Climate change: Central Banking focus report is online
Climate change: Central Banking focus report is online, Wednesday 26 June 2019
ESG, Research / Market
The calm before the storm - The climate change 2019 survey
As climate-related risks to the financial sector become increasingly understood, central banks are demonstrating their willingness to develop capabilities to analyse the impact and modify their policies. A new survey, made in partnership with Amundi, indicates a watershed for central banks that could profoundly transform policies over the coming years.
The survey questionnaire was sent to 100 central banks in March 2019. By the middle of April, responses had been received from 34 central banks. The central banks responded on the condition of anonymity, and that neither the banks nor their officials would be cited in the report. Of these 34 respondents, 44% were from Europe and 41% were from emerging market economies. Almost all central banks that took part are from countries that have signed the Paris Agreement on climate change.
The main findings include the following statements:
- Central banks do not typically consider climate change a major risk to financial stability, although this is changing, notably among industrial countries.
- Climate change is clearly a concern for central banks – and a key concern for some – but not all consider it an issue they as institutions should directly act on.
- The insurance and banking sectors are the areas of the economy where central banks believe climate change will have an impact.
- Most central banks do not collect data directly related to climate change risk, but a growing number are assigning resources to this and developing capabilities.
- Stress testing risks derived from climate change is in its infancy among central banks. But this will likely change in the near future.
- Green assets are becoming increasingly attractive as an investment proposition for central banks, which regard green credentials as criteria that should be taken into consideration in reserve management.
- The use of environmental, social and governance (ESG) criteria in balance sheet management is the preserve of a minority of central banks.
- Central banks do not think they have the tools to promote green sectors. Many contend this is beyond their mandates.
- An overwhelming majority of central banks do not require commercial banks to disclose their climate-related risks.
- Central banks do not in the main think it necessary to add a specific section to their mandate in order to mitigate climate change risks, although a significant minority think a change should be made.
Global Investment Views - February 2020
At the start of the 2020s, markets continued to be dominated by geopolitical issues, with short-lived Iran tensions at the forefront initially, followed by the news regarding a phase one trade deal between the US and China. Now, growth expectations are becoming the main driver of the market. That’s why the recent volatility due to the news about the spreading of the corona virus in China is higher than in the case of US-Iran tensions, as the epidemic could harm China (and global growth) if not contained soon (not our base case at the moment). Other than this issue, recent data point to a ‘so far, so good’ assessment as Germany has avoided a recession and the Euro area is bottoming out. Inflation uptrends are materialising to some extent, but risks appear to be limited and the overall inflation outlook remains benign. Central banks are likely to continue to pause on policy changes, which should help to maintain dovish financial conditions across regions. Therefore, in the search for further growth, attention is globally moving towards fiscal measures: Japanese stimulus package; approval of 2020 Budget Laws for Indonesia, the Philippines and India; and hopes for support in Germany, the UK and broader Europe (€1tn European Green Deal).
Focus on fundamentals: virus volatility provides entry points for EM equities
Overview: The coronavirus has been the strongest driver behind the recent volatility in financial markets, providing the trigger for a break in the rally in risk assets, which had been running uninterrupted since October. We should be aware that the trough for markets could be well in advance of the peak of the epidemic, as markets tend to overreact at the beginning of a crisis and then stabilise and rebound, despite the continuation of the negative news flow.
Don’t panic: market overreactions may turn into opportunities for long term investors
The epidemiological characteristics of this pandemic (low mortality rate, probably much less than the 2% reported for the whole population and in any case less than 0.5% for the labour force) suggest that the impact of the epidemic should prove “short-lived” (first half of the year). An epidemic of this nature affects neither demography nor physical capital, provided that the policy mix is adequately calibrated, with a full mobilisation of fiscal tools.