Live coverage of the third and final day of the Green Swan Conference, debating how the financial sector can take immediate action against climate change-related financial risks.
10:30 CEST: SNB chair Thomas Jordan softens stance on climate in reserves and balance sheets
11:30 CEST: Former PBoC Governor Zhou Xiaochuan reviews green central banking in China
13:15 CEST: Nicholas Stern on economic leadership for net zero transformation
14:45 CEST: Christine Lagarde (ECB), Yi Gang (PBoC) and Jerome Powell (US Fed) together for the first time
The final day of the Green Swan Conference began early with an 8:15 CET (Geneva time) introduction to a guest speech by Laurent Fabius, former President of COP21. Beginning with an overview of the seriousness of our climate situation, Fabiius commented on the duties and responsibilities of the financial sector from his experience as president of COP21.
Discussion panels are just wrapping up, with ‘Panel M’ asking central bankers from Spain, Switzerland, Germany, New Zealand and France about the policies currently considered by central banks, regulators and supervisors.
The big event today will be the penultimate panel discussion at 2pm CEST with Gillian Tett of the Financial Times moderating central bank heads Christine Lagarde (ECB), Yi Gang (People’s Bank of China), Jerome Powell (US Fed) and François Villeroy de Galhau (Banque de France and NGFS), along with Agustín Carstens (BIS). The question facing these central banking titans will be “how to manage expectations, balance actions and communication and contribute to coordinate with other important actors?”
The session will be live-streamed, making this is the first time that Powell, Yi Gang and Lagarde have appeared in public together.
Discussion panels are just wrapping up, with ‘Panel M’ asking central bankers from Spain, Switzerland, Germany, New Zealand and France about the policies currently considered by central banks, regulators and supervisors. A video recording can be found here. A transcript of Spanish Central Bank president Pablo Hernandez de Cod‘s remarks to the panel can be found here.
De Cod said that the right way to frame the issue is to base it on central bank mandates, suggesting that as long as climate change is addressed in response to price and financial stability threats it is compatible with mandates. He acknowledged that climate change poses risks to the financial stability and therefore supervisors should act, including the Basel committee.
De Cod then reflected on the current limitations on measuring risk and spoke of the necessity for cooperation at international and national level to overcome these limitations. From the monetary policy side, he acknowledged that climate change will have impact on the price stability, saying “We should incorporate climate risks in our monetary operations such as collaterals we accept.”
Sabine Mauderer, a member of the Executive Board of the Deutsche Bundesbank, spoke in her role as chair of the NGFS work stream on scaling up green finance. Following pioneering disclosures from the Bank of England and Banque de France, the NGFS would like to set up guidance for central banks’ balance sheets on how they could disclose their own carbon footprint, she said.
Thomas Jordan, chair of the governing board of the Swiss National Bank, started his contribution by stating that the primary responsibility lies with governments and parliaments. “They have to set up clear and credible transition plans as this will provide clarity for consumers and investors,” he said. “Monetary policy cannot be a substitute for this”
He then gave three reasons why the primary focus of central banks should be their mandate: 1. Central banks do not have the tools that governments and parliaments do; 2. If central banks pursue climate policy goals they might face conflict with our mandate to insure price stability; and 3. Central banks have very narrow mandates. If they start to engage in other issues that are too far from their mandates, they might lose our independence.
Jordan’s position is similar to that abandoned by Bundesbank president Jens Weidmann earlier in the conference, and he has given similar statements before. However, he surprised the audience when he started talking about what roles central banks can play. “We can contribute to the analysis of macro-economic consequences of climate change by developing new tools,” he said. “It will help us to prepare policy decisions if climate change alters the economic cycle, especially inflationary dynamics. Central banks can develop macroprudential frameworks by identifying, further quantifying but also mitigating climate risk by developing stress tests.”
The real shift in his position was when he stating that “central banks can integrate climate change into risk management of our own reserves and balance sheets.” Jordan had formerly rejected resolutions from two cantons at this year’s SNB AGM at the end of April, asking to integrate climate risk into its balance sheets.
Christian Lüthi, director of Alliance Climatique Suisse, has a good twitter analysis of the Jordan’s change of position here.
People’s Bank of China former Governor Zhou Xiaochuan has concluded his guest speech. Zhou, now President of the China Society for Finance and Banking and Vice Chairman of the Boao Forum for Asia, began by pointing out that as the producer of one third of the world’s emissions, China has a unique responsibility and a pivotal role in global efforts to reduce emissions. His talk mainly focused on Chinese domestic activities in greening its financial system, with debate among Chinese financial regulators between those seeking to rely on market forces, and those seeking to go further to directly intervene. However there is agreement on the maximisation of the market function.
Zhou pointed out that there are three main discussions in China about how to speed up movement to achieve China’s 2030 and 2060 emissions targets. The first concerns emissions-reduction roadmaps currently being prepared for 24 sectors, which will have a big effect on carbon market prices, while the second debate is whether to use carbon markets to adjust short-term supply-demand relationships or to incentivise investments for the longer term. Zhou said the inelasticity of emissions from production and consumption makes this impossible in the short term, and called for a market with longer term goals to encourage R&D and new technologies.
The third debate in China is about how to set up the quotas in the carbon markets. Zhou said that setting up the carbon market in the wrong way and changing things later would cost a lot for China.
Zhou ended his speech by proposing a different approach to carbon border adjustment mechanisms and proposed that the revenue from this mechanism could be used to speed up the transition in developing countries who are willing to cut emissions.
When asked one thing he would suggest for international cooperation, he responded that developing countries with high emissions should set up carbon emission reduction targets and emissions as soon as possible. And any carbon tax whether domestic or international (border tax) should be used to cut emissions further.
Panel discussions on coordination between regulators, biodiversity loss risks and development banks are currently underway.
Nicholas Stern‘s dense and detailed speech and slide presentation has just concluded. His topic was ‘Economic leadership for transformation in a critical decade: managing risks and fostering investment’.
Stern is Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, one of the world’s leading research institutions focusing on central banking, financial regulation and climate change. He is noted for the 2006 ‘Stern Review Report on the Economics of Climate Change’ published by HM Treasury, clearly identifying climate change as an economic externality and market failure.
Stern began his talk with characteristics of the story of transforming finance. It is a story of acting together internationally, he said, and a macro-critical story. But it is also a story of “strong, sustainable, inclusive and resilient” growth, focusing particularly on the systems of energy/transport, cities and land use. There will be dislocation in jobs and changing prices, Stern said, and these will require just government policies. But the financial system must change and align with the Paris Agreement targets and pathways.
Stern appealed for a change to the way we do economics. We are in the middle of deep structural change, and current macro-economic models are too narrow. We need a serious, dynamic and deeper economics, he said, calling for central banks to lead in re-evaluating conventional economics.
He concluded with a list of four forces that give us a special opportunity in fighting climate change. Interest rates are low and lots of savings are available; there is rapid technological change; we have the Paris Agreement; and there are strong young people’s movements. Asked for his one priority he listed three: carbon pricing, clear plans and credible commitments, and enabling investment.
The unimaginatively named “Panel S” (for Swan?) has just concluded – the first time Christine Lagarde (ECB), Yi Gang (People’s Bank of China) and Jerome Powell (US Fed) have appeared in public together – albeit virtually. Along with François Villeroy de Galhau (Banque de France and NGFS) and Agustín Carstens (BIS) they responded to the question: How to manage expectations, balance actions and communication, and contribute to coordinate with other important actors? The panel was moderated by Gillian Tett of the Financial Times.
Christine Lagarde (ECB president) began, and set a serious tone by quoting Jacques Chirac: “Our house is burning and we are looking away.” Responding to a question about mandates, she said that climate change affects price stability, monetary policy transmission, and the ECB’s assets and collateral. Regulating banks in the face of systemic climate risk is also firmly within the mandates of central banks, she said. Pressed on her reaction to Bundesbank President Jen’s Weidmann’s change of view on greening the ECB’s monetary policy, Lagarde said that she hoped for a full consensus on the ECB Governing Council to incorporate climate change into all of the bank’s activities, including its monetary policy.
On climate stress testing, Lagarde said that the ECB had mapped the NGFS scenario to data from 4 million corporate accounts and all EU banks over 30 years. It is a huge exercise and is still underway, but what is already clear is that the cost of later action is much, much higher than earlier action, she said, and some of this risk is concentrated in a small number of banks.
Lagarde emphasised two key risks. TCFD is a voluntary and private activity, she said. This is like the light touch regulation prior to the 2008, and we know where that went. There is a risk that this reliance on market forces will be similarly disastrous with climate change. Lagarde’s second risk is that we yet again go into double standards where there were various take ups to mostly voluntary regulation. We need as much standardization as possible. We need to “trust but verify” to avoid greenwashing.
Asked if she supported a green Basel Accord, Lagarde said we ought to be concerned about an exclusively private-led approach. Without answering explicitly she said that a green Basel would be a “much larger project involving all key decision-makers, and not just central bankers.”
Yi Gang, Governor of the People’s Bank of China, agreed with Lagarde’s perspective of our climate situation, saying “our planet is on fire”. He emphasised the importance of education and of communicating the importance of green finance to the public (as he spoke just over 1,400 people were watching the discussion on YouTube). Yi also issued a strong call for carbon pricing.
Asked for China’s position on mandatory TCFD, Yi said that the PBoC is positive towards it, starting with major commercial banks and followed by listed companies. The bank is working closely with the FSB on TCFD but the bank’s job was first to work on a green taxonomy, Yi said. We already have a green loan standard and a green bond standard, so we have done some work on this. On climate-related stress testing, Yi was asked if we can expect published results. Yes, he said, outlining current climate stress testing by the PBoC.
“Our task is to manage the transition is a smooth manner”, Yi said. “We are very much alert to the importance of guiding the commercial banks to ensure a safe transition.” Asked about the European and Chinese taxonomies, Yi said that the green bond taxonomies were 80% similar. Yi said that China had removed all fossil fuel assets from its taxonomy.
Fed Governor Jerome Powell, was more sobering. “We do not seek to be climate policy implementers,” he said, referring to the greening of US monetary policy. “That’s not up to us,” he made clear, limiting the Fed’s efforts to researching, collecting and providing information on climate-related risk. Gillian Tett then gently asked about climate education within the Federal Reserve. All central banks are building institutional capacity on climate risk management, Powell responded, thanking the NGFS for its pioneering work on climate scenario analysis.
Powell also said that the Fed was studying climate-related stress testing, but had not made any decisions yet. In response to a question on the Fed’s position on mandatory TCFD, he said that that was not the Fed’s jurisdiction, but stressed the need for more data. He was strongly supportive of mandatory, standardised disclosure, but pointed to the SEC for the timing of mandatory implementation. Asked if he supported a “green Basel”, he said “those are your words, not mine,” but seemed to be warm to the idea.
Tett asked Powell why the US is lagging dramatically behind in TCFD disclosure. Is the US prepared, or will there have to be a lot of catch up – especially in smaller financial institutions? Powell said the Fed’s engagement now is only with large financial institutions, saying “I think that’s appropriate for now.”
Banque de France Governor Villeroy de Galhau, also representing the NGFS, said that climate change action is in full compliance with his mandate. There are climate-related risks to financial stability, he said, and in monetary policy, there is a strong link with price stability. Climate change has long term price effects, but is also affecting prices now.
Wearing his NGFS hat, Villeroy de Galhau outlined the upcoming report on climate scenarios. He hopes the ECB can be a pioneer in greening monetary policy, outlining possible first steps, including mandatory TCFD. “There is a duty to act,” he emphasised, calling for carbon pricing from governments. Later he said that he hopes the NGFS will have a standard operational framework and practice for climate scenarios within a year.
Villeroy de Galhau refused to be pressed on Jens Weidmann’s softening of his green monetary policy views, saying simply that it was welcome.
BIS General Manager Agustín Carstens said that the financial system is key to the reallocation of resources – indeed that is its purpose. In this context it would be unconscionable for central banks and regulators not to play a core role in the resource allocation that will be needed to respond to climate change. However Carstens also warned central banks not to over promise on climate change, and that governments must lead.
Carstens ended the session by stressing the importance of communication and coordination. “I think the G20 is a great fora to improve this coordination,” he said. Covid19 is a great wake-up call for climate change, he said.
The Green Swan conference is concluding with wrap-up speeches from BIS Deputy General Manager Luiz A Pereira da Silva and Bank of Italy Governor Ignazio Visco.
Da Silva gave a summary of the main messages of the conference. Climate is a new type of systemic risk, he said, certain to happen if we don’t act. The threat goes far beyond financial stability, but work is underway in several areas. Da Silva identified the key themes emerging from the conference as including:
- Carbon pricing is necessary, but difficult and complex. Many participants pointed out that the under-pricing of carbon is a source of financial instability.
- Disclosure was important. What are we exposed to? Many participants called for mandatory TCFD.
- Financial regulation. Coordination is needed here, as green finance faces a risk of fragmentation. Some participants called for a “green Basel Accords,” while others called for more data first.
- The relationship of financing to net zero. Some participants warned of a “Minsky moment” for climate, with the scale and horizon of the risks requiring a precautionary principle.
- New and better data was also a common topic.
Beyond finance, the technical contributions of central banks to this debate was discussed, Da Silva said, including work on how to include climate-related risks into core risk management functions.
Da Silva ended with a call for justice in response to the challenge of climate change. The conference brought a wealth of practical proposals, he said, and these proposals will be brought to the appropriate working groups of the G20.
Bank of Italy Governor Visco spoke last, reviewing the key points raised at the conference in light of the G20 Presidency programme. Italy currently holds the G20 Presidency and the G20 Heads of State and Government Summit will be held in Rome this October, days before COP26 meets in Glasgow in early November. Speaking in great detail, Visco’s remarks were in some ways administrative, outlining the finance-related agenda.
Concluding, Visco quoted the conclusions of the recent IEA report, including the necessity of ending all new fossil fuel investment. A delayed and disorderly transition will cost much more than acting quickly, he said. Putting the climate challenge into the context of global development, Visco emphasised the necessity for a just transition.
A transcript of Governor Visco’s remarks is available here.
That concludes the Green Swan Conference and our live coverage. It’s been a full few days and there is lots to digest, but the conference has clearly been a significant event in the development of green central banking. Thank you for reading our coverage.
This page was last updated June 9, 2021
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