Bank of Spain integrates climate risk across all core functions
Deputy Governor Soledad Núñez outlined the Bank of Spain's comprehensive strategy to integrate climate and environmental risks across its core functions. The central bank focuses on financial stability, banking supervision, and monetary policy to address the climate challenge.
Embedding climate in central bank pillars
The Bank of Spain (BDE) is systematically embedding climate and environmental considerations into its core central banking functions, as highlighted by Deputy Governor Soledad Núñez.
This holistic approach addresses the inflationary effects of climate transition, the systemic risks posed by physical and transition risks to financial stability, and the need for specific regulatory compliance in banking supervision.
The BDE's work spans regulation, supervision, financial stability analysis, economic research, environmental management of its own operations, and the integration of climate factors into monetary policy and proprietary portfolios.
The overarching objective is to ensure the soundness of the banking system while actively contributing to the energy transition.
This effort involves close coordination with international bodies such as the Network for Greening the Financial System (NGFS), the Financial Stability Board (FSB), and the European Central Bank (ECB/SSM).
Concrete actions include incorporating climate aspects into stress tests, developing flood maps, and analyzing the macroprudential framework for climate risks.
The BDE emphasizes a holistic regulatory perspective, extending beyond climate to broader environmental risks, aiming to enhance understanding, management, and disclosure of granular, high-quality data.
Supervisory roadmap and greening operations
The BDE's supervisory actions follow a gradual approach, expanding from climate to broader environmental risks.
This includes evaluating banking practices, conducting self-assessments, and analyzing disclosures on climate and environmental risks.
The BDE participates in the ECB's thematic reviews and climate stress tests, progressively integrating these risks into the Supervisory Review and Evaluation Process (SREP) and conducting on-site inspections.
Monetary policy also incorporates climate considerations, aligning with the ECB's 2021 strategy review.
This involves adjusting corporate bond holdings, collateral frameworks, and risk management practices to align with the Paris Agreement.
The BDE also applies Sustainable and Responsible Investment principles to its own portfolio management, demonstrating a commitment to reducing its carbon footprint and increasing green investments.
Economic analysis and research are crucial, with the BDE developing new indicators and models to assess the impact of ecological transition on long-term growth, inflation, and financial stability, particularly concerning physical risks like aridity and fires in Spain.
A robust framework, complex implementation
The Bank of Spain's comprehensive strategy for climate risk integration is both ambitious and necessary.
Its multi-faceted approach, spanning supervision, monetary policy, and research, establishes a robust framework for addressing these complex challenges.
However, the effective implementation will require continuous efforts in data granularity, methodological refinement for stress testing, and sustained international coordination.