Climate-related Financial Risks

The upcoming Group of Seven (G7) summit predictably triggers a flurry of public policy activity across a range of issues. The mid-year mark also provides a good opportunity to backtest our 2021 policy trajectory projection and data-driven nowcasting using PolicyScope data. Yesterday's Bank of England initiative to implement climate-related stress test scenarios for regulated banking institutions drives climate-related financial policy to the top of our agenda.


Climate-related Financial Policy: 2021 So Far


Back in January, this post on our Data and Disruption blog alerted readers to dynamics that had been visible to PolicyScope Platform users for quite some time: central banks were becoming serious about increasing the pace and scale of their efforts to incorporate climate perspectives into their policy toolkit.


Based on this data



We concluded: "We expect 2021 will generate far more financial regulation and risk management oversight activity concerning the definition and disclosure of climate-related risks by financial institutions and securities issuers."


2021 has confirmed this analysis.


Aggregate activity levels regarding NGFS (the central bank Network for Greening the Financial System, which spearheads climate stress testing) and climate-related financial disclosure issues remain elevated and continue to trend upwards heading into the G7 summit:


Importantly, the vast majority of activity to reorient regulatory and monetary policy effectively operates below the radar even when it is publicly available. Rhetoric activity (generated by media coverage) barely registers in the time series above.


Consider last week's major Green Swan Conference. Nearly all G7 central banks (France, Germany, Italy, United States, United Kingdom) plus the ECB and China together with the IMF and the Bank for Internationally Settlements delivered major policy addresses that contained clear isignals regarding forward policy trajectories. The PolicyScope Platform's patented process automatically captured, analyzed, and measured the activity associated with those speeches.....but media coverage was minimal.


Capital markets participants tracking the evolution of public policy regarding climate-related policy know that sustained action levels that exceed rhetoric levels signal alpha generation opportunities because policymakers are taking far more action publicly than appears in mainstream media. For these issues, sustained activity also implies increased regulatory compliance costs as firms pivot towards conducting stress tests and preparing more detailed financial disclosures. The PolicyScope data measures aggregate global activity levels without the embedded bias generated by sentiment analysis. It thus delivers the public policy equivalent of market volatility measures daily and globally.


Analysts that drill down into the verbal details obtain an additional informational advantage by finding publicly available information faster than might have been the case if they had relied on third party publications to notify them of official sector activity.

For more information on how the PolicyScope Platform can help your team identify strategically significant shifts regarding public policy trajectories using objective data, please contact us today.