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Climate Change – Enter Central Banks

June 03, 2021

The naysayers can pretend climate change isn’t impacting our world but there may come a time when no one listens. Economic impact tends to trump (no pun intended) non-believers. When private companies and central banks such as the Fed validate environmental issues, the world will finally start to address change.

Central banks around the world now recognize that there is a financial and economic risk to climate change. Our Federal Reserve is more cautious than other central banks but since many companies are global in nature, foreign central banks will still have an impact.

A new group, Central Banks and Supervisors Network for Greening the Financial System will meet in June. While it started as an eight-member group, now 90 global central banks and regulators are on board. They are looking at:

  • Steering financial systems away from fossil fuel
  • Higher capital requirements for lending to fossil-fuel companies
  • Bank stress test that assesses the risk of temperature increases on the loan portfolio
    • Loans to waterfront property
    • Loans in wildfire areas
  • Potentially charging higher lending interest rates for carbon intensive assets
  • Lower bank capital requirements for loans to alternative energy companies vs. loans to fossil-fuel companies

Some central banks are already moving to establish regulations that companies will have to follow.

The Bank of England requires setting interest rates to assess “strong, sustainable and balanced growth that is also environmentally sustainable.”

The Bank of France began tallying potential liabilities for climate change. They are piloting a bank stress test that focuses on the cost of insurance claims from droughts and flooding. So far, the data shows a six-fold rise in parts of France by 2050.

The European Central Bank (ECB) says climate change is already covered in their mandate. According to Frank Elderson, Chair of the ECB’s central bank climate group, “Climate change can directly affect inflation.” He cites floods and droughts that destroy crops that cause food prices to increase – in other words: inflation.

The politicians may want to debate climate issues but when corporations, banks and central banks assume its validity and its impact on the economy and financial systems, change will occur. Better late than never.

Many of our clients ask us to include environmental criteria in their investments. If this is something you would like to pursue, please contact us.

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