Weekly round-up: May 31 - June 4

The top five climate risk stories this week

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1) Bundesbank chief backs ‘greening’ ECB corporate bond portfolio

German Bundesbank president Jens Weidmann, a one-time critic of the idea that central banks should favour climate-friendly bonds when conducting monetary policy, has changed his tune.

In a speech to the virtual Green Swan conference hosted by the Bank for International Settlements (BIS) on Thursday, Weidmann said: “Just like the portfolios of private financial institutions, climate-related financial risks can affect the asset holdings of central banks, too. Their balance sheets — and thus their ability to maintain price stability — might be impaired. Central banks’ risk management should therefore incorporate climate-related financial risks adequately, including those arising from monetary policy operations like corporate bond purchases”.

He went on to endorse a change in approach by Eurosystem central banks that would have them screen out securities that don’t meet “certain climate-related reporting obligations” from their bond-buying and collateral frameworks. The Eurosystem consists of the European Central Bank (ECB) and 19 national central banks.

But he also argued that these changes could not be made overnight, as issuers “need time to provide the necessary information”. 

Still, the Bundesbank chief’s support for “greening” central bank portfolios is a marked departure from his earlier rhetoric. As recently as October 2019, Weidmann said: “A monetary policy which pursues explicitly environmental policy objectives is at risk of being overburdened. And in the long run, the central bank’s independence might be called into question”.

Other officials at European central banks have long favoured “greening” their monetary policy portfolios. In February, Banque de France chief François Villeroy de Galhau proposed decarbonising the Eurosystem banks’ balance sheets, starting with all corporate assets. European Central Bank president Christine Lagarde has also previously argued that a market-neutral approach to monetary policy portfolio management may not right in the face of “market failures” pricing climate risks.

2) Global pact on climate risk disclosures imminent —  Banque de France

Governments and central bankers are near agreement on a global climate risk disclosure mandate for all public companies, Banque de France Governor François Villeroy de Galhau has said.

“Nobody expected six months ago for us to go as quickly as we did and to say perhaps we could have a positive conclusion on mandatory disclosure at the COP26,” Villeroy told the Financial Times.

He also said that progress should be made towards standardising disclosure rules, so that companies around the world can operate on a level playing field.

The Governor’s comments come ahead of a meeting of the Group of Seven (G7) countries’ finance ministers on June 4-5 in the UK. Rishi Sunak, the UK’s Chancellor of the Exchequer, is pushing his counterparts from Canada, France, Germany, Italy, Japan and the US to back a communique supporting mandatory reporting of climate risks and opportunities, according to Bloomberg.

3) TCFD to issue climate metrics guidance

The Task Force on Climate-related Financial Disclosures (TCFD) will release proposed guidance on climate-related metrics, targets, and transition plans for public consultation on June 7.

Respondents’ contributions will be used to improve the usefulness of the TCFD recommendations on strategy and metrics and targets, and enhance comparability across financial disclosures.

The proposed handbook will also include a Portfolio Alignment Technical Supplement developed by the COP26 Private Finance Hub’s Portfolio Alignment Team. Last year, the group published a report on the strengths and trade-offs of a variety of metrics, including the share of net zero-aligned assets in a portfolio, transition progress against scientifically-established transition pathways, and a portfolio warming measure.

The consultation closes on July 7.

4) Climate risks will alter US capital rules in future — OCC official

Bank capital requirements will have to incorporate climate risks “eventually”, the Acting Chair of the US Office of the Comptroller of the Currency (OCC) told Reuters.

In an interview, Michael Hsu, who has led the banking watchdog since May 10, said it would be hard for regulators to dodge the issue in the long-run. “Exposure is exposure and you have to risk manage and capitalize for that”.

Still, Hsu said that regulators had more “steps” to take understanding and analysing climate risks before overhauling existing capital regulations.

Last month, the left-leaning think-tank, Center for American Progress, published a report urging regulators to update the bank capital framework to safeguard the economy from a “climate-driven financial crisis”.

“One of the most powerful tools in financial regulators’ arsenal is the bank capital framework, and it should be at the heart of efforts to improve the resilience of the financial system to climate-related risks,” the report said.

5) Republicans knock the SEC on climate disclosure push

GOP lawmakers warned the head of the Securities and Exchange Commission (SEC) that its efforts to promote climate risk disclosure threatens the agency’s “credibility and independence”.

In a letter sent Thursday, the 22 Republican members of the House Financial Services Committee said the SEC “must not politicize the agency” and should ensure that “any further action it takes regarding climate-related disclosure is clearly tied to its core competencies of investor protection”.

The House members also said that “one-size-fits-all” disclosure requirements “would be deeply misguided”, as the climate risks faced by companies vary sector by sector.

They further urged the agency to abide by the “longstanding materiality standard”, a principle in securities law that obliges issuers to report all information that “a reasonable investor” would see as important for decision-making. The Republicans reading of the standard holds that any company facing significant climate risks should already be reporting them under current rules.

Gary Gensler, head of the SEC, told Congress in May that the agency looks to propose rules on environmental, social, and governance reporting by US securities issuers following the conclusion of a public consultation launched in March.

On May 24, SEC Commissioner Allison Herren Lee pushed back against the idea that the materiality standard eliminates the need for new rules on climate disclosure in a speech at the 2021 ESG Disclosure Priorities Event.

“We must not operate under the false assumption that the securities laws already effectively elicit the information investors need. We must not be diverted by mistaken views regarding the SEC’s rulemaking authority. And we must not be persuaded to ignore scientific evidence or other decision-useful data on the grounds that it intersects with issues of political or social concern,” said Lee.

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First image: Magnus Manske / Wikipedia, Second Image: World Economic Forum / Sikarin Thanachaiary, Fourth Image: Mark Van Scyoc / Shutterstock.com. All other images under free media license through Canva