focused on. This
challenge is not only analytical and practical but also a matter of mindset.
3. CLOSING INFORMATION GAPS, IMPROVING DISCLOSURE, PROMOTING STANDARDS
The preceding discussion has made clear that the lack of relevant and
sufficiently granular data is a major impediment to both measuring
climate-related risks and taking policy action. Recognizing this, international
organizations and regulatory networks have launched a number of initiatives
aimed at closing data gaps and improving disclosure.
* The FSB launched the private sector-led Task Force on Climate-related
Financial Disclosures (TCFD) to develop ‘voluntary, consistent
climate-related financial disclosures that would be useful to investors,
lenders, and insurance underwriters in understanding material risks’. Its
report includes four recommendations on the collection, analysis, reporting,
and governance of climate-related data and risk metrics.69
* The International Association of Securities Commissions (IOSCO) established a
Sustainable Finance Network (SFN) and announced its intention to work toward
‘robust sustainability reporting standards, interconnected with financial
reporting standards’ that would ‘lay the foundations for mandatory corporate
reporting on sustainability internationally’.70
* Five global organizations—CDP (formerly the Carbon Disclosure Project), the
Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative
(GRI), the International Integrated Reporting Council (IIRC), and the
Sustainability Accounting Standards Board (SASB)—published in 2020 a vision
document for a comprehensive corporate reporting system that would include
both financial accounting and sustainability disclosures and complement
generally accepted financial accounting principles (GAAP), as well as a
prototype of a climate-related financial disclosure standard.71
* The NGFS issued a ‘Progress Report on Bridging Data Gaps’ that proposes a
strategy centred on three building blocks: (i) rapid convergence towards a
common and consistent set of global disclosure standards; (ii) efforts
towards a minimally accepted global taxonomy; and (iii) development and
transparent use of well-defined and decision-useful metrics, certification
labels and methodological standards.72
* The European Commission published in 2017 non-binding guidelines for
climate-related reporting supplementing its Non-Financial Reporting Directive
(NFRD) (Directive 2014/95/EU) that applies to large companies (over 500
employees) domiciled in the EU. After a public consultation, a proposal for
revisions to NFRD is under consideration by EU legislature. The proposed
revisions would extend the scope of reporting to all large companies and all
companies listed on regulated markets and they would embed in regulation the
criterion of double materiality, ie the notion that corporate disclosures
should provide information necessary for understanding not only the impact of
environmental and climate issues on their own finances and risk profile but
also the impact of their activities on the environment and society.73
In view of these overlapping global initiatives, the International Financial
Reporting Standards (IFRS) Foundation announced at COP26 the formation of an
International Sustainability Standards Board (ISSB).74 The ISSB is meant to
build on the work of existing investor-focused reporting initiatives—including
the CDSB, the TCFD, the Value Reporting Foundation’s Integrated Reporting
Framework and SASB Standards, and the World Economic Forum’s Stakeholder
Capitalism Metrics—to become the global standard-setter for sustainability
disclosures for financial markets. In March 2022, the ISSB launched a public
consultation on a set of proposed standards (on general sustainability-related
disclosure requirements and climate-related disclosure requirements), following
which it will finalize and endorse them.75 As the G20 have welcomed this
initiative, the ISSB looks likely to yield eventually a broadly accepted
disclosure standard.
In parallel, the explosion in investor and shareholder interest in ESG issues
and the growth in ‘green’ bonds have spurred the development of a bewildering
array of standards and taxonomies for ‘green’ or ‘sustainable’ financial
products in the private sector. Most of them have been developed by industry
associations, environmental advocates, or ‘ESG ratings’ advisers and are
voluntary. IOSCO has identified more than 45 such initiatives (Table 1).
Table 1
ESG-Related Initiatives for Companies, Investors, Issuers, and Asset Managers.
Categories . No of initiatives . Disclosure and reporting principles and
frameworks used by companies and issuers 12 Principles and frameworks applicable
to asset managers 4 Green bond principles and taxonomies 7 Coalitions and
alliances related to ESG 17 Other initiatives 8
Categories . No of initiatives . Disclosure and reporting principles and
frameworks used by companies and issuers 12 Principles and frameworks applicable
to asset managers 4 Green bond principles and taxonomies 7 Coalitions and
alliances related to ESG 17 Other initiatives 8
Source: IOSCO, Sustainable Finance and the Role of Securities Regulators and
IOSCO—Final Report IOSCO Report FR/04/2020 (2020) 9
<https://www.iosco.org/library/pubdocs/pdf/IOSCOPD652.pdf>.
Open in new tab
Table 1
ESG-Related Initiatives for Companies, Investors, Issuers, and Asset Managers.
Categories . No of initiatives . Disclosure and reporting principles and
frameworks used by companies and issuers 12 Principles and frameworks applicable
to asset managers 4 Green bond principles and taxonomies 7 Coalitions and
alliances related to ESG 17 Other initiatives 8
Categories . No of initiatives . Disclosure and reporting principles and
frameworks used by companies and issuers 12 Principles and frameworks applicable
to asset managers 4 Green bond principles and taxonomies 7 Coalitions and
alliances related to ESG 17 Other initiatives 8
Source: IOSCO, Sustainable Finance and the Role of Securities Regulators and
IOSCO—Final Report IOSCO Report FR/04/2020 (2020) 9
<https://www.iosco.org/library/pubdocs/pdf/IOSCOPD652.pdf>.
Open in new tab
Most of these initiatives have major shortcomings in the areas of transparency,
coherence, governance, and accountability. Many financial products are labelled
by their issuers or managers as ‘ESG’, ‘green’, or ‘sustainable’ without a clear
link to how the product is contributing to environmental objectives. Most of
these classification schemes make no provision for an independent external
evaluation of compliance or for a process for certifying that self-reporting has
been prepared in accordance with any particular standards. As a result,
different providers often come up with different ratings for the same
companies.76 The lack of consistency and rigor in defining and applying ‘green’
criteria risks undermining the credibility of these classifications.77 Emerging
evidence of extensive ‘greenwashing’78 and the probes launched in the summer of
2021 by US and German regulators into Germany’s DWS for mis-labelling ‘green’
financial products underscore these concerns.79
Securities regulators may not have the authority to step into this breach. All
34 national securities regulators responding to a recent IOSCO survey shared the
goal of supporting sustainable investment by facilitating greater transparency
and disclosure. However, only 13 indicated that they have the legal mandate to
promote or incentivize ‘green’ or sustainable investment through statutory
measures.80
As a result, only a handful of regulators have so far introduced statutory
frameworks for classifying and mandating sustainable or ‘green’ investment and
related disclosures.
* The EU introduced in 2020 a Framework to Facilitate Sustainable
Investment—the so-called ‘Taxonomy Regulation’ (Regulation (EU) 2020/852).
This Regulation, which followed and amended the Sustainability-Related
Disclosures Regulation (Regulation (EU) 2019/2088), establishes an EU-wide
classification system intended to provide businesses and investors with a
common language to identify what economic activities can be considered
environmentally sustainable. While the bulk of the Regulation applies to
asset managers making available financial products that are marketed as
‘environmentally sustainable’ or promote other environmental characteristics,
the Regulation also states that financial market participants who do not
consider criteria for environmentally sustainable investments should provide
a statement to this end. This effectively means that all asset
managers—including non-EU asset managers offering financial products in the
EU—are in scope.
* The Chinese authorities issued in 2019 a ‘Guiding Catalogue for the Green
Industry’ to help promote sustainable development through clarifying the
definition of ‘green industry’ and harmonizing standards for sustainability.
In addition, in June 2020, the People’s Bank of China (PBoC), the China
Securities and Regulatory Commission (CSRC), and the National Development and
Reform Commission (NDRC) released a draft ‘Green Bond Endorsed Project
Catalogue’ to update PBoC’s 2015 green bond guidelines and harmonize them
with the ‘Guiding Catalogue’.
The Climate Bonds Initiative and the International Platform on Sustainable
Finance (IPSF)—founded in 2019 by the EU, China, and other six countries and now
counting 18 members—have published comparisons of the EU and Chinese
standards.81 Canada, South Africa, and Malaysia are reportedly considering
similar initiatives.82
Notwithstanding the broad agreement on the need for shared and meaningful
taxonomies that facilitate transparency and consistent disclosure, mandatory
taxonomies have serious pitfalls.83
* First, they are backward-looking: they reward currently established ‘green’
assets and activities and penalize ‘brown’ ones. As such, they may not
provide adequate incentives for investment and technological innovation in
‘brown’ activities today that could help make these more environmentally
sustainable in the future. For example, climate investment funds—which
represent a subset of the ‘sustainable funds’ category—tend to hold
portfolios with slightly higher carbon intensity levels than conventional
funds, as these are the ones with the highest decarbonization potential if
supported by credible decarbonization plans.84 This type of funds would be
penalized under a green taxonomy.
* Second, they tend to be binary (green/brown), thus failing to adequately
reflect the more nuanced reality of the transition to a low-carbon economy.
This has been brought into full evidence by the intense controversy that
surrounded the decision by the European Parliament to include nuclear energy
and gas in the EU Taxonomy. Nuclear energy is a low-carbon technology and its
revamping is considered by some to be a crucial ingredient of any realistic
decarbonization strategy,85 while others see it as fundamentally incompatible
with the principle of ‘do no significant harm’ (to environmental objectives
other than climate change mitigation) that lies at the foundation of the
taxonomy.86 Natural gas is seen by some as a ‘bridge fuel’ between coal
(which is almost twice as carbon-intensive) and renewables,87 but by others
as a way to perpetuate the economy’s carbon addiction.88 A binary framework,
such as the EU Taxonomy, fails to reconcile these opposite views, while
amplifying the influence of mutually incompatible ideological stances in what
should be an essentially pragmatic decision.
* Third, they tend to be static, which could make them obsolete as technology
advances. Instead, the distinction should ideally be dynamic, by establishing
a target path over time that an activity must follow to satisfy the
taxonomy’s criteria, for example, a declining GHG emissions pathway for power
generation—the approach taken by the EU.89 However, translating reliably and
transparently these dynamic pathways for specific activities to targets for
individual corporations, which often operate many different activities, is a
major conceptual and practical challenge.
* Fourth, these taxonomies can be applied to publicly traded equities and funds
but not to direct investments into privately held assets through venture
capital and private equity. These continue to invest in oil, gas, and coal.90
As a result, despite the regulators’ best intentions, mandatory disclosure
requirements and, more broadly, regulatory actions to promote ‘green’
investments may simply push heavy GHG emitters to shift their financing
sources to private equity, diminishing their effectiveness.
* Finally, like old-fashioned industrial policies, which they resemble,
mandatory taxonomies could be swayed by industry lobbying or be used to
promote political agendas.91
Nonetheless, in the absence of ‘first-best’ policies for climate change
mitigation (notably carbon taxes), it has been argued that a disclosure-based
regulatory strategy could make a positive contribution.92
III. BRAVE NEW WORLD: SHOULD FINANCIAL POLICY AND REGULATION PROMOTE LOW-CARBON
TRANSITION?
All the initiatives discussed thus far share an underlying preoccupation: they
seek to safeguard the established goals of financial policy and regulation in
the face of a new reality: climate change and the concomitant imperative to
transition towards a low-carbon economy. For the last five years or so,
policymakers and regulators have been trying to ‘see through a glass, darkly’
and identify what changes they need to make in their data requirements,
analytical models, policy toolkit, and global standards in order to continue
doing their job in this new environment: ensuring financial stability, the
safety and soundness of financial institutions, market integrity, investor
protection, or whatever other goals they are mandated to pursue.
Recently, a growing chorus of voices has been questioning this focus. Critics
have pointed out that in the face of climate change, which arguably represents
an urgent threat to humanity, continuing to focus on financial stability is akin
to re-arranging tables on the deck of the Titanic while doing little to ‘make
finance flows consistent with a pathway towards low GHG emissions and
climate-resilient development’ as laid out in the Paris Agreement.
According to this view, central bankers and financial regulators have a duty to
play a more active, ‘promotional’ role in the transition to a low-carbon
economy. The actions discussed in the previous section—measuring and raising
awareness of climate-related risk, enhancing transparency and disclosure of
relevant information to the market, and using prudential regulations to improve
the pricing of risk in credit decisions—are helpful but insufficient. In
addition to those, central banks and regulators should (i) lead by example,
taking steps to make their own operations ‘greener’; and (ii) use all tools at
their disposal to influence private investment and credit allocation decisions
so as to promote decarbonization in the economy. This would involve, inter alia,
directing credit to ‘green’ investments through differentiated capital
requirements or rediscount facilities; setting ceilings to (or banning outright)
lending to ‘brown’ activities; and requiring all supervised entities to submit
decarbonization plans and holding them accountable for their implementation.93
The first proposal—leading by example—is uncontroversial and a number of central
banks have embraced it: the Banca d’Italia has been publishing since 2010 annual
‘Environment Reports’ monitoring its ecological footprint through a series of
environmental indicators, such as energy and resource consumption, waste
production, etc;94 the Banque de France published a ‘Responsible Investment
Charter’ in 2018, followed by annual ‘Responsible Investment Reports’;95 the
Sveriges Riksbank published a sustainability strategy;96 the Bank of England
started publishing a climate-related financial disclosure report in line with
the recommendations of the TCFD;97 and the Dutch central bank started including
this information in its Annual Report.98
In contrast, the proposal to use regulatory tools actively to promote
decarbonization in the economy is more controversial. It may be inconsistent
with the current legal mandates of central banks and financial regulators, and
it raises issues of policy coherence, effectiveness, and coordination. However:
* Advocates of a ‘promotional’ role for central banks and financial regulators
have argued that in many cases, it is indeed consistent with their existing
mandates. While only a few have an explicit mandate to promote sustainable
growth, many are tasked to support their governments’ policy objectives,
often as a subordinate goal conditioned on not interfering with their primary
goals.99 Since many governments have adopted climate mitigation targets,
advocates argue that central banks and regulatory authorities in many
jurisdictions do not need additional or modified mandates to play a
‘promotional’ role in the transition to a low-carbon economy.
* Moreover, in cases where a ‘promotional’ role is not permitted by the
existing mandates, these can be updated. Historically, central bank and
regulatory agency mandates have evolved considerably, and often in response
to crises: for example, the global financial crisis prompted an expansion of
these mandates to cover systemic stability. Whether this took the form of a
revised legal framework or a re-interpretation of the existing one is
immaterial. Likewise, the argument goes, in the face of a climate emergency,
mandates of central banks and financial regulators should be expanded to
enable them—indeed compel them—to contribute to the transition to a
low-carbon economy.100
In practice, however, using regulatory tools to promote climate transition would
complicate the conduct of policy while, based on the available evidence, it is
unlikely to be effective. At a minimum, it would need to address the ‘Tinbergen’
constraint of correspondence between objectives and tools: if the same tools are
used to pursue different objectives, policy inconsistencies will inevitably
arise (for example, if a ‘Green Supporting Factor’ were used to adjust RWAs).101
A ‘promotional’ objective for the prudential regulator would dictate that RWAs
for ‘green’ activities be adjusted downwards; but if a certain activity presents
a certain level of risk from the Basel III perspective, its climate-adjusted RWA
should not be lower than the unadjusted one. In situations like this, regulators
would be forced to make uneasy choices between their standard and ‘promotional’
roles. In addition, regulatory measures are unlikely to achieve the massive
shift in credit and investment flows required for decarbonization. The evidence
shows that the EU’s ‘SME supporting factor’, which was supposed to promote SME
lending in a similar fashion, has had no material influence on lending prices or
volumes to SMEs.102 This is corroborated by recent model estimates that show
that even a massive ‘Green Supporting Factor’ (effectively halving the capital
requirement for ‘green’ projects) would have a negligible impact on overall
credit growth and a very low impact on financing for the targeted transition
projects.103 In addition, a sudden and sizeable differentiation of capital
requirements between ‘green’ and ‘brown’ projects could increase financial
stability risks.104 Lastly, it has been shown that the anticipation by the
market of such ‘promotional’ interventions by regulators may create risky
imbalances in the balance sheets of financial intermediaries.105
In conclusion, the merits of the proposal to task financial regulation with
promoting the transition to a low-carbon economy are doubtful. Advocates of a
‘promotional’ role for central banks and financial regulators sometimes like to
present their case as a struggle against old-fashioned ‘traditionalists’, in
which ‘the only barrier is orthodox thinking’.106 But this oversimplification
overlooks a much more complex reality. The fundamental problem is not legal:
agency legal mandates are often flexible enough and, if necessary, can indeed be
re-interpreted or updated. This, of course, is not something that central
bankers and regulators can (or should) do by themselves: it has to be done
through the political process and be accompanied by appropriate political
oversight and accountability arrangements for the central banks and other
agencies that would be given these expanded responsibilities. The fundamental
problem, rather, is that in practice, ‘green’-promoting regulatory action would
raise major governance and operational challenges for regulators while it is
unlikely to have a real-world impact.
Not surprisingly, central banks and financial regulators seem so far reluctant
to adopt a more active ‘promotional’ role. They continue to approach the
consequences of climate change primarily through the lens of risk management for
the financial sector.107 As the Bank of England has concluded, regulatory
tools—the capital framework, in particular—should be used to address the
consequences of climate change for the financial sector in terms of increased
risk, not its causes.108
IV. TO BOLDLY GO? RISKS AND UNINTENDED CONSEQUENCES
In adapting their policies to the new challenges created by the effects of
climate change and the transition to a low-carbon economy, central banks and
financial regulators need to weigh carefully the potential pitfalls. These fall
broadly into two groups: (i) unintended consequences their policies may have on
markets and the financial system; and (ii) risks that these policies may fail to
achieve their stated objectives owing to poor design or lack of coordination
with other policymakers. In both cases, there could be negative repercussions on
the central bankers’ and regulators’ reputation for competence and independence
and, ultimately, on their credibility. And if this were to happen, it would
undermine their ability to achieve not just their climate-related but all their
policy goals.
* One potential unintended consequence of regulatory action to favour ‘green’
or penalize ‘brown’ assets or activities is inadvertently exacerbating
financial market volatility. This potential exists regardless of whether the
intention of the regulator is to mitigate climate-related risks for the
financial sector or to promote decarbonization in the economy. Although
market volatility per se is not a concern for financial policy and
regulation, it can trigger financial instability and have broader
repercussions.
* There is already some evidence of a certain price exuberance in the ‘green’
energy sector, although this may to some extent reflect normal market
dynamics.109 The MSCI Global Alternative Energy Index has reached a market
cap of about 15 per cent of the global energy sector, up from 6.4 per cent in
2010. Alternative energy equity exchange-traded funds (ETFs) have shown a
similar growth.110 These dynamics are, at least to some extent, an inherent
aspect of market adjustment to new information. As awareness of
climate-related risks grows but—due to data gaps, cognitive lags, or other
reasons—these risks are only slowly being priced in, stocks of ‘green’
companies (or companies with higher ESG scores) should initially have a
return advantage over ‘brown’ stocks (with lower ESG scores). As ESG
investing becomes more widely adopted and these risks are gradually priced
in, ‘brown’ stocks would decline relative to ‘green’ until they have a higher
expected return that compensates for their higher environmental risk. During
an initial period, ‘green’ stocks would outperform ‘brown’ stocks creating a
‘green’ bubble, but once a new equilibrium has been reached where ESG risks
are fully integrated into the analysis of most investors, ‘brown’ stocks
should have higher returns. The evidence suggests that the market is
currently in this initial period.111
* Since many of the ‘green’ companies in sectors such as renewables or energy
storage tend to be more capital- and technology-intensive, their stock prices
are more sensitive to increases in interest rates. For a gas-fired power
plant, for example, a large part of the total operating cost over its
lifetime is the cost of fuel, but for a solar or wind power plant almost all
costs are fixed and borne upfront, at the time of construction and
installation. Such ‘long duration’ stocks, whose valuations are based on high
expected earnings in the future (like those of technology companies) are, at
least in theory, more sensitive to changes in the cost of finance. Therefore,
a transition to a higher interest rate environment could aggravate volatility
in the prices of these stocks, at least temporarily.
* Moreover, a new commodity cycle appears to be forming, with potentially
broader economic ramifications. At present, the technological transformation
required for the transition to a low-carbon economy depends on the supply of
a small group of minerals, such as graphite, lithium, and nickel, used in
energy storage; palladium for hydrogen fuel cells; and molybdenum for wind
turbines. Because clean energy technologies are much more material-intensive
than fossil fuel-based electricity generation, the World Bank has estimated
that in a scenario that would keep the global temperature rise below 2°C from
pre-industrial levels, as called for by the Paris Agreement, demand for 17
specific minerals would quadruple by 2050.112 And these estimates do not
include the demand from the additional infrastructure needed to support the
deployment of these technologies, such as new transmission lines or the
chassis of newly built electric vehicles. Prices of these minerals have
already started reflecting these trends, which some see as the start of a new
commodity super-cycle.113 Last but not least, although most of these minerals
are abundant in nature, supply chain dependencies can choke their provision.
The batteries used in electric vehicles, for example, require a number of
critical minerals for which substitutes are limited or non-existent and
supplies are geographically concentrated.114 Volatility in such a context
could have ramifications that extend well beyond the financial system.
* Finally, looking beyond financial markets, as the spike in energy prices in
the second half of 2021 demonstrates, the road towards a low-carbon economy
is going to be bumpy. The scale of the economic transformation required to
achieve the Paris Agreement goals is unprecedented. Given the delicate
balance that has to be maintained throughout the long process of replacing
fossil fuel resources with sustainable ones, volatility in energy markets is
likely to remain high.
In such a complex environment, central banks and financial regulators have to
tread a fine line. While they should not necessarily aim at dampening volatility
in financial, commodity, or energy markets or preventing overstretched
valuations in the ‘green’ sector, measures that unintentionally amplify this
volatility (for example, if central banks’ asset purchases are tilted toward
‘green’ securities while their supply is still limited) can be destabilizing and
ultimately counterproductive: excessive volatility of ‘green’ asset prices could
temporarily dampen investment flows into the sector and delay urgently needed
progress toward decarbonization. Moreover, as the discussion of commodity and
energy markets highlights, such measures could have repercussions that extend
well beyond the financial system.
Another set of challenges that central banks and financial regulators face in
this new environment relates to their own governance. Prior to the global
financial crisis, central banks were by and large focused on price stability: as
one of the leading central bankers of the day put it, their ‘ambition was to be
boring’.115 The crisis and the Great Recession that followed prompted an
overhaul of central banking and regulatory frameworks. In almost all cases,
central banks were given substantial additional responsibilities, notably for
financial stability. Because these did not fit well within the governance model
that had been established for monetary policy, they created frictions—and, in
some cases, a political backlash against central bank power—and prompted a
search for new governance and accountability arrangements.116 The new
expectations that are now being placed on central banks and regulators as a
result of climate-based considerations, especially if they include playing an
active role in decarbonization, fit even less well within existing governance
arrangements. Like financial stability,117 climate mitigation is not a task that
can—or should—be delegated to technocratic agencies, like a central bank or a
regulator, as it does not meet the conditions for such delegation.118 A
collective effort of such magnitude and far-reaching economic and distributional
repercussions should be mediated by the political process.
Central banks and regulators taking on—or being tasked with—supporting the
transition to a low-carbon economy may face renewed criticism for ‘mission
creep’ and unchecked power. For some academic advocates of a ‘promotional’ role
in climate mitigation, such ‘mission creep’ cannot happen fast enough.119 But
for real-life central bankers and regulators, it is a major risk: it would
divert attention and resources from the pursuit of their core mandates; it would
raise difficult technical trade offs in the targeting of their tools, as
illustrated in the previous section; and it would create a pressing need for
greater accountability for achieving the new objectives, as well as the spectre
of greater political and public scrutiny of their activities.120
Failures of broader policy coordination also create risks for the financial
system that could reflect back on central bankers and financial regulators.
Financial policy and regulation cannot deliver the transition to a low-carbon
economy by itself: broader policy efforts and investments are needed to meet
climate and environmental objectives, and most of these are in the hands of
governments—notably carbon pricing and other policies that are necessary to
deliver the governments’ own Paris Agreement commitments.121 If central banks
and regulators move ahead on their own but, despite their stated intentions,
governments fail to follow, these efforts will not only prove fruitless but
could have negative repercussions. Financial firms could end up incurring losses
if they move—in anticipation of or prompted by regulators—towards ‘green’
finance but governments fail to follow through with changes in carbon pricing.
Such an outcome would prevent the change in relative prices needed to sustain
the transition122 and would deprive the market of the ‘critical signal for
re-directing private investment and innovation to clean technologies, and to
incentivize energy efficiency’.123 Asset managers and pension funds could be
seen as compromising their fiduciary responsibilities as these are currently
defined—a risk that is acknowledged even by advocates of a more active role for
financial policy and regulation.124 And the inevitable backlash would be
directed toward central banks and financial regulators.125
V. CONCLUDING OBSERVATIONS
The reality of climate change and the increasing political support for moving
towards a low-carbon economy mean that financial policy and regulation have to
grapple with new challenges. The required large-scale, long-term economic
transformation generates new risks—as well as opportunities—for financial firms
and for the stability and orderly functioning of the financial system. Central
bankers and financial regulators need to understand the implications for the
firms they supervise, as well as assess and, if possible, take action to
mitigate these new risks. Given the current state of development of their
diagnostic and policy tools, however, none of these tasks is easy. In addition,
at least in some jurisdictions, they are increasingly pushed to play a more
active role promoting the transition to a low-carbon economy. And because
central bankers and regulators are not immune to the political environment in
which they operate, some of them may be willing to take on these additional
responsibilities.
Engaging central banks and regulatory agencies to achieve specific climate
transition goals may not be consistent with their current legal mandates,
governance arrangements, or with the risk-focused approach they have been taking
so far. To be sure, these mandates can be re-interpreted or expanded, if
necessary. But this has to happen through the political process, not by the
central bankers themselves, in order to avoid criticism of ‘mission creep’.
Governance arrangements would have to be amended and political oversight and
accountability of central banks and regulators strengthened considerably if they
are given a new goal that is essentially political and has far-reaching social,
distributional, and inter-generational implications. Moreover, the evidence
suggests that their tools are unlikely to be effective in bringing about the
massive reorientation in financial flows required for the transition. Last but
not least, pursuing this new goal alongside their existing goals will create
difficult operational trade offs and risk compromising their ability to achieve
any of their goals.
As with any other policy, there is also the risk of unintended consequences for
the financial system and the broader economy. Instead of safeguarding market
integrity and stability, central banks and financial regulators may find
themselves inadvertently fuelling market volatility, overstretched asset
valuations, or even a commodity super-cycle—which appears to be already
underway. To be sure, an economic transformation of such a magnitude can be
expected to generate large-scale re-pricing of financial assets, and market
volatility per se should not be a concern for policy. But excessive volatility
or, at the limit, the bursting of a ‘green’ bubble could be destabilizing. And
given the complexities of the economics of climate transition, this could have
repercussions well beyond the financial system.
These challenges are neither unprecedented nor insuperable, but they are
significant. The scope of financial policy and regulation has always been
adapting to new exigencies, most recently after the global financial crisis. In
the process, mandates had to be re-defined, accountability strengthened,
institutions reformed, technical problems tackled, and risks taken. The same has
to happen today in order to enable financial policy and regulation to play its
role in the transition to a low-carbon economy. At the same time, these
challenges are real and cannot be wished away. Recognizing and debating them
should not be seen as an excuse for inaction but as a necessary step to
developing appropriate solutions.
Central banks and financial regulators find themselves having to walk a
tightrope. As in the aftermath of the global financial crisis, they face
political pressure to step into the breach and take on the new challenge of the
times. While they certainly have a key supporting role to play in the transition
to a low-carbon economy, they cannot deliver this goal by themselves. They
should not overestimate their abilities or their toolkit, overstep their
mandate, or disregard the possible unintended consequences of their actions.
More importantly, they should always act in concert with government climate
policies, especially on carbon pricing. Their reputation and, ultimately, their
effectiveness in achieving not just their climate-related but all their goals
could be compromised if they find themselves (again) in the role of ‘the only
game in town’.
FOOTNOTES
1
Intergovernmental Panel on Climate Change (IPCC), ‘Climate Change 2022:
Mitigation of Climate Change—Summary for Policymakers’ (WMO–UNEP)
<https://www.ipcc.ch/report/ar6/wg3>.
2
Climate Action Tracker, ‘The CAT Thermometer’ (2021)
<https://climateactiontracker.org/global/cat-thermometer>.
3
Nicholas Stern, ‘The Economics of Climate Change’ (2008) 98(2) American Economic
Review.
4
Partha Dasgupta, ‘Discounting Climate Change’ (2008) 37 Journal of Risk and
Uncertainty; Martin Weitzman, ‘Fat-Tailed Uncertainty in the Economics of
Catastrophic Climate Change’ (2014) 5(2) Review of Environmental Economics and
Policy.
5
Daron Acemoglu and others, ‘The Environment and Directed Technical Change’
(2012) 102(1) American Economic Review.
6
Mark Carney, ‘Breaking the Tragedy of the Horizon—Climate Change and Financial
Stability’ (Speech by the Governor of the Bank of England at Lloyd’s of London,
29 September 2015)
<https://www.bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability>.
7
For a review of the literature, see Signe Krogstrup and William Oman,
‘Macroeconomic and Financial Policies for Climate Change Mitigation: A Review of
the Literature’ IMF Working Paper WP/19/185
<https://www.imf.org/-/media/Files/Publications/WP/2019/wpiea2019185-print-pdf.ashx>.
8
Nicholas Stern and others, The Economics of Climate Change: The Stern Review
(Cambridge University Press 2006); Ian Parry and others, Getting Energy Prices
Right: From Principle to Practice (International Monetary Fund 2014);
International Monetary Fund, ‘Fiscal Monitor: How to Mitigate Climate Change’
(October 2019).
9
United Nations Environment Programme Finance Initiatives (UNEPFI), ‘Climate
Change and the Financial Services Industry’ (2002)
<http://www.unepfi.org/fileadmin/documents/cc_fin_serv_ind_module1_2002.pdf>;
Andrew F Dlugolecki and Thomas Loster, ‘Climate Change and the Financial
Services Sector: An Appreciation of the UNEPFI Study’ (2003) 28(3) The Geneva
Papers on Risk and Insurance; Association of British Insurers, ‘A Changing
Climate for Insurance’ (June 2004)
<https://engweb.swan.ac.uk/~hewstonr/A%20Changing%20Climate%20for%20Insurance%20-%20ABI.pdf>;
Allianz Group and World Wildlife Fund, ‘Climate Change and Insurance: An Agenda
for Action in the United States’ (October 2006)
<http://www.climateneeds.umd.edu/pdf/AllianzWWFreport.pdf>; 360 Risk Project,
Lloyd’s of London, ‘Climate Change: Adapt or Bust’ (2006)
<https://biotech.law.lsu.edu/climate/docs/FINAL360climatechangereport.pdf>.
10
Intergovernmental Panel on Climate Change (IPCC), Climate Change 2001: Impacts,
Adaptation, and Vulnerability—Contribution of Working Group II to the Third
Assessment Report of the IPCC (Cambridge University Press 2001)
<https://www.ipcc.ch/report/ar3/wg2>. See also the work of David R Easterling
and others, ‘Climate Extremes: Observations, Modelling and Impacts’ (2000)
289(5487) Science, and Richard SJ Tol, ‘Estimates of the Damage Costs of Climate
Change, Part II: Dynamic Estimates’ (2002) 21(2) Environmental and Resource
Economics.
11
Allison H Lee, ‘A Climate for Change: Meeting Investor Demand for Climate and
ESG Information at the SEC’ (Speech by the Acting SEC Chair Allison Herren Lee,
15 March 2021) <https://www.sec.gov/news/speech/lee-climate-change#_ftn1>.
12
Kosmas Papadopoulos, ‘The Long View: US Proxy Voting Trends on E&S Issues from
2000 to 2018’ (Harvard Law School Forum on Corporate Governance 2019)
<https://corpgov.law.harvard.edu/2019/01/31/the-long-view-us-proxy-voting-trends-on-es-issues-from-2000-to-2018>.
13
In 2020, ‘green’ bond issuance reached a record of US$270 billion, continuing on
a rising trend for nine consecutive years (Climate Bonds Initiative (24 January
2021)
<https://www.climatebonds.net/2021/01/record-2695bn-green-issuance-2020-late-surge-sees-pandemic-year-pip-2019-total-3bn>).
‘Sustainable investments’, a broader category that includes all investments that
integrate ESG factors in asset selection and management, is estimated to have
reached US$35.3 trillion in five major markets, more than one-third of global
assets under management (Global Sustainable Investment Alliance (GSIA), ‘Global
Sustainable Investment Report 2020’ (2021)
<http://www.gsi-alliance.org/wp-content/uploads/2021/08/GSIR-20201.pdf>.
14
‘G20 Finance Ministers and Central Bank Governors’ Communiqué’ (17 April 2015)
<http://www.g20.utoronto.ca/2015/150417-finance.html>.
15
United Nations Framework Convention on Climate Change (UNFCCC), ‘Glasgow Climate
Pact’ (2021)
<https://unfccc.int/sites/default/files/resource/cma2021_L16_adv.pdf>.
16
William D Nordhaus, ‘The DICE Model: Background and Structure of a Dynamic
Integrated Climate-Economy Model of the Economics of Global Warming’ Cowles
Foundation Discussion Paper No 1009 (Yale University 1992)
<https://ideas.repec.org/p/cwl/cwldpp/1009.html#download>; and Managing the
Global Commons: The Economics of Climate Change (MIT University Press 1994).
17
UNEPFI (n 9).
18
Carney (n 6).
19
Liability or litigation risk is sometimes identified as a separate
climate-related risk. Since in most cases this arises as a result of climate
change, it is included in physical risk for the purposes of this article.
20
François Villeroy de Galhau, ‘Climate Change—The Financial Sector and Pathways
to 2°C’ (Speech by the Governor of the Bank of France at the COP21, Paris, 30
November 2015) <https://www.bis.org/review/r151229f.pdf>; Luigi F Signorini,
‘The Financial System, Environment and Climate: A Regulator’s Perspective’
(Welcome Address by the Deputy Governor of the Bank of Italy, Conference on the
National Dialogue on Sustainable Finance, 6 February 2017)
<https://www.bancaditalia.it/pubblicazioni/interventi-direttorio/int-dir-2017/en_Signorini_06.02.2017.pdf?language_id=1>;
Timothy Lane, ‘Thermometer Rising—Climate Change and Canada’s Economic Future’
(Remarks by the Deputy Governor of the Bank of Canada at the Finance and
Sustainability Initiative, Montréal, 2 March 2017)
<https://www.bis.org/review/r170405b.pdf>.
21
Prudential Regulation Authority (PRA), ‘The Impact of Climate Change on the UK
Insurance Sector’ (September 2015)
<https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/publication/impact-of-climate-change-on-the-uk-insurance-sector.pdf>;
and ‘General Insurance Stress Test 2017 Feedback, Letter to CEOs of
Participating Firms’ (December 2017)
<https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2017/general-insurance-stress-test-2017-feedback.pdf?la=en&hash=EA1B998F8E753DA71232A490FEEB27E7101C18C3>.
22
See the summary in International Association of Insurance Supervisors (IAIS),
‘Issues Paper on Climate Change Risks in the Insurance Sector’ (July 2018)
<https://www.iaisweb.org/uploads/2022/01/180727-SIF-IAIS-Issues-Paper-on-Climate-Changes-Risk.pdf>.
23
Network for Greening the Financial System (NGFS), ‘First Progress Report’
(October 2018) <https://www.ngfs.net/en/first-progress-report>; and ‘First
Comprehensive Report: A Call for Action—Climate Change as a Source of Financial
Risk’ (April 2019)
<https://www.ngfs.net/sites/default/files/medias/documents/ngfs_first_comprehensive_report_-_17042019_0.pdf>.
24
NGFS, ‘Glasgow Declaration: Committed to Action’ (3 November 2021)
<https://www.ngfs.net/sites/default/files/medias/documents/ngfsglasgowdeclaration.pdf>.
25
The methodological differences between ‘traditional’ stress tests and
scenario-based assessments in relation to climate-related risks have been
analysed extensively in the literature. For an in-depth discussion, see Jakob
Thomä and Hugues Chenet, ‘Transition Risks and Market Failure: A Theoretical
Discourse on Why Financial Models and Economic Agents May Misprice Risk Related
to the Transition to a Low-Carbon Economy’ (2016) 7(1) Journal of Sustainable
Finance and Investment; and Hugues Chenet, Josh Ryan-Collins and Frank van
Lerven, ‘Climate-related Financial Policy in a World of Radical Uncertainty:
Towards a Precautionary Approach’ UCL Institute for Innovation and Public
Purpose Working Paper IIPP WP 2019-13
<https://www.ucl.ac.uk/bartlett/public-purpose/wp2019-13>.
26
Basel Committee on Banking Supervision (BCBS), ‘Climate-related Risk Drivers and
Their Transmission Channels’ (April 2021)
<https://www.bis.org/bcbs/publ/d517.pdf>; Financial Stability Board (FSB), ‘The
Implications of Climate Change for Financial Stability’ (November 2020)
<https://www.fsb.org/wp-content/uploads/P231120.pdf>.
27
For a discussion of the various methodological and other challenges facing
climate-related scenario-based assessments, see BCBS, ‘Climate-related Financial
Risks—Measurement Methodologies’ (April 2021)
<https://www.bis.org/bcbs/publ/d518.pdf>; Francisco Covas, ‘Challenges in Stress
Testing and Climate Change’ (Bank Policy Institute, October 2020)
<https://bpi.com/challenges-in-stress-testing-and-climate-change>; Seraina N
Gruenewald, ‘Climate Change as a Systemic Risk: Are Macroprudential Authorities
Up to the Task?’ European Banking Institute, EBI Working Paper No 62 (2020)
<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3580222>; Vivian Dépoues
and others, ‘Pour une Autre Approche du Risque Climatique en Finance. Tenir
Pleinement Compte des Incertitudes’ International Atomic Energy Agency
INIS-FR-20-0310 (2019)
<https://inis.iaea.org/search/search.aspx?orig_q=reportnumber:%22INIS-FR--20-0310%22>;
and Emanuele Campiglio and others, ‘Climate Change Challenges for Central Banks
and Financial Regulators’ (2018) 8 Nature Climate Change
<https://doi.org/10.1038/s41558-018-0175-0>.
28
Robert Vermeulen and others, ‘An Energy Transition Risk Stress Test for the
Financial System of the Netherlands’ De Nederlandsche Bank, Occasional Studies
16-7 (2018)
<https://www.dnb.nl/media/pdnpdalc/201810_nr-_7_-2018-_an_energy_transition_risk_stress_test_for_the_financial_system_of_the_netherlands.pdf>.
29
Bank of England, ‘The 2021 Biennial Exploratory Scenario on the Financial Risks
from Climate Change’ Discussion Paper (2019)
<https://www.bankofengland.co.uk/paper/2019/biennial-exploratory-scenario-climate-change-discussion-paper>.
30
Bank of England, ‘Results of the 2021 Climate Biennial Exploratory Scenario
(CBES)’ (May 2022)
<https://www.bankofengland.co.uk/stress-testing/2022/results-of-the-2021-climate-biennial-exploratory-scenario>.
31
Autorité de Contrôle Prudentiel et de Resolution (ACPR), ‘The Main Results of
the 2020 Climate Pilot Exercise’ Analyses et Synthèses No 122-2021
<https://acpr.banque-france.fr/en/analysis-and-synthesis-no-122-main-results-2020-climate-pilot-exercise>.
32
European Systemic Risk Board (ESRB), ‘Positively Green: Measuring Climate Change
Risks to Financial Stability’ (June 2020)
<https://www.esrb.europa.eu//pub/pdf/reports/esrb.report200608_on_Positively_green_-_Measuring_climate_change_risks_to_financial_stability~d903a83690.en.pdf>.
33
European Central Bank (ECB) and ESRB, ‘Climate-related Risk and Financial
Stability’ (July 2021)
<https://www.ecb.europa.eu/pub/pdf/other/ecb.climateriskfinancialstability202107~87822fae81.en.pdf>.
34
Spyros Alogoskoufis and others, ‘ECB Economy-wide Stress Test’ European Central
Bank, Occasional Paper No 281 (September 2021)
<https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op281~05a7735b1c.en.pdf>.
35
ECB, ‘2022 Climate Risk Stress Test’ (July 2022)
<https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.climate_stress_test_report.20220708~2e3cc0999f.en.pdf?d27896f699f13878870f2d26775db6ec>.
36
European Banking Authority (EBA), ‘Mapping Climate Risk: Main Findings From the
EU-wide Pilot Exercise’ EBA Report 2021/11
<https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/2021/1001
589/Mapping%20Climate%20Risk%20-%20Main%20findings%20from%20the%20EU-wide%20pilot%20exercise%20on%20climate%20risk.pdf>.
37
For a detailed list of concluded, ongoing, and planned scenario-based exercises
by a group of NGFS members, see NGFS, ‘Scenarios in Action. A progress report on
global supervisory and central bank climate scenario exercises’ (October 2021)
<https://www.ngfs.net/sites/default/files/medias/documents/scenarios-in-action-a-progress-report-on-global-supervisory-and-central-bank-climate-scenario-exercises.pdf>.
38
Board of Governors of the Federal Reserve System, Financial Stability Report
(Board of Governors of the Federal Reserve System 2020)
<https://www.federalreserve.gov/publications/files/financial-stability-report-20201109.pdf>.
39
NGFS, ‘NGFS Climate Scenarios for Central Banks and Supervisors’ (2020)
<https://www.ngfs.net/en/publications/ngfs-climate-scenarios>.
40
International Monetary Fund (IMF), Philippines—Financial System Stability
Assessment (International Monetary Fund 2021)
<https://www.imf.org/en/Publications/CR/Issues/2021/04/08/Philippines-Financial-System-Stability-Assessment-Press-Release-and-Statement-by-the-50347>;
Pierpaolo Grippa and Samuel Mann, ‘Climate-Related Stress Testing: Transition
Risks in Norway’ IMF Working Paper 20/232
<https://www.imf.org/-/media/Files/Publications/WP/2020/English/wpiea2020232-print-pdf.ashx>;
and IMF, United Kingdom—Financial Sector Assessment Program—Systemic Stress, and
Climate-Related Financial Risks: Implications for Balance Sheet Resilience
(International Monetary Fund 2022)
<https://www.imf.org/en/Publications/CR/Issues/2022/04/07/United-Kingdom-Financial-Sector-Assessment-Program-Systemic-Stress-and-Climate-Related-516264>.
41
Weitzman (n 4).
42
Kevin Stiroh, ‘Climate Change and Risk Management in Bank Supervision’ (Remarks
at the conference on Risks, Opportunities, and Investment in the Era of Climate
Change, Harvard Business School, 4 March 2020)
<https://www.bis.org/review/r200309b.pdf>.
43
Stefano Battiston and others, ‘Accounting for Finance Is Key for Climate
Mitigation Pathways’ (2021) 372(6545) Science.
44
Henk Jan Reinders, Dirk Schoenmaker and Mathis Van Dijk, ‘A Finance Approach to
Climate Stress Testing’ (Centre for Economic Policy Research 2020)
<https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14609>.
45
Alogoskoufis and others (n 34).
46
John Cochrane, ‘Testimony to the US Senate Committee on Banking, Housing, and
Urban Affairs on Financial Regulation and Climate Change’ (2021)
<https://johnhcochrane.blogspot.com/2021/03/testimony-on-financial-regulation-and.html>.
47
Bank of England (n 29).
48
Gruenewald (n 27); Dirk Schoenmaker and Rens van Tilburg, ‘What Role for
Financial Supervisors in Addressing Environmental Risks?’ (2016) 58 Comparative
Economic Studies; ESRB, Too Late, Too Sudden: Transition to a Low-carbon Economy
and Systemic Risk Report of the Advisory Scientific Committee No 6 (European
Systemic Risk Board 2016)
<https://www.esrb.europa.eu//pub/pdf/reports/esrb.report200608_on_Positively_green_-_Measuring_climate_change_risks_to_financial_stability~d903a83690.en.pdf>.
49
Gruenewald (n 27).
50
See, eg, Patrick Bolton and others, ‘The Green Swan: Central Banking in the Age
of Climate Change’ (Bank for International Settlements 2020)
<https://www.bis.org/publ/othp31.htm>; Maria Berenguer, Michel Cardona and Julie
Evain, ‘Integrating Climate-Related Risks into Banks’ Capital Requirements’
(Institute for Climate Economics 2020)
<https://wwfint.awsassets.panda.org/downloads/integratingclimate_etudeva.pdf>;
and Maria J Nieto, ‘Banks, Climate Risk and Financial Stability’ (2019) 27(2)
Journal of Financial Regulation and Compliance.
51
Valdis Dombrovskis, ‘Greening Finance for Sustainable Business’ (Speech by the
Vice President of the European Commission, 12 December 2017)
<https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_17_5235>; EU High
Level Expert Group, ‘Financing a Sustainable European Economy’ Final Report 2018
by the EU High Level Expert Group on Sustainable Finance
<https://ec.europa.eu/info/sites/info/files/180131-sustainable-finance-final-report_en.pdf>.
It should be noted that in the EU context, introducing a GSF/BPF—as with the
‘SME supporting’ factor—would be a matter for the European Parliament and EU
Council.
52
Berenguer and others (n 50).
53
See Stefano Giglio, Bryan T Kelly and Johannes Stroebel, ‘Climate Finance’
National Bureau of Economic Research (NBER) Working Paper 28226 (2020)
<http://www.nber.org/papers/w28226> and Campiglio and others (n 27). Overall,
there is limited evidence that broader market prices incorporate risk premia
commensurate with the scale and nature of climate-related risks across different
sectors (see IMF, ‘Physical Risk and Equity Prices’, Global Financial Stability
Report April 2020 ((International Monetary Fund 2020)
<https://www.imf.org/-/media/Files/Publications/GFSR/2020/April/English/ch5.ashx>.
In addition, risk reductions that may appear linked to the ‘green’ nature of an
exposure could be the result of other factors, such as government subsidies or
tax advantages.
54
François Villeroy de Galhau, ‘Green Finance—A New Frontier for the 21st Century’
(Speech by the Governor of the Bank of France at the International Climate Risk
Conference for Supervisors, Amsterdam, 6 April 2018)
<https://www.bis.org/review/r180419b.htm> (emphasis added); see also Arnoud Boot
and Dirk Schoenmaker, ‘Climate Change Adds to Risk for Banks, but EU Lending
Proposals Will Do More Harm than Good’ Bruegel (2018)
<https://www.bruegel.org/2018/01/climate-change-adds-to-risk-for-banks-but-eu-lending-proposals-will-do-more-harm-than-good>;
Greg Ford, ‘A Green Supporting Factor Would Weaken Banks and Do Little for the
Environment’ Finance Watch (2108)
<https://www.finance-watch.org/a-green-supporting-factor-would-weaken-banks-and-do-little-for-the-environment>.
55
Institute of International Finance, ‘Prudential Pathways: Industry Perspectives
on Supervisory and Regulatory Approaches to Climate-related and Environmental
Risks’ (January 2021)
<https://www.iif.com/Portals/0/Files/content/Regulatory/01_21_2021_prudential_pathways.pdf>;
Manesh Samtani, ‘Climate Risk and Regulation: A Race to the Top’ (Interview with
Bill Coen, Chair of the IFRS Advisory Council and former BCBS Secretary General,
Regulation Asia, 2021)
<https://www.regulationasia.com/climate-risk-regulation-a-race-to-the-top>; Otso
Manninen and Nea Tiililä, ‘Could the Green Supporting Factor Help Mitigate
Climate Change?’ Bank of Finland Bulletin (13 July 2020)
<https://www.bofbulletin.fi/en/2020/articles/could-the-green-supporting-factor-help-mitigate-climate-change>.
56
BCBS, Regulatory Consistency Assessment Programme (RCAP)—Assessment of Basel III
regulations—European Union (Bank for International Settlements 2014)
<https://www.bis.org/bcbs/publ/d300.htm>.
57
Kern Alexander and Paul Fisher, ‘Banking Regulation and Sustainability’(2018)
<https://ssrn.com/abstract=3299351>; NGFS, ‘Guide for Supervisors: Integrating
Climate-related and Environmental Risks into Prudential Supervision’ NGFS
Technical Document (May 2020) 57, Box 26
<https://www.ngfs.net/sites/default/files/medias/documents/ngfs_guide_for_supervisors.pdf>.
58
Financial Stability Board (FSB), ‘Stocktake of Financial Authorities’ Experience
in Including Physical and Transition Climate Risks as Part of Their Financial
Stability Monitoring’ (July 2020)
<https://www.fsb.org/wp-content/uploads/P220720.pdf>; BCBS, Climate-related
Financial Risks: A Survey on Current Initiatives (Bank for International
Settlements 2020) <https://www.bis.org/bcbs/publ/d502.pdf>.
59
BCBS (n 58); see also the case studies in NGFS, ‘Guide for Supervisors:
Integrating Climate-related and Environmental Risks into Prudential Supervision’
NGFS Technical Document (May 2020)
<https://www.ngfs.net/sites/default/files/medias/documents/ngfs_guide_for_supervisors.pdf>.
60
See, eg, EBA, ‘Final draft implementing technical standards on prudential
disclosures on ESG risks in accordance with Article 449a CRR’ (24 January 2022).
61
IAIS, ‘Issues Paper on Climate Change Risks in the Insurance Sector’ (2018)
<https://www.iaisweb.org/uploads/2022/01/180727-SIF-IAIS-Issues-Paper-on-Climate-Changes-Risk.pdf>.
62
PRA, ‘Enhancing Banks’ and Insurers’ Approaches to Managing the Financial Risks
from Climate Change’ PRA Supervisory Statement SS3/19
<https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2019/ss319>.
63
European Commission, ‘Sustainable Finance Package’ (2021)
<https://ec.europa.eu/info/publications/210421-sustainable-finance-communication_en>;
and European Commission, ‘Communication from the Commission to the European
Parliament and the Council on the review of the EU prudential framework for
insurers and reinsurers in the context of the EU’s post pandemic recovery’
COM/2021/580 Final
<https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021DC0580>.
64
PRA (n 62); ECB, ‘Guide on Climate-Related and Environmental Risks: Supervisory
Expectations Relating to Risk Management and Disclosure’ (November 2020)
<https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.202011finalguideonclimate-relatedandenvironmentalrisks~58213f6564.en.pdf>.
65
EBA, ‘Action Plan on Sustainable Finance’ (6 December 2019)
<https://www.eba.europa.eu/sites/default/documents/files/document_library/EBA%20Action%20plan%20on%20sustainable%20finance.pdf>.
66
Agnieszka Smoleńska and Jens van ‘t Klooster, ‘A Risky Bet: Climate Change and
the EU’s Microprudential Framework for Banks’ (2022) 8(1) Journal of Financial
Regulation.
67
European Securities and Markets Authority (ESMA), ‘Enforcement and Regulatory
Activities of European Enforcers in 2019’ Report 32-63-846 (2 April 2020)
<https://www.esma.europa.eu/sites/default/files/library/esma32-63-846_2019_activity_report.pdf>.
68
Commodity Futures Trading Commission (CFTC), Managing Climate Risk in the U.S.
Financial System (Commodity Futures Trading Commission 2020).
69
Task Force on Climate-related Financial Disclosures (TCFD), ‘Recommendations of
the Task Force on Climate-related Financial Disclosures’ (June 2017)
<https://www.fsb-tcfd.org/publications/final-recommendations-report>.
70
International Organization of Securities Commissions (IOSCO), ‘Statement on
Disclosure of ESG Matters by Issuers’ IOSCO Statement (18 January 2019)
<https://www.iosco.org/library/pubdocs/pdf/IOSCOPD619.pdf>.
71
‘Five global organisations, whose frameworks, standards, and platforms guide the
majority of sustainability and integrated reporting, announce a shared vision of
what is needed for progress towards comprehensive corporate reporting—and the
intent to work together to achieve it’ Press Release (11 September 2020)
<https://bit.ly/35qx8KH>.
72
NGFS, ‘Progress Report on Bridging Data Gaps’ NGFS Technical Document (26 May
2021) <https://www.ngfs.net/en/progress-report-bridging-data-gaps>.
73
European Union, ‘Proposal for a Directive of the European Parliament and of the
Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive
2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability
reporting’ COM/2021/189 final (2021)
<https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0189>.
74
‘IFRS Foundation announces International Sustainability Standards Board,
consolidation with CDSB and VRF, and publication of prototype disclosure
requirements’ Press Release (3 November 2021)
<https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes>.
75
See
<https://www.ifrs.org/news-and-events/news/2022/03/issb-delivers-proposals-that-create-comprehensive-global-baseline-of-sustainability-disclosures>.
76
Sarah Murray, ‘Navigating the thicket of ESG metrics’ Financial Times (24
October 2021).
77
NGFS, ‘Sustainable Finance Market Dynamics’ NGFS Technical Document (31 March
2021) <https://www.ngfs.net/en/report-sustainable-finance-market-dynamics>;
Organization for Economic Co-operation and Development (OECD), ‘ESG Investing:
Practices, Progress and Challenges’ (OECD 2020)
<http://www.oecd.org/finance/ESG-Investing-Practices-Progress-Challenges.pdf>.
78
Noël Amenc, Felix Goltz and Victor Liu, ‘Doing Good or Feeling Good? Detecting
Greenwashing in Climate Investing’ (EDHEC Business School 2021)
<https://www.edhec.edu/sites/www.edhec-portail.pprod.net/files/210921-1_doing_good_or_feeling_good.pdf>.
79
Attracta Mooney and Chris Flood, ‘DWS Probes Spark Fears of Greenwashing Claims
Across Industry’ Financial Times (31 August 2021).
80
IOSCO (n 70).
81
Climate Bonds Initiative, ‘Comparing China’s Green Bond Endorsed Project
Catalogue and the Green Industry Guiding Catalogue with the EU Sustainable
Finance Taxonomy’ (September 2019)
<https://www.climatebonds.net/files/reports/comparing_chinas_green_definitions_with_the_eu_sustainable_finance_taxonomy_part_1_en_final.pdf>;
International Platform on Sustainable Finance, ‘Common Ground Taxonomy—Climate
Change Mitigation’ (IPSF Taxonomy Working Group Co-chaired by the EU and China
2021)
<https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/211104-ipsf-common-ground-taxonomy-instruction-report-2021_en.pdf>.
82
Government of Canada, ‘Final Report of the Expert Panel on Sustainable Finance’
(2019)
<https://www.canada.ca/en/environment-climate-change/services/climate-change/expert-panel-sustainable-finance.html>;
Will Martindale, ‘Taxonomies a revolutionary shift in ESG’ Top 1000 Funds (18
September 2020)
<https://www.top1000funds.com/2020/09/taxonomies-a-revolutionary-shift-in-esg>.
83
Discussed in, among others, Organisation for Economic Co-Operation and
Development, ‘Developing Sustainable Finance Definitions and Taxonomies, Green
Finance and Investment’ (2020) <https://doi.org/10.1787/134a2dbe-en>; Simon
Ogus, ‘ESG Criteria Are Distorting Markets and Portfolio Decisions’ OMFIF
Commentary (16 March 2021)
<https://www.omfif.org/2021/03/esg-criteria-are-distorting-markets-and-portfolio-decisions>;
Elliot Hentov, ‘Biden Impact on ESG Investing Will Go Deeper than Climate’ OMFIF
Commentary (3 March 2021)
<https://www.omfif.org/2021/03/biden-impact-on-esg-investing-will-go-deeper-than-climate>;
and Ben Caldecott, ‘“Encourages laziness and disincentives ambition”: Ben
Caldecott shares his thoughts on the EU’s green taxonomy’ Responsible Investor
(14 June 2019)
<https://www.responsible-investor.com/articles/encourages-laziness-and-disincentives-ambition-ben-caldecott-shares-his-tho>.
84
IMF, ‘Investment Funds: Fostering the Transition to a Green Economy’ Global
Financial Stability Report October 2021 (International Monetary Fund 2021)
<https://www.imf.org/-/media/Files/Publications/GFSR/2021/October/English/ch3.ashx>.
85
International Energy Agency (IEA), ‘Nuclear Power and Secure Energy Transitions’
(June 2022)
<https://www.iea.org/reports/nuclear-power-and-secure-energy-transitions?utm_content=bufferf8ae1&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer>.
86
See Mehreen Khan, ‘Scientists Lambast EU over Gas and Nuclear’s “Green” Energy
Label’ Financial Times (21 January 2022).
87
IEA, ‘The Role of Gas in Today’s Energy Transitions’ (July 2019)
<https://www.iea.org/reports/the-role-of-gas-in-todays-energy-transitions>.
88
Greg Muttitt, ‘Gas Is Not a Bridge Fuel, It’s a Wall. So Why Are Governments
Still Financing It?’ (International Institute for Sustainable Development, 10
June 2021).
89
The EU taxonomy tries to address this issue by setting thresholds for
‘contributing to environmental objectives’ that are to be updated by the
European Commission in line with technological advances.
90
Private Equity Stakeholder Project, ‘Private Equity Propels the Climate Crisis’
(October 2021)
<https://pestakeholder.org/wp-content/uploads/2021/10/PESP_SpecialReport_ClimateCrisis_Oct2021_Final.pdf>.
91
On the latter, see, eg, Danae Kyriakopoulou, David Marsh and Mark Sobel,
‘Biden’s Climate Challenges: China, Data, Turf Wars’ OMFIF Commentary (21 April
2021)
<https://www.omfif.org/2021/04/bidens-climate-challenges-china-data-turf-wars>.
92
Sebastian Steuer and Tobias H Tröger, ‘The Role of Disclosure in Green Finance’
(2022) 8(1) Journal of Financial Regulation.
93
See, eg, Schoenmaker and van Tilburg (n 48); Ulrich Volz, ‘On the Role of
Central Banks in Enhancing Green Finance’ UNEP Inquiry Working Paper 7/01
<https://unepinquiry.org/wp-content/uploads/2017/02/On_the_Role_of_Central_Banks_in_Enhancing_Green_Finance.pdf>;
Finance Watch, ‘Report—Breaking the Climate-Finance Doom Loop’ (June 2020)
<https://www.finance-watch.org/wp-content/uploads/2020/06/Breaking-the-climate-finance-doom-loop_Finance-Watch-report.pdf>;
Mariana Mazzucato, Josh Ryan-Collins and Asker Voldsgaard, ‘Central Bank’s Green
Mission’ Project Syndicate (8 December 2020)
<https://www.project-syndicate.org/commentary/central-banking-green-transition-climate-change-by-mariana-mazzucato-et-al-2020-12>;
Nick Robins, Simon Dikau and Ulrich Volz, ‘Net-Zero Central Banking: A New Phase
in Greening the Financial System’ (Grantham Research Institute, LSE, and Centre
for Sustainable Finance, SOAS, University of London 2021)
<https://www.lse.ac.uk/granthaminstitute/publication/net-zero-central-banking-a-new-phase-in-greening-the-financial-system>.
94
Banca d’Italia, ‘Rapporto Ambientale 2020’ (2020)
<https://www.bancaditalia.it/pubblicazioni/rapporto-ambientale/2020-rapporto-ambientale/index.html>.
95
Banque de France, ‘Charte d’Investissement Responsable de la Banque de France’
(2018)
<https://www.banque-france.fr/sites/default/files/media/2018/03/29/818080_-charte-invest_en_2018_03_28_12h12m41.pdf>;
Banque de France, ‘Rapport d’Investissement Responsable’ (2021)
<https://www.banque-france.fr/sites/default/files/medias/documents/rapport_investissement_responsable_2020.pdf>.
96
Sveriges Riksbank, ‘Sustainability Strategy for the Riksbank’ (2020)
<https://www.riksbank.se/globalassets/media/riksbanken/hallbarhetsstrategi/engelska/sustainability-strategy-for-the-riksbank.pdf>.
97
Bank of England, ‘The Bank of England’s Climate-related Financial Disclosure
2020’ (2020)
<https://www.bankofengland.co.uk/-/media/boe/files/annual-report/2020/climate-related-financial-disclosure-report-2019-20.pdf?hash=5DA959C54540287A2E90C823807E089055E6721B&la=en>.
98
De Nederlandsche Bank, ‘Annual Report 2020’ (2021)
<https://www.dnb.nl/media/odydkcui/jaarverslag2020.pdf>.
99
Simon Dikau and Ulrich Volz, ‘Central Bank Mandates, Sustainability Objectives
and the Promotion of Green Finance’ (2021) 184(C) Ecological Economics, examined
the charters of 133 central banks and showed that about half are directly or
indirectly mandated to support their national governments’ national policy
objectives.
100
The EU, for example, has extended the mandates of its supervisory agencies to
include sustainability by obliging them to consider environmental, social, and
governance factors (ESG) in the course of their duties. See Nathan De
Arriba-Sellier, ‘Turning Gold into Green: Green Finance in the Mandate of
European Financial Supervision’ (2021) 58(4) Common Market Law Review 1097.
101
As illustrated in Berenguer and others (n 50).
102
EBA, ‘EBA Report on SMEs and SME Supporting Factor’ EBA Report 2016/04
<https://www.eba.europa.eu/sites/default/documents/files/documents/10180/1359456/602d5c61-b501-4df9-8c89-71e32ab1bf84/EBA-Op-2016-04%20%20Report%20on%20SMEs%20and%20SME%20supporting%20factor.pdf>.
103
Benjamin Chamberlin and Julie Evain, ‘Indexing Capital Requirements on Climate:
What Impacts Can Be Expected’ (Institute for Climate Economics (I4CE) 2021)
<https://www.i4ce.org/en/publication/indexing-capital-requirements-on-climate-what-impacts-can-be-expected>.
104
Yiannis Dafermos and Maria Nikolaidi, ‘How Can Green Differentiated Capital
Requirements Affect Climate Risks? A Dynamic Macrofinancial Analysis’ (2021) 54
Journal of Financial Stability.
105
Francesca Diluiso and others, ‘Climate Actions and Stranded Assets: The Role of
Financial Regulation and Monetary Policy’ CESifo Working Paper No 8486 (Center
for Economic Studies and Ifo Institute 2020)
<https://www.econstor.eu/handle/10419/223558>.
106
Dirk Schoenmaker and Stanislas Jourdan, ‘Foreword’ in Jens van ‘t Klooster and
Rens van Tilburg, ‘Targeting a Sustainable Recovery with Green TLTROs’ (Positive
Money Europe 2020)
<http://www.positivemoney.eu/wp-content/uploads/2020/09/Green-TLTROs.pdf>.
107
See, eg, Frank Elderson, ‘Integrating the Climate and Environmental Challenge
into the Missions of Central Banks and Supervisors’ (Speech by Frank Elderson,
Member of the Executive Board of the ECB at the 8th Conference on the Banking
Union, Goethe University, 23 September 2021)
<https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210923~0c7bd9c596.en.html>.
Other central bankers and regulators have also cautioned against adopting a
‘promotional’ role, for example, Jens Weidmann, ‘Climate Change and Central
Banks’ (Address by the President of the Deutsche Bundesbank and Chairman of the
Board of Directors of the Bank for International Settlements at the Deutsche
Bundesbank’s second financial market conference, Frankfurt am Main, 29 October
2019) <https://www.bis.org/review/r191029a.htm>; and Peter Laca, ‘Central Banks
Can’t Fix Climate Change, Czech Policy Maker Says’ Bloomberg (18 February 2021).
108
PRA, ‘Climate-related Financial Risk Management and the Role of Capital
Requirements—PRA Climate Adaptation Report 2021’ (28 October 2021)
<https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/publication/2021/october/climate-change-adaptation-report-2021.pdf?la=en&hash=FF4A0C618471462E10BC704D4AA58727EC8F8720>.
109
Billy Nauman, ‘“Green Bubble” Warnings Grow as Money Pours into Renewables’
Financial Times (19 February 2021).
110
Data from MSCI Global Alternative Energy Index
<https://www.msci.com/documents/10199/40bd4fec-eaf0-4a1b-bfc3-8ed5c154fe3c>,
MSCI World Energy Index
<https://www.msci.com/documents/10199/de6dfd90-3fcd-42f0-aaf9-4b3565462b5a>, and
ETF Database
<https://etfdb.com/etfdb-category/alternative-energy-equities/#etfs__returns%26sort_nam
e%3Dassets_under_management%26sort_order%3Ddesc%26page%3D1>.
111
Patrick Bolton and Marcin T Kacperczyk, ‘Do Investors Care about Carbon Risk?’
European Corporate Governance Institute (ECGI) Finance Working Paper 711/2020
<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3398441>; Joachim Klement,
‘Are We Seeing a Green Bubble Forming?’ The Evidence Based Investor (3 February
2020) <https://www.evidenceinvestor.com/are-we-seeing-a-green-bubble-forming>;
Maximilian Goergen and others, Carbon Risk (2020)
<https://ssrn.com/abstract=2930897>.
112
World Bank, ‘Minerals for Climate Action: The Mineral Intensity of the Clean
Energy Transition’ (2020)
<https://pubdocs.worldbank.org/en/961711588875536384/Minerals-for-Climate-Action-The-Mineral-Intensity-of-the-Clean-Energy-Transition.pdf>.
113
Andy Home, ‘Goldman Proclaims the Dawn of a New Commodity Super-Cycle’ Reuters
(5 January 2021).
114
Ethan N Elkind, Patrick RP Heller and Ted Lamm, ‘Sustainable Drive Sustainable
Supply: Priorities to Improve the Electric Vehicle Battery Supply Chain’
(Berkeley Law, July 2020)
<https://www.law.berkeley.edu/research/clee/research/climate/transportation/building-a-sustainable-electric-vehicle-battery-supply-chain>.
115
Mervyn King, ‘Balancing the Economic See-Saw’ (Speech by the Deputy Governor of
the Bank of England, 14 April 2000)
<https://www.bankofengland.co.uk/-/media/boe/files/speech/2000/balancing-the-economic-see-saw>.
116
Paul Tucker, Unelected Power (Princeton University Press 2018); Ed Balls, James
Howat and Anna Stansbury, ‘Central Bank Independence Revisited: After the
Financial Crisis, What Should a Model Central Bank Look Like?’ Mossavar-Rahmani
Center for Business & Government Working Paper, Harvard Kennedy School (2018)
<https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/files/67_central.bank.v.2.pdf>;
Charles Bean, ‘Central Banking After the Great Recession’ (2017) 38(1) Economic
Affairs.
117
Dimitri G Demekas, ‘Building an Effective Financial Stability Policy Framework:
Lessons from the Post-Crisis Decade’ (London School of Economics and Political
Science 2019)
<http://eprints.lse.ac.uk/100483/3/Building_an_effective_financial_stability_policy_framework.pdf>.
118
Alberto Alesina and Guido Tabellini, ‘Bureaucrats or Politicians? Part I: A
Single Policy Task’ (2007) 97(1) American Economic Review; and ‘Bureaucrats or
Politicians? Part II: Multiple Policy Tasks’ (2008) 92 Journal of Public
Economics.
119
Robins and others (n 93); Mazzucato and others (n 93).
120
James Mackintosh, ‘The Downsides of Central Bank Mission Creep’ Wall Street
Journal (18 June 2019); Merryn Somerset Webb, ‘Central Banks Need to Stop the
Mission Creep’ Financial Times (27 August 2021).
121
IMF, ‘World Economic Outlook October 2020: A Long and Difficult Ascent’ (2020)
<https://www.imf.org/-/media/Files/Publications/WEO/2020/October/English/text.ashx>;
Group of Thirty, ‘Mainstreaming the Transition to a Net-Zero Economy’ (2020)
<https://group30.org/images/uploads/publications/G30_Mainstreaming_the_Transition_to_a_Net-Zero_Economy.pdf>.
122
Jean Pisany-Ferry, ‘Central Banking’s Brave New World’ Project Syndicate (23
February 2021)
<https://www.project-syndicate.org/commentary/central-banking-brave-new-world-inequality-climate-change-by-jean-pisani-ferry-2021-02>.
123
Kristalina Georgieva, ‘Remarks by IMF Managing Director on Global Policies and
Climate Change’ (International Conference on Climate, Venice, 11 July 2021)
<https://www.imf.org/en/News/Articles/2021/07/11/sp071121-md-on-global-policies-and-climate-change>.
124
James Vaccaro and David Barmes, ‘Financial Stability in a Planetary Emergency:
The Role of Banking Regulators in a Burning World’ (Climate Safe Lending Network
2021)
<https://www.climatesafelending.org/s/6-Financial-Stability-Planetary-Emergency.pdf>.
125
Mervyn King and Dan Katz, ‘Central Banks Are Risking Their Independence’
Bloomberg Opinion (23 August 2021)
<https://www.bloomberg.com/opinion/articles/2021-08-23/central-banks-are-risking-their-independence-mervyn-king-dan-katz>.
AUTHOR NOTES
Dimitri Demekas, Visiting Senior Fellow, School of Public Policy, London School
of Economics and Political Science, Houghton Street, London WC2A 2AE, UK, and
Special Adviser, Bank of England, Threadneedle Street, London EC2R 8AH , UK.
Tel: +1 202 250 9511. Email: d.demekas@lse.ac.uk.
Pierpaolo Grippa, Senior Economist, Monetary and Capital Markets Department,
International Monetary Fund (IMF), 700 19th Street NW, Washington, DC 20431,
USA. Tel: +1 202 378 7586. Email: pgrippa@imf.org. The views expressed in this
article are those of the authors and do not necessarily represent the views of
the Bank of England or of the IMF, its Executive Board, or IMF management.
© The Author(s) 2022. Published by Oxford University Press.
This is an Open Access article distributed under the terms of the Creative
Commons Attribution License (https://creativecommons.org/licenses/by/4.0/),
which permits unrestricted reuse, distribution, and reproduction in any medium,
provided the original work is properly cited.
© The Author(s) 2022. Published by Oxford University Press.
Issue Section:
Article
Download all slides
Advertisement
CITATIONS
VIEWS
1,025
ALTMETRIC
More metrics information
×
EMAIL ALERTS
Article activity alert
Advance article alerts
New issue alert
Receive exclusive offers and updates from Oxford Academic
CITING ARTICLES VIA
Google Scholar
Crossref
* LATEST
* MOST READ
* MOST CITED
A Theoretical Framework for Law and Macro-Finance
Walking a Tightrope: Financial Regulation, Climate Change, and the Transition to
a Low-Carbon Economy
MiFID II and the Regulation of Multilateral Trading in OTC Derivatives: Is the
OTF Fit for Purpose?
Incentive Effects from Write-down CoCo Bonds: An Empirical Analysis
Introducing the Revised and Updated Financial Reform Database
More from Oxford Academic
Financial Law
Law
Books
Journals
Advertisement
Advertisement
* About Journal of Financial Regulation
* Editorial Board
* Author Guidelines
* Facebook
* Twitter
* LinkedIn
* Purchase
* Recommend to your Library
* Advertising and Corporate Services
* Journals Career Network
* Online ISSN 2053-4841
* Copyright © 2022 Oxford University Press
* About Oxford Academic
* Publish journals with us
* University press partners
* What we publish
* New features
* Authoring
* Open access
* Purchasing
* Get help with access
* Institutional account management
* Accessibility
* Contact us
* Advertising
* Media enquiries
* Legal and policy
* Oxford University Press
* News
* Oxford Languages
* Epigeum
* University of Oxford
Oxford University Press is a department of the University of Oxford. It furthers
the University's objective of excellence in research, scholarship, and education
by publishing worldwide
* Copyright © 2022 Oxford University Press
* Cookie policy
* Privacy policy
* Legal notice
Close
Close
THIS FEATURE IS AVAILABLE TO SUBSCRIBERS ONLY
Sign In or Create an Account
Close
This PDF is available to Subscribers Only
View Article Abstract & Purchase Options
For full access to this pdf, sign in to an existing account, or purchase an
annual subscription.
Close