**Programming note** There will be no Monday deep-dive article next week. The Thursday comment article will be out as usual.
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1) Fed knocked by Democrats and GOP over climate action
Pity the Federal Reserve. The central bank was assailed by lawmakers from both the left and the right this week over its efforts on climate change, with neither side happy with its actions so far.
On Thursday, 25 congressional Democrats sent a letter to Fed chair Jerome Powell castigating what they called the agency’s “limited action” to prepare US financial institutions and the broader economy “for the risk and destabilizing impact of climate change”.
To better protect US financial stability from climate risks, the lawmakers wrote that the Fed should support “accelerated action” in three areas. One, in the implementation of climate-related supervisory and prudential measures for financial institutions — including climate risk stress tests for banks and “adjusting capital requirements to reflect climate risk”. Two, in monetary policy, by excluding fossil fuel debt from its asset purchase programmes and collateral framework. And three, in supporting bank investments aimed at limiting global warming to 1.5°C.
Separately, on Monday Senator Patrick Toomey (R-PA), the ranking member on the Senate Banking Committee, sent a letter to Mary Daly, president of the Federal Reserve Bank of San Francisco (FRBSF) blasting the the agency’s “sudden pivot … toward publishing politically-charged research on environmental, social and governance (ESG) topics like climate change and racial justice”.
Toomey said a recent flurry of papers and seminars on ESG issues represented “mission creep” at odds with the Fed’s statutory responsibilities. He told Daly to give up all records on the FRBSF’s recent Virtual Seminar on Climate Economics and all memoranda and emails related to the agency’s focus on climate change and racial justice issues.
2) BoJ to inspect banks’ climate risk management
Japan’s central bank will grill lenders on their climate risks as part of this year’s cycle of on-site examinations.
Guidelines published on Tuesday say the Bank of Japan (BoJ) will “examine the role of climate change issues, SDGs [Sustainable Development Goals] and ESG issues in financial institutions’ business and their efforts in this area, such as the use of stress testing”.
The BoJ will also continue to examine whether bank business continuity management is reviewed appropriately in response to natural disasters, including typhoons and floods.
Last year, on-site examinations were suspended in light of the Covid-19 pandemic and remote interviews held instead, covering 37 financial institutions. In 2019, 85 on-site inspections were held.
3) ESG ratings need to be transparent, say green central banks
ESG and credit ratings providers should open up on the criteria they use to gauge the materiality of climate and sustainability factors for the companies they score, the Network for Greening the Financial System (NGFS) has said.
In a new report, the NGFS — the club of 89 climate-conscious central banks and regulators — outlined seven “key takeaways” for policymakers and financial markets participants to consider as they work to catalyze sustainable finance. One focued on ESG ratings and the need for their providers “to enhance transparency surrounding their methodologies”.
The NGFS reiterated concerns that there is “little clarity” on how credit ratings vendors currently integrate climate-related and ESG risks into their company scores.
Another “key takeaway” concerned financial watchdogs’ relationships with their supervisees. “There is a need for regulators to require financial institutions to consider material climate and sustainability factors as financial factors. Financially material climate and sustainability factors should be part of the fiduciary duty of asset managers,” the report said.
The authors also said financial authorities should back “global disclosure frameworks” aligned with Task Force on Climate-related Financial Disclosures (TCFD) recommendations and help develop “a global set of sustainability reporting standards”.
4) EM investors must ditch short-term mindset to promote green investing
Emerging market (EM) investment managers have to think long term about how climate change will affect their portfolios if green investing is to take off in the developing world.
That’s one of the conclusions of a new report from Imperial College London on why EM countries are missing out from the green bond boom.
“EM investors should not only require climate criteria as a core part of the investment process, they must seek to collaboratively overcome the incentives that are driving an aversion to long-term thinking,” the authors wrote.
At present, EM portfolio managers typically do not differentiate between debt issued by companies and countries in the developing world because of their “strong inclination to hug the index”. Investors are attracted by the high yields offered by EM debt, as reflected in key benchmarks, which pushes portfolio managers to replicate these in their allocations. These indexes overweight bonds issued by carbon-intensive corporates and sovereigns.
To help spur take-up of green investments by EM investors, and push them to consider climate risks in their portfolios, the Imperial authors say a new forum, similar to the Climate 100+ for equities, should be set up “to thrash out fundamental questions surrounding climate strategies”. This would offer asset managers a framework with which to engage issuers.
EM-specific green indexes may also help, as existing climate benchmarks and green bond standards are skewed towards developed world issuers, the authors said.
5) BlackRock, Vanguard join Net Zero Asset Managers Initiative
Heavyweight investors BlackRock, Vanguard and Brookfield were among 43 firms to join the Net Zero Asset Managers Initiative on Monday.
Founded in December 2020 by a coalition of climate-focused investor groups, the initiative now boasts 73 members representing $32 trillion of assets under management. Signatories commit to investing aligned with net zero emissions by 2050 or sooner in line with efforts to limit global warming to 1.5°C. Firms must also set interim targets for 2030 consistent with a fair share of the 50% global reduction in CO2 needed to stay on track with 1.5°C of warming.
To ensure accountability, all members must also publish disclosures aligned with the recommendations of the TCFD.
On joining the initiative, Tim Buckley, chairman of Vanguard — which has $6.2 trillion of assets under management — said: “As a steward of our clients’ assets, we recognize the crucial role we and others play in driving real progress on climate risk over time. As part of our ongoing efforts to tackle this important matter, we will continue to engage with portfolio companies, industry regulators, and policymakers”.
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