Programme: Central banking and financial supervision in the biosphere

“Nature, Finance and the Macroeconomy: Risks, Impacts and Feedback effects”

The Asia School of Business, Bank Negara Malaysia, CEP, sustainable macro and INSPIRE invite you to this conference, taking place in person in Kuala Lumpur, Malaysia, on 19-20 October 2023. The conference addresses challenges posed by nature loss, including deforestation and land-use change, and the related environmental risks and impacts for the macroeconomy and finance. It aims to also discuss implications for monetary policy, financial supervision and climate policy. We welcome submissions from scholars, especially early career researchers and advanced PhD students, working on these topics.

Climate, Lives, Inequalities, and Financial Frictions

Climate change is expected to have increasing impacts on our economies and societies. The extent of such economic impacts has generally been analyzed with integrated assessment models. These models have substantially improved over time to account for various features that may lead them to underestimate the extent of climate damages. There is, however, in our view, one crucial feature that so far has not yet been accounted for: financial frictions. We consider that financial frictions may amplify the impact of climate damages on the affected economies, to an extent that has not yet been measured. Hence, the main goal of this project is to extend integrated assessment models of climate change to include financial frictions, to measure the possibility that physical risks, the impact on financial assets that arise from climate- and weather-related events, may lead to financial crises, and what measures may be introduced to limit such possibility. Further, to better assess the impact of such financial crises, which add to the direct effect of the climate- and weather-related events that trigger them, the integrated assessment model is conceived to include income categories, an important aspect too often neglected in this literature and necessary to account for inequalities in how climate damages may affect people’s livelihoods. The integrated assessment model is also conceived to include a widely used regional decomposition. The project aims to provide clear policy lessons, analyzing the impact of a wide range of policy levers, including financial institutions, macroprudential policy, insurance schemes, and adaptation efforts, and their ability to mitigate physical risks.

Integrating sustainability concerns in financial supervision – exploring complementarities across institutional contexts

The Paris Agreement committed the signatory jurisdictions to make financial flows consistent with a net zero future. A variety of new international networks and standard setting bodies are emerging to ensure the development of adequate approaches and methodologies to ‘green finance’ across asset classes (banking, insurance, capital markets). These include the Financial Stability Board’s Task Force for Climate-Related Disclosures (TCFD), the Network for Greening the Financial System (NGFS) and the International Sustainability Standards Board (ISSB). In addition, established bodies such as the International Association of Insurance Supervisors (IAIS) and the Basel Committee for Banking Supervision (BCBS) are also developing frameworks to address risks related to sustainability transition in insurance and banking respectively. Within such globally developing ‘green finance’ frameworks, individual supervisors adopt different approaches, for example regarding the scope of sustainability concerns and regulatory tools used. 

In this context, what remains still understudied are the institutional factors that shape banking supervisors’ individual approaches. The project analyses comparatively how public authorities are using the prudential frameworks to address environmental and social risks across countries and asset classes. The different legal routes (legislative, regulatory, supervisory guidance) to introducing prudential treatment of environmental and social risks are identified for both banking and insurance at national level and juxtaposed with the emerging global standards. Factors considered in the comparative analysis include the scope of mandate, the institutional set-up (e.g. whether the supervisor is a central bank or another authority), independence and accountability mechanisms. Case studies are drawn from the supervisory practices of the ‘leaders’ of sustainable finance trend in the European Union (Banking Union, Hungary, Sweden) and beyond (Brazil, United Kingdom and China). 

The project contributes to filling three gaps in sustainable finance and related regulation and governance literatures. First, it explores the institutional design aspect of ‘greening’ prudential supervision that for now has been neglected in the scholarship on sustainable financial supervision. The ‘institutional fit’ between supervisory architectures and specific regulatory and supervisory solutions in relation to environmental and social risks (‘institutional complementarity’) is identified. Second, the project identifies the ‘balancing acts’ of supervisors in developed and developing jurisdictions with regard to risk- and non-risk aim, showing the different approaches to addressing possible policy objective trade-offs. Third, the project explores the policy layering process that takes place with regard to national practices and international standards in the field of sustainability risk integration.  

Central bank supervisory role: micro-prudential supervision and regulation of ESG risks

Recent years have seen great strides in the deepening of our understanding of how sustainability factors – in particular those related to environment, society and governance (ESG) – may act as drivers of financial risks, and therefore are of relevance to institutions responsible for oversight of the financial sector. This chapter reviews these arguments in the context of the progressive inclusion of sustainability factors in microprudential regulation of the banking sector. New rules at international (Basel Committee for Banking Supervision, Network for Greening the Financial System), regional (European Union) and individual jurisdiction levels require that banks include ESG considerations in their governance. How such rules are implemented on the ground is contingent on the regulatory oversight architecture, that is how the responsibility for different objectives and financial sectors is repartitioned between different public authorities as well as the broader institutional framework the latter operate in. The chapter analyses from this perspective practices of microprudential supervisors in the EU (European Banking Union, Hungary, Sweden) and beyond (Brazil, United Kingdom) that are seen to be leaders in the trend, with view to distil the institutional factors shaping the ‘greening’ of supervision with regard to scope of prudential sustainability concerns and the instruments used. Four out of the five studied jurisdictions have delegated banking supervision to the central bank, which is interesting not least given the significant heterogeneity of financial supervision models globally. The chapter concludes with a discussion of the implications of the comparative analysis with regard to legitimacy (e.g. market overreach) and institutional implications (e.g. need for developed for accountability, institutional design) of micro-prudential supervision and regulation, in particular with regard to central banks.

NGFS-GRASFI-INSPIRE Exchange – The scientific dimensions of biodiversity and its loss

Pablo Pacheco (WWF) will provide a scientific presentation on biodiversity, biodiversity loss and planetary boundaries, among others topics that will provide the necessary background for central bankers and supervisors willing to engage on environmental risks. This will be the second webinar of the current series on “environmental risks beyond climate change”.

NGFS-GRASFI-INSPIRE Exchange – Central banking and supervision in the biosphere

Co-chairs of the Joint NGFS-INSPIRE Study Group on Biodiversity and Financial Stability, Nick Robins (LSE & INSPIRE) and Dr Ma Jun (PBC & NGFS) will present the Study Group’s final report “Central Banking and Supervision in the Biosphere” and share their perspectives on nature’s role in supporting financial stability.

 

The NGFS-GRASFI-INSPIRE Exchange is designed to strengthen the connection, collaboration and research exchange between the central bankers, financial supervisors and the academic community to share and explore new and innovative research that advances the agenda on greening the financial system. New editions occur monthly and are co-organised by the NGFS Secretariat, INSPIRE and GRASFI (the NGFS’ two designated global research stakeholders). This session is the 1st in a 7-part series exploring dimensions of Environmental Risks, such as biodiversity loss and environmental degradation, and reflects the NGFS’s ambition to broaden its scope beyond climate-related risks. This 16th edition of the Exchange is hosted by the NGFS..

Biodiversity and Economic Growth: Something Must Give

28 March: The level of world economic activity driven by explosive growth in population and living standards since the late 18th century has reached utterly unprecedented levels under a longer-term view. Equally astonishing has been the pace of environmental degradation because of this expansion. According to recent NGFS scenarios, successful mitigation of climate change–the most salient dimension of such degradation– need not materially affect world GDP in the long run, and thus chiefly constitutes a problem of risks, whose successful management would allow to achieve similar growth outcomes.

This paper reviews the recent evidence on biodiversity loss and ecosystem degradation, an equally important but much less salient dimension of the environmental crisis. Simple calculations suggest halting its alarming recent trends will involve problems of both first as well as second moments: the transition will have to deal with risks, but even a successful management of these will probably require adjusting expectations about the possibilities of future economic and population growth. We believe this contrast should receive special attention as the focus of environmental-economic modelling in general, and the seminal work by the NGFS in particular, expanding its focus to include biodiversity in macro-financial analysis. We also present new evidence consistent with the intuition that population growth dominates the negative impact of growth on biodiversity, especially since the second half of the 20th century. This supports the notion that territories rich in biodiversity, but poor and in the early stages of the demographic transition will be critical for the preservation of natural capital.