How in practice can the financial sector take immediate action against climate change-related risks? That’s the question in front of the world’s leading central bankers, financial regulators and policy makers at the unprecedented Green Swan Conference over the next three days.
Vast amounts of capital must move away from fossil fuel use and towards sustainable alternatives if the world is to meet its agreed target of keeping global heating to well below 2ºC. In the run-up to next week’s G7 meeting and November’s COP26 conference, what happens at this virtual meeting may be pivotal in humanity’s efforts to eliminate greenhouse gas emissions and avoid catastrophic climate change.
Minouche Shafik (LSE) moderates an introductory session with speakers from each of the organisations sponsoring the conference. Shafik ended her introduction by pointing to widespread greenwashing and asking if it’s now time for mandatory climate-related risk disclosure. IMF Managing Director Kristalina Georgieva has said that the Fund has been slow to focus on climate change, but promises to make up.
Now Banque de France Governor François Villeroy de Galhau is speaking. He’s in the Financial Times today, saying that mandatory disclosure could be agreed at November’s COP26.
The introductory session is now over. The recording now available here.
BdF Governor Villeroy de Galhau was very strong on climate ambition and explicitly supported green asset purchases and collateral framework – important in the ECB’s current debate on market neutrality and greening its monetary policy. He was “an example of an accelerating pioneer”, as the moderator called him.
Mandatory TCFD is clearly the big theme of this conference. Another is cooperation and coordination. NGFS chair and ECB executive board member Frank Elderson emphasised the “5 C’s”: Contribute to Coordination to Combat Climate Change.
Agustín Carstens, general manager of the Bank of International Settlements, said that central banks recognise that taking action on climate is paramount, but need “a significant amount of coordination across and within jurisdictions and sectors.” He listed three important tools to combat greenwashing (another theme): Taxonomies, Standards and certification and verification processes. “A structural change in financial markets is underway and this is happening very fast,” he ended. “If we want to avoid a green bubble, we have to act now.”
Now speaking is former BOC and BoE Governor and green central banking pioneer Mark Carney, who begins with a strong call for mandatory TCFD.
Mark Carney’s very detailed speech is now over – a strong call for mandatory TCFD along with other proposals for greening the international financial architecture. Governments have newfound resolve, says Carney, and another tipping point – a political and public tipping point – may be underway. Mandatory TCFD is just the baseline of what needs to be done, he said, stressing the need to move beyond disclosure alone and start to set policies to mitigate climate risk.
Carney outlined three actions that are urgently needed – mandatory TCFD, developing skills (especially in scenario analysis), and mainstreaming the use of scenarios – especially in stress testing.
Among his proposals, mandatory TCFD disclosure is the primary priority that Carney would like to see happen, as he made clear in the Q&A. However this means refining and mainstreaming forward-looking scenario analysis, and there is work to be done there. Success would be that climate factors are considered in all financial decision-making as a matter of course – becoming so mainstream that its as much a part of decision-making as credit risk and other risk management.
Carney also announced that the BIS, NGFS, IAIS and the Sustainable Insurance Forum are launching a new climate training platform for central banks and financial supervisors. The ‘Central Bankers and Supervisors Climate Training Alliance‘ (CTA) should be up and running by COP26.
Closed sessions are now underway and the next public session will be a special guest speech by Robert Engle (NYU Stern School of Business) at 15:15 CEST
In the earlier panel discussion focusing on biodiversity loss, both Jim O’Neill (Chatham House) and Dirk Schoenmaker (Rotterdam School of Management) were very supportive of adjusting capital requirements to reflect biodiversity and climate risks. O’Neill thinks this is inevitable and hopes for an agreement from COP26.
Robert Engle, Professor of Finance at the NYU Stern School of Business, has just concluded his talk on climate risk in portfolio management. Mayra Rodriguez Valladares has a great Twitter thread covering the conference, and has slides from Engle’s talk starting here.
Former US vice president Al Gore is speaking next. It’s worth noting that one-third of all greenhouse gas emissions in human history have been emitted since his book An Inconvenient Truth was published in 2006.
Al Gore’s passionate and captivating speech covered three topics: the current climate situation and accelerating response; the role of investors in mitigating climate change; and the importance of “radical transparency” in transitioning to a net-zero society.
Gore began, as you might expect, with a sobering review of the unfolding climate emergency and the quickly growing costs of current climate disruption. The current costs of climate effects doubled from 2019 to 2020, he said, and this is only going to accelerate.
But Gore also offered hope. Over 90% of all newly installed energy was from renewables last year, and renewables will be the cheapest source of energy worldwide within five years, he said. There has also been a sea change in public and political awareness – a social “tipping point” towards climate ambition and action.
Gore then looked at the role of investors in the transition to sustainability, making a powerful financial case for climate action. By 2030, US$5 trillion of green investment will be needed each year, representing a vast opportunity for investors. Gore’s vision for finance is that by 2025 all asset managers, owners and regulators will have a 2050 net-zero pathway, based on robust climate reporting and disclosure standards.
He ended by speaking about what he called “the age of radical transparency”. Those who continue to dump an endless stream of greenhouse gasses into the atmosphere will be held accountable, he said, calling for better and more open data and information.
Banque de France Governor François Villeroy de Galhau’s speech from this morning is now available in text on the BIS website. “I strongly hope the ECB will be the first central bank to… incorporate climate risk into our operations on corporates (on both asset purchases and collateral policies),” he says. In the recording he emphasised this part, saying, “I want to be clear.”
Closed panel discussions are now happening. The next public speech is from Bundesbank president and BIS chair Jens Weidmann at 17:45 CEST. ECB watchers will be looking for his comments on the so-called market neutrality principle in monetary policy. In direct contrast to Governor Villeroy de Galhau, above, Weidmann leads opposition to the greening of ECB asset purchases and collateral policies.
What is the true resilience of our financial systems to climate change risks with the buffers we currently have? That was the question facing one of this afternoon’s panel discussions with four leading central bankers joined by Rostin Behnam, a commissioner of the US Commodity Futures Trading Commission (CFTC), and by academic Ulrich Volz from SOAS at the University of London. A recording of the session is available here.
All panelists acknowledged the complexity and non-linearity of climate-related risks, but there was division about the use of macroprudential frameworks to help mitigate them. Sarah Breeden, (newly-appointed executive director for Financial Stability and Risk at the Bank of England), and Glenn Rudebusch (San Francisco Fed) were both cautious. “We’re still in the risk identification phase,” said Rudebusch.
In response, Uli Volz suggested that we already have a fairly good understanding of the broader climate-related risks that further data is unlikely to change. We don’t have much time to conduct these assessments, he said. When it comes to certain particularly carbon-intensive activities central banks have to be bold and apply the precautionary principle.
Bank of Mexico governor Alejandro Díaz de León agreed. Looking at the macroprudential framework is the right path, he told the conference. “We must not oversimplify the topic, but it is an approach we should use.”
Bundesbank President Jens Weidmann has opened the door to the greening of ECB monetary policy in a speech that will be well received by many of his colleagues on the bank’s governing council.
In his short but interesting talk, Weidmann called for climate-related financial risk to be included in central bank risk management, including in monetary policy operations – a policy he has advocated for some time. But these measures will take time to implement, he says, as bond issuers need time to provide the information that rating agencies need for assessments and as rating agencies may struggle with the long time horizons involved.
“If no adequate solution can be found here, the Eurosystem will have to adopt alternative measures to properly incorporate climate-related financial risks into its risk management,” Weidmann said. “For example, by limiting the maturities or the amount of corporate bonds of certain sectors and issuers in the Eurosystem’s monetary policy portfolio.”
Weidmann’s statement means that he is dropping his opposition to actively greening ECB monetary policy and that these measures are now likely to be included in the bank’s strategy review, due to be published this autumn.
A text copy of Weidmann’s speech is available here.
This page was last updated June 8, 2021
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