Interview: Nick Robins on climate-neutral central banking

Nick Robins is Professor in Practice in Sustainable Finance at the London School of Economics’ (LSE’) Grantham Research Institute on Climate Change and the Environment, where he leads the sustainable finance research theme. He is author of The Road to Net Zero Finance report for the UK’s Climate Change Committee and leads the finance platform for the Place-based Climate Action Network. He is also co-chair of the International Network for Sustainable Finance Policy Insights, Research and Exchange (INSPIRE), and co-chair of the NGFS-INSPIRE joint study group on biodiversity and financial stability. He was recently appointed to the UK government’s Green Technical Advisory Group, charged with the delivery of a green taxonomy.

Robins’ research focus is on mobilising finance for a just transition, promoting the role of central banks and regulators in sustainable development, and investigating how the financial system can support the restoration of nature. His latest publication on climate-neutral central banking examines how the European system of central banks can support the transition to a net-zero economy. It offers seven policy proposals for aligning the European Central Bank’s (ECB) operations with the Paris Agreement target.

Graham Caswell and Hilal Ataci spoke with Robins last week about his impressions of the Green Swan Conference, his perspective of the development of green central banking and financial supervision in the run up to COP26, and his policy proposals for the upcoming European Central Bank (ECB) strategy review.

_______________

Speaking just a week after the Green Swan Conference, Nick Robins is emphatic that this was a pivotal event. The weight of the sponsoring organisations, the calibre of the speakers, and the sheer sense of confidence on display represents an extraordinary shift in the landscape of greening central banks and the financial regulators, he says. “There is obviously a long way to go, but perhaps we might think of this as the end of the beginning in terms of the strategic recognition from the world that climate risk is core to the mandates of the world’s leading financial authorities.”

One of the defining characteristics of the next chapter of central bank action revolves around how these guardians of the financial system support the transition to the net-zero economy, says Robins. “It may seem surprising, but the original TCFD recommendations don’t include the words ‘net zero’,” he points out. “A consultation is underway on net-zero within the TCFD, but it points to the importance of a shift in focus from generalised risk towards specifics.”

Robins roots this shift in the core goal of the Paris Agreement to “make financial flows consistent” with net-zero and climate resilient development. “We have to recognise that net-zero is not just one future among many,” he explains “but is a desired outcome.” With more than 120 governments now setting net-zero targets, “we need to be ready for the implications for specific portfolios and for the financial system as a whole”, he insists. Given the catastrophic impacts of unchecked climate change, “supporting the move to net zero is fundamentally a risk management strategy for central banks” and this means bringing the implications of the future into today’s financial decisions.

“It’s great for banks and investors to set 2050 targets, but the real reallocation of capital needs to take place this decade,” Robins argues, pointing to the IEA’s latest report showing that a seven-fold increase in net-zero investment is needed by 2030. The latest iteration of the NGFS scenarios marks a good step forward by more clearly connecting with the net-zero goal, he believes. However these need to be supported by shorter term measures, he says. A core recommendation of the climate-neutral central banking report is that all regulated financial firms in the EU should be required to submit net-zero transition plans, which would focus on short-term shifts in balance sheets.

Robins sees the policy landscape in the run up to COP26 as characterised by a double race: financing both the race to net-zero and also the matching race to resilience. This means a “setting in” of some of the key pieces of the international framework, including mandatory disclosure (providing data), taxonomies (defining what is green or not green), and capital calibration (adjusting preferences for bonds and other investments based on climate criteria). Following a recent G7 agreement, a deal on global mandatory climate-related financial disclosures is increasingly likely from COP26. Work is also progressing on coordinated green taxonomies and the green bond market is developing rapidly, he notes.

A particularly powerful avenue for future development that Robins sees is green sovereign bonds. These are universal assets held by everyone across the market, crucially linking public finance with capital markets, explains Robins, and central banks are often major holders. “While the current focus is on central banks’ corporate bond portfolios, these are only a very small part of their total holdings,” he points out. “If central banks are going to fully align their monetary policy operations with the Paris Agreement targets, then their sovereign bond holdings will have to reflect this too.” Sustainability-linked sovereign bonds could be linked to emissions, he suggests, with higher interest payments for not meeting targets. In the language of the markets, this would align government incentives with climate outcomes, he says, but would also require strategic dialogue with finance ministries.

ECB strategy review

Moving to the upcoming ECB strategy review, Robins said there is a strong double rationale for ECB climate action. The first driver is rooted in risk. The physical effects of climate change and the transitional effects of a disorderly movement to net-zero are a direct threat to the ECB’s primary mandate of price stability, he makes clear, while moving to net-zero is the Bank’s most effective risk management strategy to address this threat. This rationale is amplified by the second imperative: the need for policy coherence with the EU’s climate neutrality goals. Here the situation is becoming clearer with leading ECB figures setting out that the EU’s Treaty shows that as long as it doesn’t undermine the primary goal of price stability, the ECB should act to support core EU policies (which would include climate action and sustainable development).

Co-authored with Simon Dikau and Uli Volz, Robins’ recent paper outlines a series of seven policy proposals for EU central banks and financial supervisors to immediately act to align their activities with EU and member state climate neutrality policies. EU central banks and supervisors need a “climate neutrality roadmap” containing both long term expectations and near-term actions. The paper calls for climate neutrality to be consistently integrated into ECB monetary policy frameworks, models and portfolios, and for forward-looking scenarios used in climate stress testing to be accompanied by “short-term outlooks.” Climate neutrality should be a core element of EU supervisory practice at both micro and macro level (including the requirement for regulators to require net-zero transition plans from all EU financial institutions), Robins proposes. EU central banks should also walk the talk themselves and publish transition plans for achieving net-zero emissions within their own portfolios.

Rather than changing the ECB’s treaty mandate, Robins instead proposes that the Bank update its mission statement to include the ECB’s secondary mandate and the link to climate and sustainability. “There is a precedent for this,” he suggests, pointing out that De Nederlandsche Bank (DNB) revised their mission statement in response to the 2008 financial crisis to “safeguard financial stability and thus contribute to sustainable prosperity in the Netherlands.”

Looking Ahead

Over the past five years, green finance and its regulation have been developed through what Robins calls an interlocking “triple helix” of rising societal expectations (including from civil society groups), market innovation and then international regulatory cooperation. In the years ahead, he sees a number of new issues joining the strategic theme of net-zero central banking.

The first is the potential for renewed international regulatory action under the Biden Administration. The G20 Sustainable Finance working group has been renewed and upgraded. The NGFS is a coalition of the willing, promoting voluntary action. But we could now see this translating into changing the ‘rules of the game’, Robins says, including the possibility of a “Green Basel.” Following policy proposals to the Green Swan Conference from a coalition of civil society groups, central bank chiefs were asked for their views on a “Green Basel” involving adjustments to Basel Accord capital requirements (Pillar I), supervision (Pillar II), and systemic risk buffers. In her response, ECB President Christine Lagarde made clear that greening the Basel Accords would require agreement “beyond central bankers,” making the annual COP meetings a potential forum for such a move.

Another priority is to connect action on net-zero by private finance and also by central banks and financial supervisors to their social consequences. Robins is highly aware of climate justice issues and his next report will focus on the just transition. He found it striking that BIS Deputy General Manager Luiz Awazu Pereira da Silva highlighted the importance of addressing distributional issues in his concluding remarks to the Green Swan Conference. While justice and distributional policies are matters for governments, central banks have an important role to play, understanding how decarbonisation in the economy will affect key sectors and regions in terms of income and jobs.

The third developing issue that Robins sees is to join the dots between the climate and nature crises for central banks. The new joint study group which he co-chairs with Dr Ma Jun is looking at what biodiversity loss means for central banks and supervisors. Its first report has just come out and lays out the agenda that the group will address over the coming months. “The Vision Paper shows why it is critical that central banks address climate change and biodiversity loss as a compound threat to the financial system, one that is posing a risk of profound and irreversible impacts,” says Robins. “The next steps for the Study Group is to gather experience and insights on the role that financial authorities can play, given their missions and mandates.”