COVID-19 can teach us a lot about the economic impact of climate change, according to the Head of Financial Stability Surveillance and Research at the Central Bank, Wendy Zammit, who pointed to the CBM’s decision to join the Network for Greening the Financial System (NGFS), as an important step in liaising with international partners to prepare for future challenges in this regard.
“One of the many things that the fight against COVID-19 has taught us is the importance of having consistent data. Researchers and policy-makers have been throwing their hands up in frustration as they try to compare their statistics with those of other countries, regions and even cities where the cause of death is ticked as COVID-19 even if a patient has died of a long-standing cancer, or – for example – where patients who die at home are not tested,” she said.
Indeed, “proper data collection, methodology and modelling matter, whether you are looking at the past, assessing the present or forecasting the future, and this is as true for health authorities as it is for central banks,” she continued, adding that “unfortunately, climate data may be available, but it is often hard to find, understand and apply.”
Moreover, “the modelling toolbox for climate change is not as intuitive as that for macroeconomic issues: there are multiple ways of looking at the impact which do not always take into account important second-round and ripple effects,” she added, underlining that this was one of the reasons why the NGFS made defining climate scenarios one of its priorities.
The Network was launched in 2017 and has attracted 65 central banks and supervisors as members, with 12 others as observers. The Central Bank of Malta joined the Network in July 2019 and has since then been playing an active role, including giving input into the report.
“As the Network said recently: ‘to determine the right actions to take today, we need to look ahead over decades, not just the next few years.’”, Ms Zammit underlined.
To this end, the NGFS’s work has included the publication of the first set of climate scenarios a few weeks ago, and looking at assessments which will provide a common starting point for analysing climate risks, not just for central banks and supervisors, but also for financial, academic and corporate communities, Ms Zammit explained. It also made public the data underlying the scenarios on its website.
“The aim is for the document to act as a catalyst to mobilise the Network’s global research partners and the broader research community around the NGFS research priorities.”
And, this is of essential importance, she continues. “Why does it matter? The frequency and severity of extreme weather events are on the rise. Let us take real estate and agriculture as examples: climate change poses physical risks, which would impact the banks that lend to them, the insurers that underwrite their risks, and asset managers who invested clients’ money in such sectors,” she explained.
This is because “they all could face huge losses. Unpredictable events could affect insurance cover and premiums, in turn leaving assets unprotected and banks exposed to credit risk. There could be an impact on inflation expectations, and on exchange rate targeting regimes, and fiscal measures such as carbon-taxes and their impact on prices. And these impacts could very well spread from the financial system to the public sector, for example if bailouts are required.”
Ms Zammit said that there was another parallel between COVID-19 and climate change: “the trade-off between short-term economic growth and long-term environmental quality”, adding that “the Network said that the risks require a better understanding of the trade-off, and of whether climate policies associated with structural reforms could lead to a positive ‘green growth’ effect, even in the short term.”
And, much is at stake, she stressed. “The topic is vast, the impacts catastrophic: extreme weather caused by temperature rises, droughts, floods, wind storms and sea-level rise affect housing, food production, health and labour productivity – and in turn health systems, tourism, logistics and even insurance. Appreciation of what is at stake is one of the reasons that the Bank joined the Network and has dedicated resources to work with other banks within the Network and its research partners, such as the Potsdam Institute for Climate Impact Research.”
In the meantime, the CBM’s, Mario Vella, explained why he is such a firm believer in the principles underlying the creation of the Network: “The COVID-19 crisis has been an important wake-up call in this sense, as we have been able to see the economic impact – even in the short-term – on consumption, demand and logistics. The impact of climate change is much slower than that of COVID-19, but it has the same global spread and the same devastating impact: in different ways in different countries, but nonetheless significant. Central banks need to be able to assess all these risks as it is the only way that we can absorb them.”