The Climate is Changing
Volume 11, Number 10
October 27, 2021
Advocacy News You Can Use
The climate is changing. This is a little bit of a play on words. Yes, we know the world is transforming and the impact from rapid climate change will likely be significant to our transformation over the next several years. Some estimates show that a temperature increase of only 1.5° C will result in an 8% reduction in global GDP by 2100. This will inevitably affect physical operations for all of us due to changes in weather-related events such as increased floods, droughts, wildfires, hurricanes and more. Many of us have already experienced these events in our local areas.
Climate change has had an immense impact on regulatory response and how the financial system and prudential policy will address climate related risks, and how these risks will affect safety and soundness. The Financial Stability Board has a roadmap for addressing climate-related financial risks and is working in coordination with the G20 to assess those risks and their impacts to the financial services system. The G20 is coordinating efforts to tackle global challenges such as climate change and environmental protection, and is promoting a transition toward greener, more prosperous and inclusive economies and societies. The Basel Committee also has a roadmap to identify gaps in the Basel framework to determine whether current rules adequately capture climate-related financial risks.
Everything from investments to the regulation of products (think eco-labels), to how you manage your balance sheet and how you govern and run a credit union will likely be affected in the coming years. Yes, the climate is changing, not only physically, but from a regulatory perspective as well. Are you ready?
G20 Finance Track Promotes Aggressive Regulatory Agenda Affecting Credit Unions
The Italian G20 Presidency at the Fourth G20 Finance Ministers and Central Bank Governors meeting (Finance Track) issued its Communique addressing numerous issues that may impact credit unions in the future. Key passages from the Communique are as follows:
- Financial Inclusion: We reaffirm our commitment to enhancing digital financial inclusion of vulnerable and underserved segments of society, including micro, small and medium-sized enterprises (MSMEs), carrying forward the work of the Global Partnership for Financial Inclusion (GPFI) and implementing the G20 2020 Financial Inclusion Action Plan. We therefore endorse the G20 Menu of Policy Options for digital financial literacy and financial consumer and MSME protection “Enhancing digital financial inclusion beyond the COVID-19 crisis”, with the aim to provide a guide for policymakers in their efforts to lay the ground for new financial inclusion strategies in the postpandemic world. We look forward to the review of the G20/OECD High-Level Principles for Financial Consumer Protection in 2022.
- Payments: We reiterate our commitment to a timely and effective implementation of the G20 Roadmap to enhance cross-border payments. We welcome the progress reported against milestones set for 2021 and we endorse the ambitious but achievable quantitative global targets for addressing the challenges of cost, speed, transparency and access by 2027 set out in the FSB report.
- Sustainable Finance: Three separate passages are as follows: 1. We agree to coordinate our efforts to tackle global challenges such as climate change and environmental protection, and to promote transitions towards greener, more prosperous and inclusive economies and societies. Sustainable finance is crucial for promoting orderly and just transitions towards greener and more sustainable economies and inclusive societies, in line with the 2030 Agenda for Sustainable Development and the Paris Agreement; 2. We endorse the G20 Sustainable Finance Roadmap and the Synthesis Report prepared by the Sustainable Finance Working Group (SFWG); and 3. It is complemented by the Financial Stability Board (FSB) Roadmap for addressing climate-related financial risks, and is designed to accommodate the evolving sustainable finance landscape and the G20 priorities going forward, taking into account national circumstances.
- Taxation: After the historic agreement reached in July on the key components of the two pillars on the reallocation of profits of multinational enterprises and an effective global minimum tax, we endorse the final political agreement as set out in the Statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy and in the Detailed Implementation Plan, released by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). This agreement will establish a more stable and fairer international tax system. We call on the OECD/G20 Inclusive Framework on BEPS to swiftly develop the model rules and multilateral instruments as indicated in and according to the timetable provided in the Detailed Implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2023.
- Digitization: We will continue to explore and address the implications of major economic, social, environmental, technological and demographic challenges including through our recovery strategies. Drawing on the G20 Menu of Policy Options - Digital Transformation and Productivity Recovery, we will continue discussing policies to sustain productivity growth, and to help ensure that the benefits are evenly shared within and across countries and sectors.
- Covid-19: We reaffirm our resolve to use all available tools for as long as required to address the adverse consequences of COVID-19, in particular on those most impacted, such as women, youth and informal and low-skilled workers, and on inequalities. We will continue to sustain the recovery, avoiding any premature withdrawal of support measures, while preserving financial stability and long-term fiscal sustainability, and safeguarding against downside risks and negative spillovers.
- AML//CFT: We reaffirm our full support for the FATF and recognise that effective implementation of AntiMoney Laundering/Countering the Financing of Terrorism and Proliferation (AML/CFT/CPF) measures is essential for building confidence in financial markets, ensuring a sustainable recovery and protecting the integrity of the international financial system. We stress the relevance of risk-based approach in the FATF recommendations with the aim to ensure legitimate cross-border payments and to promote financial inclusion. We confirm our support for strengthening of the FATF recommendations to improve beneficial ownership transparency and call on countries to fight money laundering from environmental crime, particularly by acting on findings of the FATF report.
The complete Communique from the G20 Finance Track can be viewed here.
Why this matters to your credit union: The G20 focus will direct the regulatory agenda for the international standard setting bodies for the upcoming years. The agencies will develop international standards that will influence national level regulations that ultimately will affect credit unions.
FSI Addresses Role of Climate Related Prudential Policy
A recent speech by Fernando Restoy, Chairman, Financial Stability Institute, Bank for International Settlements, addressed the role of prudential policy as it relates to climate change.
Restoy noted that banks are exposed to climate change through two different sets of climate risk drivers: 1. Physical risks resulting from the increasing frequency of extreme weather events; and 2. Transactional risk resulting from disruption from the cumulative effects of changes in government policies,technology, and consumer and investor behavior, which in turn can erode the value of banks’ credit exposures on the corresponding collateral.
He notes that the physical and transition risks manifest themselves in the form of credit, market and liquidity risks. In addition, climate-related developments can increase operational risk by affecting business continuity and by giving rise to litigation and reputational losses.
Restoy concludes that the role of prudential regulators is to thoroughly analyze the financial impact of climate change on safety and soundness and to make adjustments to protect the stability of the financial system. The key will be achieving the right balance between disclosure obligations, supervisory action, and the adjustment of capital requirements if appropriate.
A transcript of the entire speech can be viewed here.
Why this matters to your credit union: Regulators are looking to include climate related issues in their regulations. This will require adjustments in many areas of credit union operations, including investments, products, governance and others.
Financial Stability Board Issues Letter to G20 Ahead of October 13 Meeting
Ahead of their October 13, 2021, meeting, the Financial Stability Board (FSB) Chair, Randall K. Quarles, issued a letter to the G20 Finance Ministers and Central Bank Governors in relation to the two reports the FSB has already provided to the G20 regarding the development of a more resilient NBFI sector and addressing challenges in cross-border payments.
The FSB committed to a multi-year plan to enhance NBFI resilience after market turmoil in March 2020 to focus on, in collaboration with the International Organization of Securities Commission (IOSCO), vulnerabilities in money market funds (MMFs). The FSB also provided the G20 with a final report entitled “Policy Proposals Aimed to Enhance Money Market Fund Resilience.”
Further, as a follow-up to the roadmap they previously submitted to the G20 on enhancing cross-border payments, the FSB plans to submit:
- “a progress report on the roadmap to enhance cross-border payments, which also confirms steps for next year and beyond;
- quantitative targets for addressing the challenges of cost, speed, transparency and access experienced by end-users; and
- a report on the progress made on the implementation of the FSB’s high-level recommendation for the regulation, supervision and oversight of “global stablecoin” arrangements.”
More information on the FSB’s letter to the G20 can be found here.
Why this matters to your credit union: The report shows the direction the international standard setters are headed with respect to reforms in the payment systems. This will directly impact credit union operations in the future and could even be a disruptive force to the banking industry.
Andrew T. Price, Esq.