Live – Green Swan 2022: monetary policy and climate change

May 31, 2022|Written by Graham Caswell & David Clarke|Network for Greening the Financial System, Banco Central do Brasil, Bank of England, Bank of Japan, Banque de France, European Central Bank, People's Bank of China

The second annual Green Swan conference brings together leading central bankers, financial regulators, policy makers and academics to discuss monetary policy in the context of climate change. Also on the agenda is the role of finance in the climate transition, including transparency and disclosures, transition plans and financing green innovation.

As global greenhouse gas emissions rebound from a Covid-19 dip to near record levels and IPCC climate scientists warn that “the window for a livable future is closing”, what happens at this two-day virtual event has vital consequences for humanity’s efforts to avoid catastrophic climate change.

Follow the speeches, discussion and developments from the first day, and read coverage of Green Swan 2022 day two.

Gore points to ‘staggering gulf’ between pledges and actions


The final event of the day was a special address by former US vice president Al Gore with a “call to action” for the financial sector. Gore, currently chair of Generation Investment Management, said he was speaking both as a climate activist and as an investor. He began by looking at developments since he spoke at last year’s Green Swan event.

Governments have reaffirmed their commitment to the 1.5ºC target of the Paris Agreement and announced new steps, while the financial sector is now front and centre of the global effort to transition away from carbon. The Glasgow Financial Alliance for Net Zero and other initiatives have deepened the commitment of the private sector to net zero by 2050, he said, but these efforts are clearly not enough.

“The science is clear,” Gore said, referencing the recent IPCC report warning that the window of opportunity to avoid catastrophic climate change is now closing. “Climate change is now a fully fledged global emergency,” which is already impacting the most vulnerable “first and worst”.

There is a “staggering gulf” between the pledges of governments and financial institutions and the actions needed to reach the goal of the Paris Agreement, Gore said, and a 50-50 chance that 1.5ºC will be exceeded in at least one of the next five years.

While the Paris goal is an average and not based on any one year, this would mean the world passing into what he called “dangerous and unknown territory.” The 1.5ºC threshold is the point at which the planet may cross systemic tipping points, with irreparable and unrecoverable damage or dangerous feedback loops that have the potential to exponentially accelerate this crisis.

Turning to practical steps the financial sector must take to avoid this fate, Gore offered five key points. “We must expand on what the capital markets value. We must end anti-climate finance. We must reimagine our relationship with nature. We must ensure a just transition. And we must measure, report and engage.”

The value spectrum is something we tend to look at through the lens of short term profits, leaving out both negative and positive externalities, Gore said. This means that the depletion of vital resources such as topsoil and underground water aquifers is being ignored, and that investment is not being made in the solutions needed to avoid the catastrophic impacts of the climate crisis. “We must ensure that finance acts with the full value spectrum in view,” he said, and that the problem must not be passed to future generations or rely on long-term pledges.

Gore urged financial institutions to ensure that finance is flowing into renewable energy and the sustainable solutions required, noting that everything needed to cut emissions by 45% by 2030 already exists and that the world is not short of capital, but that impact is not being delivered. Calling for measures to support developing countries where access to capital remains a serious challenge, Gore said the World Bank and other development institutions are “missing in action”.

Gore then turned to “anti-climate finance”. It’s not enough to fund alternatives, he said, if fossil fuel expansion also continues to be financed and subsidised. Criticising the “deeply unethical” disinformation campaign by some fossil fuel companies, Gore said that he considers this “a crime against humanity”.

The war in Ukraine illustrates the security threats of continued fossil fuel dependence, he said. But money continues to flow into new fossil fuel projects, with banks financing projects that will last for many decades and threaten the future of all civilisation. “The bottom line is that we must cease to finance new fossil fuel assets.”

“We are part of nature,” Gore said, “not magically separate from it.” Deforestation and other destructive activities can not continue, he added, calling for “nature-positive finance” and nature-positive solutions. The use of our thin atmosphere as an open sewer cannot continue, he added, warning that carbon offsets should not be used as a “get out of jail free” card

Turning to climate justice, Gore said that a grossly unequal net-zero world is not success. While more people now understand the connection between a just transition and a net-zero goal, there is no common understanding of what the term means, he said, calling this a critical issue which must be addressed.

As part of the shift to net zero, workers and communities must have understanding and agency over decisions that affect their daily lives, he added. Climate action must bring opportunity to communities and people who have been previously marginalised.

Gore concluded by speaking on data and measurement. Climate risk must be embedded in every lending, investment and assessment decision in order to maintain the soundness of financial institutions, he explained. That requires more accurate data and clear global standards, so reporting now needs to be made mandatory by governments.

It is not only money that has a time value, Gore said, introducing the concept of a “time value of carbon”. For companies, banks and other actors, carbon reductions today are much more valuable than carbon reductions in the future. Investors must recognise that we are now entering an era of radical transparency and the entire world will be able to see the climate performances of every organisation.

“This is not a time for moral cowardice and indifference to the future of humanity,” Gore said.

How the green transition could play out


Markus Brunnermeier, a professor at Princeton University, delivered a lecture on climate change, finance and monetary policy, outlining the various ways the green transition might play out.

He said carbon reduction might be achieved either by reducing economic activity, or by developing competitive technology in renewables and energy efficiency and exploiting economies of scale.

Brunnermeier put forward some approaches policymakers could take to facilitate the transition. Either they can focus on explicitly reducing pollution or seek to mitigate the risk associated with firms’ pollution via financial regulation.

Markus Brunnermeier speaking at a lectern
Markus Brunnermeier speaking at an earlier event © ECB

He said the former option would generate tax revenue and give policymakers some influence over prices, for example by adjusting the number of pollution permits available, whereas the latter would likely cause prices to rise but with the proceeds flowing to investors. This is because such measures would create uncertainty and risk for non-green technologies. Investors would have to bear that risk but would be compensated for doing so, he said.

Brunnermeier expressed scepticism over the merits of “greening” other policy instruments and monetary policy, which he said could undermine those instruments’ primary purposes and could threaten central bank independence.

He also warned against relying too much on private sector ESG initiatives to facilitate the transition because they are subject to greenwashing. He said that governments should avoid outsourcing decisions which should be made via the democratic process.

Adapting operations to a hotter world


Moderated by the Bank of England’s James Talbot, the day’s panel discussion focused on the practical topic of how central banks can adapt their operations to a hotter world. Participants were Bank of Japan (BoJ) assistant governor Tokiko Shimizo, Central Bank of Brazil (CBB) deputy governor Fernanda Guardado, the People’s Bank of China’s (PBoC) Lyu Zheng and the Banque de France’s (BdF) Ivan Odonnat. Talbot began the session by asking for a review of the climate-related activities of each of the four institutions.

Shimizo was first up, focusing on the BoJ’s targeted lending program to support private sector decarbonisation efforts. Loans have a one-year term but can be rolled over to 2030, she said, essentially making this a source of long term financing. She emphasised that counterparties make their investments and loans based on their own decisions. The next auction will take place this July, likely expanding to regional banks.

Guardado said that lack of rainfall since 2012 has resulted in a 1.5% reduction in Brazilian GDP each year, affecting agriculture and hydroelectric energy production. These factors contributed to inflation 67 basis points above target, she said, with energy and food prices most affected.

However, Guardado made clear that the BCC’s track record in incorporating sustainability issues into its agenda has been relatively successful. Policies and instruments, new regulations, supervision practices, partnerships and internal measures have all been utilised, and Guardado added that the BCC is working on its first national climate risk exercise for financial institutions.

Cocoa pods being tipped from a basket onto the ground which is covered in dried leaves
Reduced rainfall since 2012 has cut Brazil’s GDP by 1.5% each year © twenty20photos

Lyu said that in monetary policy the PBoC focuses on the effects of transition on the macroeconomy, adding that these effects may push inflation up. He went on to say that bank credit is the main channel in China’s financial system and the green transition involves the profound structural reform of the economy and society, so structural policies are most important. Lyu then gave an outline of the PBoC’s carbon reduction lending facility, in which disclosures are required quarterly.

The PBoC has created a special lending facility for “clean and efficient” coal use, Lyu said, adding that China had experienced a short interruption in electricity supply as a result of cutting coal production. “We bear in mind the principle of ‘construction before destruction’ in the green transition to ensure energy security and economic stability,” he said.

Climate change can affect price and economic stability, Odonnat told the conference, making it an important part of monetary policy. The question is no longer whether the Eurosystem and European Central Bank (ECB) should integrate climate considerations into monetary policy, the question is how to do it. The ECB is currently engaged in preparatory work to this end, Odonnate said, outlining the building blocks of the ECB’s approach on data, disclosure, own fund portfolios and collateral framework.

In the follow-up discussion, Talbot briefly reviewed the BoE’s monetary policy activities relating to climate change and said that divestment from its corporate portfolio is an option for dealing with climate laggards.

In the second round of the discussion Talbot asked participants to outline the main challenges faced by their central banks in greening their monetary policy and other activities.

Shimizo identified the issue of so-called market neutrality, saying that the concept needs to be interpreted with some latitude. Tackling the negative externalities imposed on society by the costs of climate change can be consistent with a broad definition of market neutrality if it is done without making direct decisions on resource allocation, she said.

Guardado identified data, benchmarks and taxonomies as the three main challenges faced by central banks in their transition efforts, while Lyu said that the transition to net zero is a long, slow process and the boundaries of monetary policy in supporting the green transition are yet to be determined.

However, monetary policy should not replace market mechanisms, Lyu said, and it is important to avoid moral hazard. Odonnat saw complexity and lack of information as the biggest challenges, saying that better and more harmonised disclosure is needed.

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Turning frameworks into action


G20 sustainable finance working group chair Ma Jun chaired a roundtable discussion on turning transition finance frameworks into action.

Introducing the topic, Ma noted that while green, sustainable finance has developed rapidly in the last few years, it still focuses largely on “pure green” economic activities such as renewable energy.

A much larger part of the economy is currently high carbon and has the potential to decarbonise, he said, but this transition is not yet well financed. The G20 has recognised this problem in its sustainable finance roadmap, and is developing a transition framework composed of five elements. This will include identifying and reporting transition activities, financial instruments and policy incentives, and incorporating climate justice.

Ma asked Masyita Crystallin, special advisor to the Indonesian minister of finance, for her views on this framework. Crystallin said that the various needs of different countries need to be taken into consideration, pointing to the situations of the EU and Indonesia. However, transition finance must be interoperable between countries.

Next up was Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environment. Asked for his views on the different policy options to incentivise private sector movement away from carbon, Stern said that investment is all about expectations, so influencing those expectations in a positive way is extremely important.

The greenhouse gas externality is not the only market failure, Stern said. There are also market failures in research and development and in capital markets, while intervention is also required to build and maintain networks. There is also an important market failure in information, he added, saying that “we need to know what we’re buying, we need to know where it comes from, we need to know what’s in it”.

Stern went on to say that the market also does not incorporate the co-benefits of climate action, pointing out that air pollution associated with emissions kills up to 10mn people a year. Meeting the climate challenge will involve dislocation, Stern said, which must be faced directly while making sure that the transition is just.

Daniel Hanna, sustainable finance head at Standard Chartered, reviewed his institution’s climate efforts, saying that the transition is a shared effort and emphasising Standard Chartered’s work with low income countries. Kamran Khan, Deutsche Bank’s head of ESG for Asia Pacific, gave a similar review of his own bank’s activities.

Paulina Dejmek Hack, advisor to the president of the European Commission, reviewed EU actions and also highlighted the importance of a just transition. A lot of international cooperation is needed in this space, she said, along with a global baseline and interoperability between regional frameworks.

The G20 transition framework is the most promising movement working towards this end, she said, pointing to climate-related reporting, taxonomies and green financial instruments as the building blocks of the EU’s response.

Sue Lloyd, vice chair of the newly established International Sustainability Standards Board, gave a review of the draft standards currently open to public consultation. Built on the recommendations of the Task Force on Climate-related Financial Disclosures, the draft standards include industry-based disclosure requirements derived from the standards of the Sustainability Accounting Standards Board. Reports on all absolute gross greenhouse gas emissions generated will be required, including scope 3 emissions from suppliers and customers.

The International Finance Corporation’s Vivek Pathak was the last speaker, saying that the “elephant in the room” is that the transition to come is going to be very different compared to what has been experienced over the last 20 years. Efforts to date have focused on renewable energy and relatively easy emission reductions, but now comes the difficult part when coal decommissioning coal needs to start. Taking a dirty company and making it green requires a very different mindset, he said.

“We can have all the taxonomies in the world, but decommissioning a steel plant in India is going to be very different from decommissioning a steel plant in Mexico,” Pathak concluded, calling for detailed firm-level transition plans.

Zhou: massive investment required for net zero


The keynote speech for Green Swan 2022 was delivered by Zhou Xiaochuan, former governor of the People’s Bank of China and currently vice chair of the Boao Forum for Asia.

Speaking on the role and potential of the financial sector in climate change and the carbon market, Zhou said that achieving net zero will require a massive mobilisation of investment and that fiscal policy can only provide only a small fraction of this. China alone will need several hundred trillion yuan, he said, and this can only be done with private investment and bank loans.

“We need not only access to the market but also an appropriate incentive mechanism,” Zhou said, adding that financial institutions and private investors are always price sensitive and they need predictable, measurable, reasonable returns on investment. “We need to set-up clear standards, create a database for CO2 disclosures and develop a well functioning infrastructure,” he said, as well as a market incentive mechanism for research and development.

The financial sector plays a critical role in funding transition, Zhou said, but it is wrong to downplay the scale of the challenge. The sector is vital for price discovery, risk management, and for inter-temporal and cross-border investments, with currency exchange and risk hedging also within its remit.

Zhou Xiaochuan speaking to Christine Lagarde in 2016 © IMF

Zhou then turned to carbon pricing, emphasising the need to ensure connectivity among carbon trading markets. There is a need for a unified or interconnected market to provide consistency in incentive and disincentives, he said. Carbon quotas must be established for both the supply and the demand side, and carbon tax should include a cross-border component. The priority should go to price discovery rather than to constraining function between markets.

He added that carbon quotas could be incremental, full or a transitional hybrid. All three are acceptable for China, depending on public support and international negotiations that recognise Chinese conditions. It is important not to add too much pressure at the early stage of the transition, Zhou said, calling for a 10-year shift from incremental to full quotas.

Zhou noted that there is also a need to define greenwashing and transition washing as these concepts are ambiguous and understood differently. An incentive mechanism for certified emission reduction is required, he said, and it is vital that this CO2 reduction be certified.

Zhou ended his remarks with a to-do list for the financial sector, including discounting future returns on emissions reductions to net present value and incorporating dynamic adjustments into climate change models.

Menon: ‘climate change is the ultimate supply side shock’


Following welcoming and housekeeping remarks from Luiz Pereira da Silva, deputy general manager of the Bank for International Settlements, the opening address of Green Swan 2022 was delivered by Ravi Menon, chair of the Network for Greening the Financial System (NGFS) and managing director of the Monetary Authority of Singapore.

“The trajectory to net zero will be largely determined by 2030,” Menon began. Referencing warnings from IPCC scientists and outlining the need for global emissions to peak by 2025 and fall by around 45% by 2030, he was explicit on the urgency of climate challenge and the potentially catastrophic consequences of failing to effectively act. “2022 to 2030 is the critical decade,” he said.

Menon then turned to the newly released 2022-2024 NGFS work programme, committing the global network to a series of actions organised in six areas: financial supervision, climate scenarios, monetary policy, guidance for central banks on transition to net zero, nature-related financial risks and capacity building.

The NGFS will develop best practice guidelines for developing transition plans by financial institutions, he said, and will work towards a consistent and comparable approach. It will sharpen its climate scenarios, develop short term scenarios and strengthen its modeling of physical risk.

Focusing on monetary policy, Menon said that “climate change is the ultimate supply side shock, affecting the economy in both cyclical and structural dimensions.” To address this threat the NGFS will focus on macroeconomic modeling on critical transition issues and will explore how monetary policy operations can support the transition to net zero. The NGFS will also develop guidance on how central banks can integrate sustainability considerations across central bank functions, helping them to lead by example

He added that biodiversity loss and materialisation of other nature-related risks have deep consequences for the supply of food, water and essential materials, committing the NGFS to work towards mainstreaming these issues. The NGFS will develop a common base of knowledge about these risks, he promised, working towards a “nature positive global economy”.

Finally, the NGFS will work on building the capacity of central banks to respond to climate and nature-related risks, largely through educational initiatives. This will include creating a comprehensive training curriculum ranging from foundational knowledge to advances and specific skill sets

“Inclusivity is the key to our success,” Menon concluded. The NGFS will be “uncompromising in our ambition to support a Paris-aligned pathway to net zero while meeting the economic and social development needs of our members,” he said. “In short, a just transition to a sustainable planet.”

This page was last updated June 1, 2022

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