High Level Panel on Climate Change
COP25/Naciones Unidas
Margarita Delgado
Subgobernadora
Good morning:
Thank you very much for the invitation to be here today on this panel on the climate-related
role of the financial sector.
It is obvious that climate change, associated with global warming, is an all-encompassing
concern that is translating into initiatives ranging from the most supranational scope
possible down to the most local level. In my view this is because it is one of the few issues
affecting each and every one of us and, at the same time, the planet as a whole.
The fight against climate change has traditionally been a top-down process. The starting
point was always an international agreement that had to be transposed into supranational
and national regulations; but what we are currently witnessing is a strong bottom-up
movement occurring in parallel with this top-down process.
People, in particular the young, are increasingly demanding their Governments act
immediately and decisively, even if this affects their lives or pockets.
Another revealing feature of this movement is that these efforts are being undertaken jointly
by the public and private sectors. Many of the official initiatives currently under way are in
collaboration with the private sector.
For instance, the EU High-level Group on Sustainable Finance, created by the Commission
in December 2016 to provide advice and contribute to the implementation of these clean
policies, comprises 20 senior experts from civil society, the finance sector, academia and
observers from European and international institutions.
The same may be said about the Task Force on Climate-related Financial Disclosures,
(TCFD). This Task Force, formed by 31 members entirely from the industry, was created in
December 2015 at the request of the FSB to develop voluntary, consistent climate-related
financial risk disclosures for use by companies in providing information to investors, lenders,
insurers and other stakeholders. These disclosure standards are increasingly used by
companies around the world.
The emergence of the so-called "green bonds" is another case in point. These bonds were
not created in response to any official initiative; indeedthe market is based entirely on private
standards, such as the Green Bond Principles (GBP) issued by the ICMA in 2014. Obviously,
the green bond market has grown following the demand from private investors willing to
"put their money where their mouth is".
In this regard investors, corporates and clients demand information on the impact of
business activities on the environment. This is why it is so important that we have in the EU
finally agreed on this common taxonomy which, hopefully, after being endorsed by the
European Parliament, should allow for a more comprehensive assessment of risks and
enhanced transparency.
In sum, the fight against climate change is clearly not solely a publicly driven initiative. It is
no longer the official sector preaching to the rest of the society but rather a joint effort by all
stakeholders: Governments, Central Banks, Supervisors and Official Institutions, along with
Corporates, Financial Institutions and, ultimately, all individuals.
I say they are all stakeholders because, when it comes to this planet, everybody living on it
is a stakeholder.
I believe this is groundbreaking because, when an issue is as global as this one, there is a
tendency to go precisely in the other direction. It is too easy to dilute personal and corporate
responsibilities, find excuses and carry on without changing anything substantial.
The message we are receiving is that this is not the time to look for excuses. The writing is
on the wall: it is time for action.
Of course, whatever a person, a municipality, a region or even a country can do to combat
fight global climate change is quite futile if the rest of the world stays the same. But the
message today should be that each of us must do our bit, large or small, without looking at
what others might or might not be doing.
I am here today, precisely, to talk about doing "our bit". The contribution that the financial
sector can make to this global struggle is no silver bullet, but it is an important one.
It is clear that finance is not regarded as a polluting sector. That, at least, is a positive
development in these difficult times for banks ́ reputation. Traditionally, the companies
dependent on oil products have been those most affected by the environmental regulations
resulting from international agreements.
In fact, we should admit that the financial sector's involvement in this battle has been rather
limited. Until very recently, climate change was seen as something outside our remit. This
has changed as a result of the 2015 Paris Agreement.
What has changed since 2015 to warrant this sudden interest on the part of banking
regulators and supervisors in climate risks?
First, in 2015, the Paris Agreement stressed for the first time the importance of the financial
system for steering the resources needed to transform the economy towards a sustainable
model. Second, in 2018, the first NGFS report stated that climate-related risks were a source
of financial risk, and that supervisors and central banks should shore up the system's
solvency in the face of these risks. Both elements, risk and funding, are clearly interrelated.
Let ́s start from the risk view. In my public interventions I keep on highlighting one essential
feature of any viable business model, namely the need to identify and quantify all the costs
and risks involved in any given transaction and pass them through to prices and capital.
It is well known that the process of transition will entail two types of risks to the financial
system: (i) on the one hand, the physical risks caused by the direct effects of climate change,
as a result of the gradual increase in temperature, or more frequent or more severe climate
events such as storms, flooding or natural disasters; (ii) on the other, the transition risks,
which refer to the potential effect on specific bank borrowers of the regulatory measures
aimed at sustainably transforming the economy, technological changes, and changes in
customer behaviour and preferences driven by greater environmental awareness.
This leads me to the second element: the contribution of banks to the transition of the
economy. Of course, if banks incorporate climate-related risks into costs and capital, they
indirectly become "facilitators" of change, by reducing the cost of financing of activities that
contribute most to the sustainable transformation of the economy, while at the same time
discouraging more polluting activities.
At the same time, we should stress that the change of production model will also entail
opportunities for economic agents, which banks and companies should seize. By way of
example, to achieve the EU's 2030 targets agreed in Paris, it is estimated that, for the EU
as a whole, there is a need to fill an investment gap estimated at 260 billion EUR per year.
The cost of clean technologies has decreased dramatically -both solar panels and batteries
are around 80% cheaper than a decade ago, for instance - and the potential in terms of
growth and job creation is also striking.
In this regard, technology, society, regulation and public opinion are aligning to bring about
a change towards a more sustainable economic model. Banks should, at the same time,
nurture that change and exploit the business opportunities stemming from it.
Nevertheless, we should be mindful of the potentially systemic implications that moving to
a decarbonised economy entails, which could affect specific economic sectors. The official
sector must assess this process carefully and drive its movement gradually if we wish to
minimise any undesirable economic and social consequences. The goal is to achieve what
has been dubbed "a fair transition".
Let me talk now about the supervisor's side. What are we expecting from banks in relation
to these risks? Well, in the short and medium term we would expect all banks to include the
environmental dimension in their strategic approach, as well as in their risk analysis and
monitoring. Banks must begin to fill data gaps, compiling all relevant information at least for
new operations.
From a methodological standpoint, banks should at least be able to understand the
implications of environmental risk and how it may affect their business models, including it
in their risk appetite frameworks, in a manner proportionate to their size and complexity. Of
course, the Board has to be duly informed, and some of their members should have the
necessary expertise to assess these risks.
Needless to say, it is not only banks that need to "catch up"; we are also working at the
Banco de España to adapt to this reality. I believe it is fair to acknowledge that this is all
very new for everyone in the banking sector, including certainly Central Banks and
Supervisors.
What are we doing? Firstly, we have created an internal function entrusted with assessing
the impact we as an institution have on the environment. The aim is to identify and
coordinate the necessary measures to reduce that impact.
Secondly, as a macroprudential supervisor, we clearly need to be able to assess and
quantify the risks that the transition towards a more sustainable economy poses, both for
individual banks and the financial sector as a whole. We must be able to perform stress
tests for the financial system overall and define scenarios to be applied by banks
individually.
Accordingly, we are designing internal governance structures and methodologies, actively
participating in the cultural shift in the SSM supervisory model. Naturally, we are also
evaluating the information and data requirements needed to address this challenge.
Thirdly, as investors in the debt markets, we are working to include environmental risk
assessment in our credit analysis.
A fourth key element is our responsibility as supervisors. We must foster the implementation
of these changes in the financial sector. We cannot wait for change to occur. We need to
be proactive. Accordingly, we are also launching several initiatives to help raise awareness
of the importance of this issue, including workshops and meetings with the industry to learn
more about how the sector is coping with climate change and to promote its transformation.
There is certainly much to be done. But, to conclude on a positive note, I wanted to highlight
the incredible pace at which initiatives are moving and changes are being introduced.
Let me give you two examples. First, the NGFS was created barely two years ago, but in
this very short lifespan it has managed to publish two comprehensive reports, guidance for
central banks' investments and, not least, its membership has surged from 8 to 51 members
and 12 observers.
The second example is rather obvious: just look at the composition and topics discussed
on this panel today. They would have been quite unthinkable two years ago.
Thank you very much.