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

Let’s talk about the weather: the impact of climate change on central banks Sandra Batten, Rhiannon Sowerbutts and Misa Tanaka Discussed by Martijn Regelink – DNB Supervisory Strategy London – 14 November 2016 Views expressed in these slides are those of the individual presenter and do not necesarilu refilect official positions of De Nederlandsche Bank

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

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

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

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

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

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

Comments on tools and measures for mitigating risks Considerations on disclosure, stress testing and prudential measures Stress testing  Authors raise lack of sufficient data on relevant exposures (bonds, credit) & data  Our experience is that it is possible to gain more insights into these exposures  Are there negative sides to more disclosure on this topic? Disclosure  Section 2.1.1. discusses the effects of prudential policies as a way to mitigate Prudential climate change. policies  Wouldn’t that fit better together with the discussions on stress testing and disclosure as a way to mittigate transition risk? 8