Haruhiko Kuroda: Role of finance in addressing climate change
three essential elements
Remarks (via webcast) by Mr Haruhiko Kuroda, Governor of the Bank of Japan, at the Paris
EUROPLACE Tokyo International Financial Forum 2021, Tokyo, 29 November 2021.
* * *
Introduction
It is a great pleasure to be invited to the Paris EUROPLACE Tokyo International Financial Forum.
Paris EUROPLACE brings together financial services industry stakeholders based in Paris,
including financial institutions and investors, exchanges and clearing systems, corporate issuers,
financial authorities such as the Banque de France, law firms, accountants, and consulting firms.
Financial systems and financial markets are becoming more globalized, complex, and
interconnected. Opportunities such as this forum are extremely important in bringing together a
wide range of participants to discuss the challenges we face and to work together to develop our
financial markets. It is my great pleasure and privilege to have the opportunity to speak here
today.
Following the speech by Governor Villeroy de Galhau, I will talk about "sustainable finance," one
of the themes of this forum. Specifically, I would like to share my views on the role of finance in
addressing climate change.
I. Growing Awareness of Climate Change Issues
We are well aware of climate change issues that are increasingly affecting our daily lives. Global
temperatures continue to rise, and there has been an increase in the frequency and severity of
large-scale natural disasters. Climate change will have long-term implications both for society
and for economic activity. However, individual firms and households have continued to engage in
economic activities without due consideration of the impact of greenhouse gas emissions on
climate change. This has resulted in an excessive amount of greenhouse gas emissions in
society and the economy as a whole.
Addressing climate change requires a concerted global response for a long time to overcome
such "negative externalities." In addition, a multi-pronged approach is necessary, where science,
energy policies, regulations, and carbon pricing all have a crucial contribution to make. The
Japanese government last autumn declared its commitment to achieving carbon neutrality by
2050, and there is now widespread discussion of how we should achieve this target. We should
keep the momentum going for Net Zero.
II. Role Expected of Finance
The financial sector is expected to play a major role in addressing climate change - that is,
achieving and promoting sustainable finance. To this end, I believe there are three essential
elements: (1) making the financial system more resilient against climate-related risks, (2)
mobilizing financial resources to facilitate a smooth transition to net zero, and (3) making the
most use of market functions with enhanced disclosure.
A. Making the Financial System More Resilient against Climate-Related Risks
The first essential element is to make the financial system more resilient against climate-related
risks. The risks associated with climate change - that is, physical risks and transition risks -
could affect the businesses of financial institutions, and consequently the stability of the financial
system through various channels. These are referred to as "climate-related financial risks." It is
necessary to properly identify and manage the climate-related financial risks faced by individual
financial institutions, and to maintain the stability of the financial system against these risks.
Effective management of climate-related financial risks will also enhance the systemic resilience
of society and the economy as a whole.
However, there is considerable uncertainty as to the impact of climate change and efforts toward
decarbonization; we cannot be sure exactly how they will affect society, the economy, and
finance over the coming decades. It is extremely difficult to measure the size of the impact using
the conventional methods of financial risk management. One possible alternative method is
scenario analysis, which simulates the extent of climate change and its impact on the economy
based on a set of assumptions. This has proved useful and is part of ongoing discussions by
financial authorities and the Network of Central Banks and Supervisors for Greening the Financial
System (NGFS). The Bank of Japan, in collaboration with the Financial Services Agency, has
been working on pilot exercises in scenario analysis targeting major banks.
Meanwhile, a number of technical challenges have been recognized. The impact of climate
change varies depending on the natural environment and industrial structure of the particular
region. It is therefore necessary to make flexible and appropriate adjustments for local
differences when carrying out scenario analysis and quantifying relevant risks. Sharing our
experience and understanding on a global basis is also important.
For example, the Bank of Japan has been making quantitative analyses on the impact of floods
1
on firms' financial conditions as part of its scenario analysis. These analyses take into account
the risk characteristics of Japan, where floods are one of the most common natural disasters.
This has attracted much attention from policy makers of other Asian countries facing similar
problems.
B. Mobilizing Financial Resources to Facilitate Smooth Transition to Net Zero
The second essential element is to mobilize financial resources to facilitate a smooth transition
to net zero. Decarbonization is expected to make great progress across the globe in the medium
to long term. To make it happen, an enormous amount of financial resources will be required.
According to a recent report by the International Energy Agency (IEA), in order to achieve net
zero emissions by 2050, about 4 trillion U.S. dollars will be required annually by 2030 on a global
2
basis. In this regard, the smooth functioning of financial intermediation is vital. The financial
sector should support industries' initiatives toward decarbonization through its expertise and
innovations.
In this regard, it is important to choose optimal tools and their combination according to the
market structure of the particular region. For example, in Japan, green bond issuance has been
increasing, but its scale remains much smaller than in other advanced economies. In addition to
finance through capital markets, promoting climate-related investment or loans through
commercial banks is important in a bank-centric financial system such as Japan's. Banks are
expected to take advantage of their expertise in facilitating firms' efforts toward decarbonization. I
believe that this is also the case in Europe. It is against this background that the Bank of Japan
recently introduced the Climate Response Financing Operations through which it provides funds
to banks against investment or loans they make to address climate change based on their own
judgment, instead of the direct purchase of green bonds. We believe that this is the most
effective policy measure considering the market structure in Japan.
Moreover, optimal financing support differs depending on industrial structure. Although
responding to climate change is an urgent priority, the completion of full decarbonization will take
considerable time. In promoting decarbonization of the economy as a whole, it is important to
provide stable support for structural change in sectors and industries where decarbonization will
be difficult to achieve in a short period of time.
C. Making the Most Use of Market Functions with Enhanced Disclosure
The third element is to make the most use of market functions with enhanced disclosure. In
addressing climate change issues, it is important to encourage active risk-taking and the
allocation of resources by making the most use of market mechanisms. Financial support for
decarbonization will increase the corporate value in the medium to long term, which in turn will
benefit banks and investors through increased profitability and diversified portfolios.
Disclosure is crucial for financial markets to function in an efficient manner. It provides investors
with the information they need to make climate-related investment or loans, while at the same
time, exercising market discipline on firms' behavior. With the quality and quantity of disclosure
improving, climate-related risks will be appropriately factored in the prices, which will reflect the
value of firms more accurately.
So far, discussions about disclosure have been mainly based on the recommendations of the
Task Force on Climate-related Financial Disclosures (TCFD) set up by the Financial Stability
Board (FSB). The TCFD recommendations are a basic framework for the disclosure of an
organization's governance, strategy, risk management, and metrics and targets with regard to
climate change issues. At the COP26 conference held in Glasgow this month, the IFRS
Foundation announced the creation of a new standard-setting board - the International
Sustainability Standards Board (ISSB). This new board aims to formulate a set of common
global standards for sustainability-related disclosure. The quality and quantity of disclosure
should be improved in a globally harmonized manner.
Concluding Remarks
To conclude my remarks, I would like to emphasize that addressing climate change should not
be considered as a cost or a constraint on economic growth. Decarbonization has the potential
to stimulate innovation and create new industries and employment. In order to tackle climate
change, it is essential that all constituents of society take responsible action to address climate
change, in order to save our planet.
While keeping in mind the three elements I have talked about today, the Bank of Japan will work
together with financial institutions and market participants, and thereby strongly support progress
toward Net Zero.
Thank you for your attention.
1
Yamamoto, H. and Naka, T., "Quantitative Analysis of the Impact of Floods on Firms' Financial Conditions," Bank
of Japan Working Paper Series, no. 21-E-10, July 2021.
2
IEA, "World Energy Outlook 2021."