FE (03/2024) Taking into account climate and nature in monetary policy and banking supervision around the world

Question 1

What are the reasons behind the vital importance of climate and nature for central banks and supervisors?

Answer 1

Climate and nature are vital due to

• their profound economic impact,
• the economic benefits of a timely transition to a green and sustainable economy,
• and the translation of climate-related risks into financial risks.

Question 2

How does the Basel Committee on Banking Supervision (BCBS) view climate events in relation to financial risks? Can you give an example of how a natural disaster might translate into financial risk for a bank?

Answer 2

• The BCBS identifies climate events as drivers of traditional types of financial risks, including credit, liquidity, market, reputational, and operational risks, including legal risks.
• If floods damage a company’s production facility, it may affect the company’s ability to repay a loan, leading to higher credit risk for the bank that provided the loan. Similarly, if a house is in an area vulnerable to wildfires and falls in value, the bank that granted the mortgage faces higher risk.

Question 3

What finding did the ECB make regarding bank loans and dependency on ecosystem services?

Answer 3

The ECB found that nearly 75% of all bank loans in the euro area are to companies highly dependent on at least one ecosystem service, indicating significant financial risk if these services degrade.

Question 4

At the BIS level, what specific steps has the BCBS taken to address climate-related financial risks?

Answer 4

The BCBS has

• established a Task Force on Climate-related Financial Risks,
• incorporated climate-related financial risks into the Basel framework,
• and issued a consultation paper on climate-related disclosure requirements.

Question 5

How is the Financial Stability Board (FSB) addressing nature-related financial risks?

Answer 5

The FSB plans to conduct a stocktake (inventaire) of regulatory and supervisory initiatives on nature-related financial risks, complementing its climate-related efforts, in line with the Brazilian G20 Presidency’s focus on sustainability-related risk.

Question 6

Can you describe some actions the ECB has taken to incorporate climate and nature considerations?

Answer 6

The ECB has

• launched a climate action plan,
• improved macroeconomic models for policy decisions,
• developed a methodology to favor bonds from better climate performers,
• set sustainability criteria for collateral,
• and urged banks to manage climate and nature-related risks effectively.

Question 7

What progress have banks made in integrating climate and nature-related risks, according to the ECB?

Answer 7

Banks have begun to integrate these risks into their strategy, governance, and risk management. While no bank fully meets the ECB’s expectations yet, each expectation has been met by at least one bank, indicating sector-wide progress.

Question 8

What does the ECB’s new climate and nature action plan entail?

Answer 8

The new action plan

• outlines steps to further support the green transition within the ECB’s mandate,
• assess the physical impacts of climate change,
• explore nature-related risks,
• keeps incorporating climate change considerations into monetary policy operations.