Overview of Climate-related Statistical Indicators
The European Central Bank and the central banks of member countries recently released climate-related statistical indicators to consider climate risk in the implementation of monetary policy and the development of the financial system. The European Central Bank believes that these statistical indicators can support the green transformation of the financial industry and implement the climate action plan. Earlier, the European Central Bank has announced that climate change will be included in the next three years’ regulatory plan.
The climate-related statistical indicators have been designed for more than 18 months, covering three parts: sustainable finance, carbon emissions and physical risks. After the release of the indicators, the European Central Bank will continue to improve the indicator system, hoping that all parties in the financial industry can put forward new suggestions to jointly improve the climate analysis capacity of the financial industry.
Classification of Climate-related Statistical Indicators
The climate-related statistical indicators can be divided into three categories:
Sustainable finance indicators: describe the issuance and holding of EU sustainable debt instruments. Common sustainable debt instruments include green loans and green bonds. These indicators can measure the process of EU’s transition to a net zero economy and provide data for financial sustainability analysis. These sustainable financial indicators have been relatively specific and can be quantified;
Carbon emission indicators of financial institutions: describe the carbon emissions of financial institutions’ asset portfolios, including securities, loans, etc. These indicators mainly reflect the emissions of the banking industry in commercial operations, and can be used to measure monetary policy, evaluate financial stability and improve banking supervision. However, current data is not complete and is still under development;
Physical risk of financial assets: measure the impact of natural climate risk on financial assets, including loans, bonds, and stocks. This indicator can reflect the loss of financial assets in the event of climate change (such as flood and drought) and is comparable. The use of this data is still subjective and is still under development;
Brief Introduction of Three Indicators
The European Central Bank made a brief introduction to the three indicators of sustainable finance, carbon emissions and physical risk, such as:
Sustainable finance indicators: there are two indicators, one is the issuance of sustainable debt instruments, and the other is the holding of sustainable debt instruments. In the issuance indicators, ECB announced face value, nominal value and market value of debt instruments according to different sustainable classifications (green, social, sustainable and sustainable linked). Similar classification is also carried out in the holding indicators. In terms of green bonds (the highest proportion of sustainable debt instruments), indicators also involve countries and industries;
Carbon emission indicators of financial institutions: they are divided into two categories, each of which contains two indicators. The first category is the financing activities of financial institutions for carbon emission-intensive industries, including two indicators of financing emissions and carbon emission density. The second category is the transformation risk brought by the financing of financial institutions, including carbon emission density and carbon footprint. These indicators are consistent with the definitions of TCFD;
Physical risk of financial assets: there are three indicators, one is the normalized exposure at risk (the ratio of financial assets with climate risk to total assets), the second is potential exposure at risk (the ratio of financial assets with physical risk to assets with climate risk), and the third is the risk score, calculated according to the type of risk, ranging from 0 (no risk) to 5 (maximum risk);
ECB’s evaluation of climate-related statistical indicators
Last July, ECB released a climate action plan, incorporating climate change into the monetary policy framework. Last October, the corporate bonds held by the European Central Bank began to tilt towards issuers with better climate performance.
We need to better understand how climate change will affect the financial sector, so the development of high-quality data is key. These indicators are the first step to help narrow the climate data gap, which is crucial for further progress in the carbon-neutral economy.European Central Bank