Live – Green Swan 2022: what’s next for central banks?

June 1, 2022|Written by Graham Caswell & David Clarke|Financial Stability Board

Day two of Green Swan 2022 sees further discussions between central bankers, financial regulators and policy makers on the role of finance in achieving net zero.

Highlights include panels on financing transition plans and green investment, as well as a high-level discussion on next steps for central banks in the green transition, featuring Yi Gang of the People’s Bank of China and Christine Lagarde of the European Central Bank.

Catch up with coverage of Green Swan 2022 day one

Central banks and the green transition – what’s next?


The last event of Green Swan 2022 was a high-level panel on next steps for central banks and the green transition. Chaired by Banque de France (BdF) governor François Villeroy de Galhau, participants in the session were ECB president Christine Lagarde, People’s Bank of China (PBoC) governor Yi Gang, Bank for International Settlements (BIS) general manager Agustín Carstens and Central Bank of Brazil (CBB) president Roberto Campos Neto.

The discussion began with de Galhau asking the panelists what their institutions have done on climate over the past year, especially in the context of the return of inflation.

Yi explained that the PBOo has done two things. It has conducted its first climate risk stress test on 23 commercial banks, focusing on thermal power, steel and cement, assessing the impact of raising carbon prices on banks funding these industries. The results show the potential for a weaker capacity to service debts, Yi said, but only a small part of China’s financial sector is exposed to these sectors. The PBoC has also introduced a targeted lending program offering a reduced interest rate to commercial banks for financing green activities.

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The ECB has opened a climate change centre, has concluded that it has a strong role to play in climate action, and has introduced its own climate strategy, Lagarde said. As part of this strategy the ECB has integrated climate change into its macroeconomic toolkit and projections, and is assessing the credit ratings it uses to ensure they properly account for climate-related risks.

She added that the ECB is also exploring eurosystem standards on climate risks and has conducted a stress test of EU banks and their clients, the results of which show that a disorderly “hothouse scenario” would increase the risk of bank failure by 8%. Results from a supervisory climate stress test will be released next month.

Neto said the past year had been a complicated one. The CBB has resisted the idea of creating a “green department”, preferring that every department focus on sustainability. The culture surrounding climate action has developed, he said, with Brazil particularly affected by climatic events and the resulting rise in food prices. Identifying a tension between the risk of stepping outside the BCC’s mandate by doing too much and the risk of doing too little and suffering the consequences, Neto said that the BCC had chosen the former approach.

Agustin Carstens seated in a low chair, gesticulating with his hands
Agustin Carstens © IMF

Since last year’s conference the BCC has issued its first report on climate and environmental risk, along with a report on climate action. At the end of 2021, the BCC established a sustainable economy committee and concluded sustainability requirements for managing reserves. The BCC has also improved its data collection and standards and established ESG risk and policy guidelines, as well as creating rules for agricultural-related credit, which Neto characterised as the beginning of a green taxonomy.

Carstens offered a global view, saying that the BIS had supported central banks to manage their reserves in line with the Paris Agreement by launching an Asian green bond fund. The BIS has also been working on green innovation through its innovation hub, he said, highlighting Project Genesis which allows real-time monitoring of green investments.

Panelists were then asked to speak on standardising disclosures and the tensions between climate action and central bank mandates. Yi said China already has domestic disclosure standards, indicating that national standards must converge. Lagarde strongly welcomed work on the ISSB standards and said that while it is already clear the US would go its own way, she hoped these would become the definitive international criteria.

Lagarde said she is not giving up on a green targeted lending program although it is not “squarely” within the ECB’s primary mandate. “But if we don’t try then we have no chance of succeeding,” she said, “so count on me.”

Neto called for convergence on national standards, saying that agricultural standards were more difficult to develop than industrial ones. On mandates, he said the challenge often comes more from those being influenced than from politicians themselves, adding that the BCC has “full support” from Brazilian politicians. Neto also said the BCC has several programmes similar to a green lending facility, and that more progress in this area is possible.

Turning to the current economic situation and the prospects for “greenflation“, Lagarde said that, in the short term, the issue is fossil fuels and other inflationary pressures rather than greenflation. She pointed to a 39% increase in energy prices since last year, while noting that the price of solar panels, wind turbines and other renewable technology has gone down. “The real problem is a dependency on a small and sometimes hostile number of suppliers for fossil fuels,” she said, saying that this issue will have effects in the medium term.

Fossil fuels are creating inflationary pressure,rather than the shift to green technologies, according to ECB president Christine Lagarde

More ambitious action is required, Lagarde said, including higher carbon pricing while a higher demand for resources used in green technology may lead to higher prices in the medium term. She went on to say that it is important that the supply of these resources is diverse, and that the situation with fossil fuels is not replicated elsewhere. Less investment in fossil fuels may also put pressure on prices as demand remains strong while supply shrinks.

In the long term, Lagarde concluded, it is likely that renewable technology will expand and that energy prices will be reduced. The ECB will publish a study on these issues in its next quarterly review.

Neto said that greenflation was a challenge to reducing fossil fuel inflation, with finance more difficult to raise for green technology than for fossil fuels. He agreed with Lagarde’s timeline in which greenflation peaks in the medium term. The problem of high energy prices will likely be solved sooner than the problem of food prices, he added, as the scale of renewable sources expands, calling for carbon pricing and better data collection.

Asked about international cooperation, Yi said there was already 80% convergence between the EU and Chinese green taxonomies, and that discussion was continuing on improving this harmonisation to work towards an international taxonomy.

Carstens called the war in Ukraine a “wakeup call”, highlighting a vulnerability in the world economy. Calling for diversification, he said this crisis should be used as an advantage to build a better world. Lagarde and Neto agreed, calling the war an accelerator, while Yi said that since there is going to be a green transition regardless, the opportunity should be taken to improve green policies.

De Galhau then asked each participant to outline their key priorities over the next year. Lagarde said time cannot be wasted and that she would like to see harmonised and comparable disclosures, a green capital market union, a green lending program, and nature-based solutions to capturing carbon that protect biodiversity at the same time

Yi looked to technological innovation to reduce the green premium, emphasising the importance of carbon pricing and the development of China’s carbon market. Expanding awareness of the need for a green transition among the public is also a priority of the PBoC in the coming year, he said. He also said the PBoC was working to green its reserves.

Neto listed taxonomies, carbon markets, better use of technology and finding a way to monetise native forests as his “wish list”, while Carstens said that green macrofinancial modeling, data, technological innovation and banking products were BIS priorities.

The session ended with de Galhau saying that while the past year has been very difficult, the energy and commitment of the central bank community remains undiminished.

Risk of project failure outweighed by climate risk


The second panel of the day focused on financing green innovation and investment. Irene Heemskerk, head of the European Central Bank’s climate change centre, chaired a discussion with representatives from Swedish battery developer Northvolt, technology accelerator Breakthrough Energy and the European Investment Bank (EIB).

EIB director general Laura Piovesan said that investment in decarbonising electricity, energy storage, industrial innovation and carbon capture are all essential for the clean transport and energy transition. The EIB has an important role in supporting the scaling up this investment and has a goal to increase its green investment by 50% by 2025.

Julia Reinaud introduced Breakthrough Energy, a network of investment funds and other actors to fund and scale green technologies. Its goal is to fill funding gaps, partnering with the EIB and others. Reinaud spoke about the “green premium” in which sustainable energy and other technologies are differentiated only by higher prices, thus reducing uptake which in turn makes it harder and more expensive to finance these projects.

Northvolt’s Alexander Hartman reviewed his company’s work on green battery innovation, saying they have received nearly €6bn in capital support to date. Northvolt’s customers are mainly automotive companies, but it is also responding to growing demand for energy storage solutions.

Asked how Northvolt bridged the financing gap, Hartman said that boosting research and development was critical but that it is not easy to fund this expansion. In the absence of equity investors, Northvolt worked with partners and potential customers to fill this gap and received a loan from the EIB.

Heemskerk then asked Reinaud what challenges Breakthrough Energy sees in the innovation and investment cycle. Reinaud distinguished between three “valleys of debt” as an innovative enterprise moves from research to product, and then to deployment. The urgency of the climate crisis means that time is a pressure, but there is still an important gap in venture funding. Looking at sustainable aviation fuels, Reinaud said the green premium was a major barrier, and that this and other new technology needs alternative funding such as grants, low-cost equity and blended finance.

Reflecting on the wider context, Hartman said that while there has been progress, much more needs to be done which is not happening. We need to really understand the risk of not doing enough, he said, because it goes far beyond the risk that a project might fail. Heemskerk agreed, pointing to the recent ECB economy-wide stress test showing that the risks of not acting are so much greater than the risks of acting and calling for greater awareness.

We need to take risks today to “de-risk” the future, Hartman responded, calling for a short term focus on the here and now. Regulator requirements on financing are hindering innovation, he said, offering a wish list of policies including allowing for more capital in the capital structure, relaxing competition rules, enabling more grant financing and developing green instruments to incentivise.

Asked about the role governments can play in fostering innovation, Reinaud agreed with Hartman’s list. Breakthrough Energy has identified over 70 European green innovation projects that are ready to launch at scale but have not yet received the necessary investment. She called for a coherent industrial strategy and policy in the green tech sector.

Piovesan said that one area important to the EIB is expertise, not only in technology but in compliance and the regulatory environment. A lack of skills is also a serious problem, and this is an area for public investment and policy.

Concluding the session, Heemskerk asked each panelist for one thing they would prioritise. Hartman said risk taking needs to be aligned with the urgency and scale of the climate risks. Reinaud said she would start with the current geopolitical context and use it to accelerate the deployment of renewable and low-carbon solutions. Piovesan called for stronger global partnerships and drew a comparison with the response to the Covid-19 pandemic, agreeing that the Ukraine crisis needs to be a trigger for action to avoid huge costs later.

The challenges of investment, innovation and deployment


Laura Cozzi, co-lead of the International Energy Agency’s (IEA) World Energy Outlook, gave a short speech on the investment and innovation required to reach net zero by 2050.

Cozzi began by looking at global CO2 emissions, highlighting the fact that last year saw a record increase as the world recovered from Covid-19 disruption. This growth was largely due to increased coal use, she said, and emissions this year will be the highest ever.

As fossil energy prices rise following the Russian invasion of Ukraine, Cozzi explained that the IEA sees this as the world’s first truly international energy crisis as it affects all fossil fuels and not just oil. The 1970s oil crisis resulted in significant innovations, she said, with car fuel efficiency doubling within five years and a dramatic expansion in nuclear energy.

Looking at today’s situation, Cozzi emphasised the importance of deploying energy innovation such as renewable energy and electric cars. Growth rates of these technologies has been dramatic over the past few years, she said, and if this growth can be maintained the 2030 Paris-aligned targets are within reach.

Road sign saying 'Electric vehicle charging only'
Growth in innovative technologies such as electric vehicles should be maintained to reach international climate targets © twenty20photos

However, areas such as heating and building efficiency are lagging far behind and so overall energy efficiency is not improving nearly as much as is needed. This is not an innovation challenge, she made clear, but a deployment and investment challenge.

However there is also an innovation challenge in areas such as carbon capture, batteries, hydrogen and synthetic fuels, and other areas. Investment in clean energy is still falling short, Cozzi said, with investment particularly lacking on the demand side.

The good news is that governments in advanced economies are earmarking investment for energy efficiencies, but more work is needed in emerging markets where funding is far short of what is required. Around US$1tn is currently being invested each year towards the energy transition, Cozzi said, but this needs to be around US$4tn.

Cozzi concluded by saying that while government investment is increasing, private sector investment remains far behind what is required for the world to meet its Paris Agreement targets.

Breeden: finance sector reliant on data from businesses for transition planning


The day’s first panel discussion was on the topic of transition plans and their financing, chaired by Frédéric Samama from S&P Global. Samama said the recent COP summit had highlighted how companies, investors and governments are converging on the same climate goals, with the notable commitment by financial institutions to align US$130tn in assets with the transition to net zero.

He said there are two ways investors can support this process. They can reshuffle portfolios regularly based on emissions data and they can scrutinise the trajectories of companies they invest in, particularly via transition plans.

Alice Carr from the Glasgow Financial Alliance for Net Zero (GFANZ) outlined the work the group is doing to convene private sector and civil society actors to identify what a good transition plan will involve.

She said the financial sector faces a tough challenge because it is trying to transition the households and business it finances, and is trying to create the optimal conditions in the real economy for the transition to take place. This requires engagement with firms and access to detailed information.

Sarah Breeden from the Bank of England (BoE) agreed, saying the financial sector is a mirror of the real economy it finances. She observed that financial institutions’ transition plans can only be based on what information they get from businesses and customers. This is why the UK has determined that mandatory transparency is critical, she argued.

A woman, Sarah Breeden, standing against a white background, smiling
Sarah Breeden © Bank of England

Breeden added it is important for the financial sector to be seen as credible, and to demonstrate that it is making change, not just promising to do so in the future. For regulators, this means there must be consequences when transition plans are not followed, she argued. She said the plans are “absolutely foundational” for the BoE as a macroprudential authority.

Breeden later suggested that a key finding from the BoE’s Climate Biennial Exploratory Scenario exercise, the findings of which were published recently, is that substantial opportunities exist for the financial sector to benefit from the transition. She said the BoE is keen to work with institutions as a supportive influence and partner as they identify business model changes based on an increasing understanding of how the transition will affect the sector.

Carr said GFANZ is keen to undertake transition planning for members as soon as possible. She observed that despite the fact that some jurisdictions like the UK have taken early action to embed the plans into regulation, it is still a relatively new topic across the global regulatory community.

Carr went on to say that the financial sector would welcome more scrutiny from policymakers, including setting formal expectations. She stated that financial institutions could do a lot more to help emerging markets to transition, but suggested the international financial architecture is not yet in place to allow this. She concluded there is a need to ensure that investment is going to future technologies, as well continuing to support already-green sectors.

Knot: graceful climate transition requires urgent action


The second day began with a keynote speech from Klaas Knot, chair of the Financial Stability Board (FSB) and president of De Nederlandsche Bank. Speaking on the role of the financial system in propelling a “graceful transition”, Knot began his talk by stressing the increasing urgency to green the financial system.

“Russia’s invasion of Ukraine has demonstrated the reality of transition risk and its relevance over even a shorter time horizon,” Knot said. The resulting increase in energy prices has created pressure to deprioritise energy transition plans, he said, while the risks from climate change keep rising. Referencing the IPCC’s latest assessment report, Knot pointed to the alarming evidence of the physical risks of climate change and said that high energy prices should reinforce rather than deflect from the international sustainability ambitions, of which the financial sector plays an important part.

Climate-related stress tests across various jurisdictions show that if the transition to a low-carbon economy is delayed or disorderly, the global economy and financial system will face significant risks, he warned

Turning to the work of the FSB, Knot said that its 2021 climate roadmap has been developed to assess and address these risks and that progress has been made across all four of its building blocks: disclosures, data, vulnerabilities analysis, and regulatory and supervisory practices.

Expanding on these building blocks, Knot stressed their interdependencies. Developments on disclosures are expanding rapidly, he said, notably through the International Sustainability Standards Board’s work to establish a consistent and comparable global baseline. These disclosures will provide data on transition efforts to investors and other stakeholders, allowing the assessment of firm-level vulnerabilities and actions.

However, Knot explained that macro-level data is also important, including government data on plans to curb emissions, scientific data on physical climate risks, and systemic data on how climate risks might be transferred, amplified or mitigated by different financial sectors. This data, along with scenario analysis, will in turn assist in vulnerability analysis, he said, laying the groundwork for the development of regulatory and supervisory practices and tools.

He added that the FSB’s contribution is to combine this work together by promoting consistency and effectiveness of approaches across sectors and across countries, referring to the FSB’s interim report on supervisory and regulatory approaches to climate-related risks, released in April. Knot encouraged submissions to the public consultation on the report before the end of June.

Concluding, Knot said that a graceful climate transition requires urgent action. While members of the public may only see the outcomes of action, the work by financial regulators and the financial sector behind the scenes is vital to ensuring those outcomes are positive.

This page was last updated June 1, 2022

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