Green Swan Conference Highlights Emerging Central Bank Consensus on Supervisory Approaches to Financial Risks Arising from Climate Change – Environment

Green Swan Conference Highlights Emerging Central Bank Consensus on Supervisory Approaches to Financial Risks Arising from Climate Change – Environment

For example, the participants noted that central banks are
uniquely situated to provide regulatory frameworks and technical
support to the institutions they supervise. Therefore, and in
advance of the United Nations Climate Change Conference (COP26)
scheduled for November, financial institutions (including insurance
companies) and other private entities should expect to see
increased regulatory engagement on:   The participants outlined issues for the
financial sector to consider, including immediate steps that
central banks, regulators, supervisors, financial and insurance
firms, and other private companies should take to promote financial
stability and to reduce climate change-related risks.
climate risk disclosures;

sustainable investment practices;

carbon pricing;

climate-related risk management; and

scenario planning.

  Unlike the premise that the 2008
financial crisis was a “black swan”-a rare and unexpected
event-the core premise of the conference is that climate change is
a “green swan” that will cause increasing and systemic
shocks to the global financial system, with impacts across
financial stability, employment, inflation, interest rates and
global order. Federal Reserve Chair Powell noted that “here
is no doubt that climate change poses profound challenges for the
global economy and certainly the financial system” that will
require “bold steps and decades of sustained
efforts.” Climate Change as a Financial Challenge

Potential Solutions and Regulatory Measures
Mark Carney, UN Special Envoy on Climate Action and
Finance;

Jerome Powell, Chair of the Federal Reserve;

Agustín Carstens, General Manager of the BIS;

Andrew Bailey, Governor of the Bank of England;

Kristalina Georgieva, Managing Director of the IMF;

Christine Lagarde, President of the European Central Bank;
and

Yi Gang, Governor of the People’s Bank of China.

In addition to proposed legislation and the launching of various
frameworks, financial institutions and insurance companies should
also expect to see increased resources to train and build out
capacity for this work. For example, the BIS is launching a climate
training alliance with the NGFS to ensure that policymakers and the
private sector have the technical training to enact the various
proposed frameworks. The BIS plans to focus training on enhancing
market transparency, bolstering risk management and deterring
greenwashing by developing taxonomies for a climate transition in
alignment with the Paris Agreement. WilmerHale is advising financial institutions on meeting the
many challenges associated with managing climate-related risks and
ESG risks more generally. We are available to work with clients to
prepare for the greater regulatory engagement that is likely at
hand.  Various jurisdictions are also enacting their own measures to
combat this risk. Christine Lagarde, President of the ECB, said
they are planning to release new forecast models and new
transparency requirements. Andrew Bailey, Governor of the Bank of
England, stated that the Bank of England is working to expand its
scenario planning and set out updated supervisory expectations for
banks and insurance companies to manage the risk of climate change
and imbed this into its work by the end of 2021. And, echoing
President Biden’s May 20, 2021, Executive Order on
Client-Related Financial Risk,3 Federal Reserve Chair
Powell said that the US central bank is “quite actively”
exploring how to measure and incorporate climate-related risk into
its supervisory processes. Powell referenced scenario planning
favorably and was careful to contrast it with stress testing.

Following the Green Swan conference, G7 central bank governors
and finance ministers endorsed a move toward mandatory disclosures
at a summit in London. According to the communique,2 the
ministers and central bankers committed to “properly
embed climate change and biodiversity loss considerations
into economic and financial decision-making, including addressing
the macroeconomic impacts and the optimal use of the range of
policy levers to price carbon.” This includes moving towards
“mandatory climate-related financial disclosures” and
also emphasized “the need for a baseline global reporting
standard for sustainability” that can be supplemented by
individual jurisdictions.  The G7 members specifically
endorsed, among other options, the framework developed by the Task
Force on Climate-related Financial Disclosures (“TCFD”)
and the work being done by the International Financial Reporting
Standards Foundation. When asked to identify their number one priority to combat
climate-related risk, many in attendance identified corporate
disclosures as foundational. According to some attendees, this tool
would help policymakers analyze data, ensure that markets can
better price climate risk and enable the private sector to allocate
capital accordingly. Some attendees referenced a recent
study1 finding that only 25 percent of major financial
institutions voluntarily reported on the emissions that they
financed and that much of the data actually reported was
inconsistent, unreliable and difficult to aggregate across
industries.

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