Sabine Mauderer spoke at the Green Swan conference in Basel. © Deutsche Bundesbank
This is part one of our Green Swan 2024 coverage. Read part two.
Following a year of extreme weather events around the world, senior central bankers and industry leaders gathered in Basel recently for the annual Green Swan conference. This year’s edition focussed on how the climate crisis and policymakers’ attempts to address it are transforming the real economy.
In his opening remarks, Agustín Carstens, general manager of the Bank for International Settlements which hosted the event, highlighted the event’s shift in focus, from being finance-centric to asking how finance can “enable the desired outcomes in the real economy. Outcomes in terms of real capital investment, the energy mix, the patterns of production, and the global supply chain.”
“Understanding these real economy developments is indeed critical for central banks in performing their core functions,” he said.
Mauderer: monetary policymakers are steering through ‘uncharted waters’
“Climate change is already reshaping our economies, our financial systems, and our societies today. Even our lives are at risk. The devastating floods in Spain are a recent example,” Sabine Mauderer, chair of the Network for Greening the Financial System and member of the Deutsche Bundesbank’s board, said during her address.
The economic impact of extreme weather events is substantial, Mauderer explained, with direct damage amounting to US$280bn last year alone, and annual property damage from natural disasters more than doubling since 2004. “When we account for the second-round effects, the total impact on the global economy is much larger”, she said.
On physical risk, Mauderer cautioned that the planet is on the verge of crossing multiple tipping points, highlighting the growing threat of the Amazon rainforest’s potential collapse due to droughts and deforestation. This could have “compounding” effects that cascade across global ecosystems and economies, she said.
Mauderer signposted recent NGFS research that has deepened the network’s understanding of physical risk, including a paper exploring how climate disasters impact the macroeconomy, and the latest NGFS scenarios which include a new damage function.
On transition risk, she explained the low-carbon transition is causing “substantial structural changes within economies”, including shifts in capital flows and potential short-term inflationary pressures. However, Mauderer emphasised that these price shifts are necessary to “create incentives to adopt technologies that are climate-friendly”.
“Especially in the short run, upward pressures on prices are possible. But in the medium-to-long term, as economies decarbonise and innovation lowers the cost of reducing carbon emissions, these inflationary pressures should ease,” she told attendees.
Mauderer outlined several challenges for central banks, including the need to adapt monetary policy to manage trade-offs associated with climate-related shocks. She stressed that “central banks may increasingly face situations in which they have to react to inflationary pressures in weak economic environments”.
She concluded with a call for increased collaboration and research, urging central banks to begin “joining forces with academia and industry” to refine their analytical toolkits.
“Uncharted waters are best navigated together. So I cannot overstate the importance of international collaboration between all relevant stakeholders.”
Why central banks should consider climate change risk
During the closing panel, François Villeroy de Galhau, governor of the Banque de France, said that while there is a risk of decreasing political commitment to fighting climate change after the US election, “it would really be a mistake” for central banks not to consider climate change, as “it’s a question of predictability for all the economy”.
Regardless of politics, the frequency of extreme weather events are unlikely to go away. The economic costs of climate change are already here and have increased insurance costs for corporations, which is why companies need to have transition plans, he said.
Villeroy de Galhau reiterated that looking at climate change risk is part of the mandate of central banks to maintain monetary stability.
“If we ignore the economic consequences of climate change … on both inflation and output, we miss our duty. So even looking at the core mandate, it’s our duty to incorporate climate change in our economic forecast and in our market operations,” he said.
He also reiterated his previous comments on the need for private finance and other institutions besides central banks to help combat climate change.
“We cannot be the only green game in town. It’s very important to have public policies and to have private Investments by corporations,” he said.
Christine Lagarde, president of the European Central Bank, said climate change is also likely to have an impact on geopolitics, as an increase in demographics combined with areas that are unlivable will lead to climate migration.
“Assuming we have those migrations it is probably also going to further antagonise and further exacerbate the political tensions that in some countries already exist as a result of migration,” she said.
While central banks are focused on monetary policy, they also have to transmit the sense of risk and urgency that banks should take in regard to thinking about climate change risk.
“I know that it’s a little controversial because banks in general … do not always have the appetite to embrace wholeheartedly the necessity to measure, anticipate, test [and conduct] risk mitigation, and it’s something that I think we have to ingrain in the culture,” Lagarde said.
Regulators and banks should not underestimate the risk posed by climate change, as the recent devastating flooding in Spain, are a “stark reminder” of its impact “which we frequently underestimate”, said José Luis Escrivá, governor of the Banco de España.
“Climate science is telling us that unfortunately these kinds of events will become more frequent over time,” he said.
Using the recent flooding as an example of the risk posed by climate change, Escrivá pointed to the importance of climate models and working with other institutions to provide accurate data and research. More tools and data are needed to help measure both the macro and micro impact, he said.
Combining central bank data with data from others, such as insurers, can help regulators fully understand the risks and losses from catastrophic events. In addition, regulators need to combine their modelling with that of climate scientists, he added.
“Although it’s a challenge, it’s worth really exploring working together in order to have a better understanding of how these two elements interact in different ways,” Escrivá said.
This page was last updated November 20, 2024
Written by
Ike Walker, a Green Central Banking contributor since 2023, has a decade's experience in research writing. An Utrecht-based scholar, Ingrid specialises in transformative justice, green finance, law and systems change. They are an Utrecht University's Bright Minds scholar and previously worked for Cambridge University and various justice-based NGOs.
Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.
