Category Archives: Finance

A stark climate warning from the green swan

The green swan brings a clear message from people who should know: bankers say the climate crisis means major change lies ahead.

LONDON, 10 February, 2020 − There’s more than a touch of déjà-vu about The green swan, another alarm call from the serious world of senior bankers about what the future is likely to hold.

Way back in 2006 the British economist Lord Nicholas Stern wrote his review warning of the serious impacts of climate change, in particular its effect on the global economy and the world’s financial systems.

For a brief period it seemed people were listening. Then, in 2008, the global financial crisis came along – a crisis caused, not by climate change but primarily by reckless bank lending, weak regulation and a sustained bout of greed.

World leaders panicked as the financial sector went into meltdown. Multi-billion dollar rescue packages were thrown about like confetti. Amid the panic, Stern’s warnings were largely forgotten.

It’s only recently that bankers and financiers have been revisiting his work and waving their own red flags about the dire consequences of a warming world.

The publisher of this book – the Bank of International Settlements (BIS) – is the central bank to the world’s central banks, its goal to preserve overall global monetary and financial stability. It is a conservative, some might say staid, institution, its utterances normally carefully calibrated and moderate in tone.

“Green swan events may force central banks to intervene as ‘climate rescuers of last resort’ and buy large sets of devalued assets”

The green swan is different: it graphically describes the sense of urgency now evident in banking boardrooms about global warming, the dire state of the planet and the consequent effects on the finance sector.

“Exceeding climate tipping points could lead to catastrophic and irreversible impacts that would make quantifying financial damages impossible”, say the authors.

“Avoiding this requires immediate and ambitious action towards a structural transformation of our economies, involving technological innovations that can be scaled, but also major changes in regulations and social norms.”

In other words, in non-banking terminology, expect the unexpected. Unless major international action is taken, climate change is going to cause lasting damage to the global economic and financial systems.

The “green swan” in the book’s title is a mutation of the concept of the “black swan” made famous by Nicholas Taleb in a 2007 book of the same name.

Key differences

Taleb used the term black swan to characterise random, unexpected events such as terrorist attacks or natural catastrophes and their impact on economies and financial systems. Uncertainty becomes a major factor: calculating risk in such circumstances is a very difficult, if not impossible, business.

This book’s authors characterise climate change in a similar way, talking of green swan events. But they draw some important distinctions.

Though the effects of global warming are highly uncertain, there is a high degree of certainty that major change is on the way. There is also certainty about the need for urgent action.

“Climate catastrophes are even more serious than most systemic financial crises”, say the authors.

“The complex chain reactions and cascade effects associated with both physical and transition risks could generate fundamentally unpredictable environmental, geopolitical, social and economic dynamics.”

The authors warn about central banks being caught in what they refer to as the uncharted waters of climate change. If government and other agencies don’t take action, the world’s central banks might not be able to ensure financial and price stability.

Ending fossil fuel

Fossil fuel companies could go to the wall. While this might be good for the climate, it would create financial turmoil.

“Green swan events may force central banks to intervene as ‘climate rescuers of last resort’ and buy large sets of devalued assets, to save the financial system once more.”

The warnings from the BIS are only the latest broadside from central bank authorities on the dangers of a warming world. Late last year the Bank of England, the UK’s central bank, announced it would be subjecting the country’s banks and insurance companies to a climate change-related stress test.

In recent days Singapore’s central monetary authority has introduced similar measures to test finance institutions’ preparedness in the face of global warming.

The overall message is clear: if you see a green swan, beware. A big climate change event is happening, and turmoil is on the way. − Climate News Network

* * * * *

The green swan: Central banking and financial stability in the age of climate change

An ebook by Patrick Bolton et al. published by the Bank of International Settlements/Banque de France

The green swan brings a clear message from people who should know: bankers say the climate crisis means major change lies ahead.

LONDON, 10 February, 2020 − There’s more than a touch of déjà-vu about The green swan, another alarm call from the serious world of senior bankers about what the future is likely to hold.

Way back in 2006 the British economist Lord Nicholas Stern wrote his review warning of the serious impacts of climate change, in particular its effect on the global economy and the world’s financial systems.

For a brief period it seemed people were listening. Then, in 2008, the global financial crisis came along – a crisis caused, not by climate change but primarily by reckless bank lending, weak regulation and a sustained bout of greed.

World leaders panicked as the financial sector went into meltdown. Multi-billion dollar rescue packages were thrown about like confetti. Amid the panic, Stern’s warnings were largely forgotten.

It’s only recently that bankers and financiers have been revisiting his work and waving their own red flags about the dire consequences of a warming world.

The publisher of this book – the Bank of International Settlements (BIS) – is the central bank to the world’s central banks, its goal to preserve overall global monetary and financial stability. It is a conservative, some might say staid, institution, its utterances normally carefully calibrated and moderate in tone.

“Green swan events may force central banks to intervene as ‘climate rescuers of last resort’ and buy large sets of devalued assets”

The green swan is different: it graphically describes the sense of urgency now evident in banking boardrooms about global warming, the dire state of the planet and the consequent effects on the finance sector.

“Exceeding climate tipping points could lead to catastrophic and irreversible impacts that would make quantifying financial damages impossible”, say the authors.

“Avoiding this requires immediate and ambitious action towards a structural transformation of our economies, involving technological innovations that can be scaled, but also major changes in regulations and social norms.”

In other words, in non-banking terminology, expect the unexpected. Unless major international action is taken, climate change is going to cause lasting damage to the global economic and financial systems.

The “green swan” in the book’s title is a mutation of the concept of the “black swan” made famous by Nicholas Taleb in a 2007 book of the same name.

Key differences

Taleb used the term black swan to characterise random, unexpected events such as terrorist attacks or natural catastrophes and their impact on economies and financial systems. Uncertainty becomes a major factor: calculating risk in such circumstances is a very difficult, if not impossible, business.

This book’s authors characterise climate change in a similar way, talking of green swan events. But they draw some important distinctions.

Though the effects of global warming are highly uncertain, there is a high degree of certainty that major change is on the way. There is also certainty about the need for urgent action.

“Climate catastrophes are even more serious than most systemic financial crises”, say the authors.

“The complex chain reactions and cascade effects associated with both physical and transition risks could generate fundamentally unpredictable environmental, geopolitical, social and economic dynamics.”

The authors warn about central banks being caught in what they refer to as the uncharted waters of climate change. If government and other agencies don’t take action, the world’s central banks might not be able to ensure financial and price stability.

Ending fossil fuel

Fossil fuel companies could go to the wall. While this might be good for the climate, it would create financial turmoil.

“Green swan events may force central banks to intervene as ‘climate rescuers of last resort’ and buy large sets of devalued assets, to save the financial system once more.”

The warnings from the BIS are only the latest broadside from central bank authorities on the dangers of a warming world. Late last year the Bank of England, the UK’s central bank, announced it would be subjecting the country’s banks and insurance companies to a climate change-related stress test.

In recent days Singapore’s central monetary authority has introduced similar measures to test finance institutions’ preparedness in the face of global warming.

The overall message is clear: if you see a green swan, beware. A big climate change event is happening, and turmoil is on the way. − Climate News Network

* * * * *

The green swan: Central banking and financial stability in the age of climate change

An ebook by Patrick Bolton et al. published by the Bank of International Settlements/Banque de France

Bank of England unveils climate stress test

Tackling climate change isn’t just about replacing fossil fuels with renewables, or planting more trees. It’s about confronting climate stress across society.

LONDON, 1 January, 2020 – The warming world means climate stress now permeates every part of society. And so an entire financial system which has underpinned the growth of a global economy largely dependent on fossil fuels must be reoriented to deal with what is fast becoming a full-blown crisis.

A campaign to halt or withdraw multi-million dollar investments from industries associated with fossil fuel use is gaining momentum. And the central banks – the institutions responsible for regulating countries’ financial systems – are now taking action.

Leading the charge is the venerable Bank of England (BOE), one of the oldest such institutions in the world. In December it became the first central bank to announce what it terms a banking stress test on climate change.

Under the BOE’s stress test framework, banks and insurance companies will be required to go through their books to evaluate their exposure to the impacts of climate change.

If, for instance, a British bank has loaned money to a company building a coal-fired power plant, the BOE will require the bank concerned to hold a substantial amount of additional capital to cover the risks of the project being abandoned because of new regulations or other climate change-related factors.

“A question for every company, every financial institution, every asset manager, pension fund or insurer is what’s your plan on climate change”

In the same way, if an insurance group has granted cover to houses on a flood plain, or to coastal properties which could be subject to rises in sea level – or if a bank has granted mortgages on such properties – the BOE will require additional capital to be held to cover the financial risks involved.

Other financial institutions are examining ways in which their activities can be protected from the more serious impacts of a warming world.  Several insurance groups have announced plans to withdraw cover from fossil fuel projects.

Central banks are following the BOE’s lead: a body with the somewhat cumbersome title of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) now has more than 40 members – all involved in monitoring the risks climate change poses to the finance sector.

The BOE’s action has two aims. One is to ensure the financial system can withstand the considerable financial costs posed by climate change. The other is to encourage financial institutions to invest their funds in more sustainable, environmentally friendly projects.

Mark Carney, the outgoing BOE governor who is soon to take up a post as UN special envoy for climate action and finance, describes the BOE stress test as the first comprehensive assessment of whether the financial system is on track to help deliver a transition to a sustainable future.

Worthless assets possible

“A question for every company, every financial institution, every asset manager, pension fund or insurer is what’s your plan (on climate change)”, Carney told the BBC.

He says that unless the finance sector and large companies wake up to the scale of the climate crisis, many of the assets they now hold in fossil fuels and other enterprises will become worthless.

Some financial institutions are taking action, says the BOE governor, divesting from investments in fossil fuels and becoming involved in more sustainable projects, but progress is still far too slow. Time is of the essence.

“The climate emergency continues to build. The next year will be critical”, says Carney. – Climate News Network

Tackling climate change isn’t just about replacing fossil fuels with renewables, or planting more trees. It’s about confronting climate stress across society.

LONDON, 1 January, 2020 – The warming world means climate stress now permeates every part of society. And so an entire financial system which has underpinned the growth of a global economy largely dependent on fossil fuels must be reoriented to deal with what is fast becoming a full-blown crisis.

A campaign to halt or withdraw multi-million dollar investments from industries associated with fossil fuel use is gaining momentum. And the central banks – the institutions responsible for regulating countries’ financial systems – are now taking action.

Leading the charge is the venerable Bank of England (BOE), one of the oldest such institutions in the world. In December it became the first central bank to announce what it terms a banking stress test on climate change.

Under the BOE’s stress test framework, banks and insurance companies will be required to go through their books to evaluate their exposure to the impacts of climate change.

If, for instance, a British bank has loaned money to a company building a coal-fired power plant, the BOE will require the bank concerned to hold a substantial amount of additional capital to cover the risks of the project being abandoned because of new regulations or other climate change-related factors.

“A question for every company, every financial institution, every asset manager, pension fund or insurer is what’s your plan on climate change”

In the same way, if an insurance group has granted cover to houses on a flood plain, or to coastal properties which could be subject to rises in sea level – or if a bank has granted mortgages on such properties – the BOE will require additional capital to be held to cover the financial risks involved.

Other financial institutions are examining ways in which their activities can be protected from the more serious impacts of a warming world.  Several insurance groups have announced plans to withdraw cover from fossil fuel projects.

Central banks are following the BOE’s lead: a body with the somewhat cumbersome title of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) now has more than 40 members – all involved in monitoring the risks climate change poses to the finance sector.

The BOE’s action has two aims. One is to ensure the financial system can withstand the considerable financial costs posed by climate change. The other is to encourage financial institutions to invest their funds in more sustainable, environmentally friendly projects.

Mark Carney, the outgoing BOE governor who is soon to take up a post as UN special envoy for climate action and finance, describes the BOE stress test as the first comprehensive assessment of whether the financial system is on track to help deliver a transition to a sustainable future.

Worthless assets possible

“A question for every company, every financial institution, every asset manager, pension fund or insurer is what’s your plan (on climate change)”, Carney told the BBC.

He says that unless the finance sector and large companies wake up to the scale of the climate crisis, many of the assets they now hold in fossil fuels and other enterprises will become worthless.

Some financial institutions are taking action, says the BOE governor, divesting from investments in fossil fuels and becoming involved in more sustainable projects, but progress is still far too slow. Time is of the essence.

“The climate emergency continues to build. The next year will be critical”, says Carney. – Climate News Network