Conference "Frontiers of climate and nature in macroeconomics and finance" -
Paris, 24 October 2022
Central banking in the Anthropocene: How to re-embed our economic and
financial systems within planetary boundaries?
Speech by Sylvie Goulard,
Deputy Governor of the Banque de France
Ladies and Gentlemen,
I am very pleased to open this conference, as nature is a topic close to my heart.
I would like to start by thanking the organizers from the Banque de France, the
NGFS, the Sustainable Macro initiative and the INSPIRE research initiative for
putting together this important event on the frontiers of macroeconomics and
finance with regard to climate and nature.
In addition, I truly appreciate the presence of many young researchers. It is key
to transform the study of macroeconomics and finance for a new ecological era.
I would also like to use my time with you this morning to pay tribute to the next
speaker at today's conference, Professor Sir Partha Dasgupta, who
published
an incredibly powerful report last year.i
The introduction of the so-called Dasgupta Review makes it clear that (and I
"My reader is the concerned citizen. She is someone who has watched
quote):
television documentaries on the state of the biosphere and has read reports in
newspapers and magazines on the extent to which Earth is being degraded and
biodiversity is being lost. What she wants now is an explanation for how and
why we have come to this pass, and she wants to know how to translate that
explanation into recommendations".
because of the "she"
When I read this sentence (maybe in part used by
Professor Dasgupta), I recognized myself. I am not an ecological expert, I am
just
"a concerned citizen" who does her best to understand what is happening
and what I could do in my current position.
So please allow me, as a non-expert, to adventure myself into three lines of
thought today:
-(i) what scientist tell us about the current situation of the biosphere;
-(ii) what this means for central bankers and supervisors;
-(iii) and what may be required to address the situation.
The situation is challenging, to say the least. Urgent action is needed.
1. Welcome to the Anthropocene: from climate change to biodiversity
loss, and toward a comprehensive assessment of our
interconnected ecological crises
The scientific evidence tells us that while a lot of focus has been on climate
is only the "tip of the iceberg", to quote a famous study
change in recent years, it
by Will Steffen and co-authors.ii
Other risks exist that are not only higher than climate change but also interact
with it. For instance, we are currently facing a massive loss of biodiversity, to
which some scientists refer to as the sixth mass extinctioniii and the first one
caused by humankind. Indeed, the figures are daunting: according to the last
the world's wildlife
WWF Living Planet Reportiv published this month,
populations have declined by 69% on average since 1970. Other distressing
biophysical patterns beyond climate change and biodiversity loss include
pressures on freshwater availability and soil erosion.
There is at least one conceptual framework to understand our multiple and
"planetary boundaries"
interconnected ecological degradations, that of
developed by Johan Rockström and his colleagues.v
These scientists identified and started to quantify nine planetary boundaries,
define the "safe
which correspond to nine Earth subsystems or processes that
operating space for humanity".
Crossing certain thresholds (for instance, when
there is too much CO2 concentrated in the atmosphere, or when biodiversity loss
reaches a certain point) can trigger irreversible and massive consequences.
These are the famous tipping points: when exceeded, specific Earth
subsystems can irreversibly shift toward a new state, with potentially devastating
consequences for human populations, let alone for ecosystems and other forms
of life. For instance, evidence is mounting that tipping points related to the loss
of the Amazon forest could occur more rapidly than previously thought, and have
consequences on several planetary boundaries. Likewise, scientists from the
IPBES (which is the equivalent to biodiversity of what the IPCC is to climate
change) or the WHO have also been warning us for years that we may enter an
vi
"Era of pandemics"
if we do not tackle the biodiversity crisis: there is only one
planet, and "one experience we've gone through for
Healthvii. The devastating
the past few years with Covid 19 could repeat itself through new viruses if we
do not urgently revert biodiversity loss.
Thinking through the concept of planetary boundaries therefore enables us to
better understand the interconnections between different ecological challenges.
For instance, biodiversity loss can accelerate climate change, which can
in turn further accelerate biodiversity loss. Likewise, acting on land use
change (one of the planetary boundaries) will be critical to move back below the
safety thresholds for other planetary boundaries such as climate change and
biodiversity. In line with these findings, a recent joint workshop between the
IPCC and the IPBESviii concluded that it will be impossible to tackle climate
change and biodiversity in silos.
The dramatic and unprecedented changes in many Earth subsystems caused
by human activity have led many scientists to consider that we have entered a
literally the "age of humans".
new geological epoch: the Anthropoceneix,
The first one to develop this concept was the Nobel Prize in Chemistry Paul
Crutzen in
2002",x and many others have since used the concept, including
concept of "global
Professor Dasgupta who refers to the very interesting
in the Anthropocene" in his Review (page 26).
economy
What is at actually stake here is civilizational, and I am carefully choosing my
words: the Anthropocene makes it clear that failing to act on our multiple
ecological crises could disrupt the stability of the Earth system that prevailed
over the past thousands years. For instance, the relatively stable atmospheric
concentration of CO2 (around 270-280 parts per million, or ppm) that prevailed
for the past 12,000 years until recently, has been critical to guarantee stable
climate conditions in which human societies were able to develop agriculture
and become more complex.xi
We cannot even imagine human life as we
know it without the stable climate that prevailed during the Holocene
period. In contrast, CO2 atmospheric concentration is now around 420ppm, a
level that has never been reached in human history. That is, we may be leaving
the Holocene and entering the Anthropocene.
We should not underestimate the importance of this transition. Let me simply
"human impacts on
quote the scientists Will Steffen and co-authorsxii here:
essential planetary processes have become so profound that they have driven
the Earth out of the Holocene epoch in which agriculture, sedentary
communities, and eventually, socially and technologically complex human
societies
developed". Let me also mention that in 2019, a group of 15,000
issued a "warning to
scientists (yes, 15,000) humanity"xiii, reminding that
runaway consumption by a growing population in a world of limited resources
and limited capacity to absorb pollutions is now posing an existential threat.
2. What does the Anthropocene mean for central banks?
Even in such a dire situation, one may still be tempted to ask: why should
macroeconomists, let alone central bankers, care about it? The short response
is: because they belong to mankind. Another one, is that there cannot be
macroeconomic, price or financial stability on a dead planet. But let me be a bit
more specific.
You probably already know that central banks and supervisors created a
"contribute to the development of environment and climate
network in 2017 to
risk management in the financial
sector". The NGFS (Network for Greening the
Financial System), created by 8 members, now counts with 121 members in
addition to 19 observers, and the Banque de France proudly hosts its
secretariat.xiv
In March, the NGFS acknowledged that biodiversity loss and nature loss
are also a source of macroeconomic and financial instability.xv This
statement followed some groundbreaking work conducted by researchers from
NGFS members along with the INSPIRE research networkxvi, as well as other
research conducted by researchers at a few central banks including the Dutch
central bankxvii (DNB), the Banque de France, as well as the central banks of
Malaysia and Brazil jointly with the World Bankxviii. At the Banque de France, we
called "A "Silent Spring" for the Financial System?",xix
published a study which
explored the dependencies and impacts of the French financial system on
biodiversity.xx Importantly, the study was interdisciplinary and involved several
researchers and experts from various institutions.xxi As I will discuss later, I
believe that this interdisciplinary approach is essential to address the challenges
of the Anthropocene.
These different studies enable us to understand that nature-related financial
risks can be split between physical and transition risks, much like climate-related
financial risks.
Physical risks stem from the dependency of economic activities on
ecosystem services and their vulnerability in the case of disruption. For
instance, the loss of pollination could affect agricultural output and lead to food
shortages or higher consumer prices, while new pandemics could disrupt entire
value chains.
Transition risks result from the negative impacts of some economic
activities on biodiversity, which makes them vulnerable to transition
policies. For instance, it is hoped that the COP15 that will take place in
December in Montreal will lead to an international agreement to protect 30% of
land and sea areas by 2030. Regional and national policies are also expected:
the EU Green Deal contains several goals related to biodiversity, such as the
need to increase organic farming practices from 9% to 25% cultivated areas. All
these policies could have profound implications for different sectors (agriculture,
industry, real estate, and so on), and it is important to assess the potential
impacts for financial institutions and the financial system as a whole.
It is precisely to assess these risks that the NGFS launched a dedicated task
earlier this year. I have the great honor to co-lead this task force with
forcexxii
Saskia de Vries from the DNB. It includes many members from all over the
world.
Luckily, we do not start from scratch. For instance, economists recognize that
biodiversity enables ecosystems to provide essential services that sustain life
on our planet (called "ecosystem services"). As they regenerate themselves,
they are able to provide basic but essential goods (such as food, wood, water,
etc.) but also regulation services (such as climate regulation, water purification
or pollination) and cultural services such as touristic activities.
Our economies are deeply dependent on these ecosystem services. A study
indicates than half of global GDP is moderately or highly dependent on
ecosystem servicesxxiii and another study finds that that the total economic value
of ecosystem services at the global level amounts to more than annual global
GDP.xxiv
But let's be careful: we also know that such monetary assessments of
ecosystem services have many limitations. For instance, Robert Costanza
and co-authors (in the study I just referred to) acknowledge that such
assessments of ecosystem services help to increase the awareness of policy
makers and economists about the importance of biodiversity, but have limited
value in terms of decision-making.
There are at least three reasons to proceed carefully here.
Firstly, as Professor Dasgupta made clear in his Review, nature and many of
the ecosystem services it provides are often "mobile, silent and invisible",
We may understand
and therefore incredibly complex to fully appreciate.
the price of wood and some of the services provided by forests (such as climate
regulation or flood prevention) but we will never understand all the interactions
that exist within nature.
Secondly, different social groups and individuals relate differently to nature, as
the IPBES made clear in its recent report on the diverse ways of valuing
nature.xxv For instance, a poor fisherman or an indigenous person may not be
able to put a high price tag on the fish he catches or the forest she lives in, yet
their entire livelihoods directly depend on the existence of specific ecosystems.
In other words, nature does not have a fundamental value but rather means
different things to different people. Recognizing this diversity of values, at
the global level, is key to enable its protection. We cannot say how much a
seaside or a bird song represents.
Thirdly, even if we could perfectly account for the points above (complexity and
multiplicity of values), nature remains only very partially substitutable. This
means that we risk underestimating the costs of losing ecosystem services. For
instance, Professor Dasgupta provocatively but insightfully reminds us that if we
only look at how much pollination contributes to agricultural outputs in high-
income countries, we may end up with a very small percentage of GDP. Should
we conclude that we can live without pollinators and without food? That would
be foolish and dangerous of course. We therefore need to understand how
shocks in one sector can (and will, in the case of biodiversity loss) greatly affect
the output of other sectors. And the current gas crisis in Europe is an example
of the fact that we have not sufficiently thought about this.
Hence, what we need to understand as central bankers is that the best risk
mitigation strategy is to do everything in our power, early enough, to
ensure that we remain within planetary boundaries. The Dasgupta Review
indicates (in chapter 17, dedicated exclusively to the financial sector) that failing
to do so will lead to systemic environmental risks known as "green swans"xxvi.
Elsewhere in the Review, he also reminds us that the loss of nature (of natural
capital) is only very partially substitutable with labor or manufactured capital.
Beyond monetary valuations of ecosystem services what we truly need to
we are "embedded in
understand is that as living creatures, nature", to quote
Professor Dasgupta again. However, it is pretty clear that our socioeconomic
system is currently disembedded from nature: it takes much more from it than
what nature can provide us.
In 1823, French economist Jean-Baptiste Say famously said that natural
resources are infinite because if they were not, we would not be able to obtain
freely. He deducted from this that the still emerging economic discipline did not
need to be concerned with the value of natural resources.
Today, we can see how problematic this statement is. We do not only need to
make these resources (and ecosystem services) visible to the economic
discipline (including through price signals), we also need to engage in a
self-critical assessment to understand how the discipline may need to
revisit some of its own assumptions to embed itself in nature.
All this means that, if we really want to understand the macro-financial criticality
of nature, we will need to engage in more conceptual and even philosophical
debates. In other words, we cannot solve a problem with the mindset that
contributed to generating it in the first place.
3. Central banking in the Anthropocene: some initial thoughts towards
re-embedding our economic and financial systems within planetary
boundaries
What should we do, then, to re-embed economic and financial systems within
our planetary boundaries? While I do not pretend to have the answer to such a
question, let me open up a few avenues.
As central banks and supervisors concerned primarily with price and
financial stability, the first thing we can do is delve further into the
assessment of financial risks, while being aware of the limitations of such
an exercise because of the points I raised earlier. But perhaps we could at least
be informed by some of the issues I discussed, and be willing to explore new
frontiers. For instance:
-How could we design scenarios that account for what IPBES experts
are telling us, for instance with regards to the different values of
nature, the rights of indigenous people and the need to think
comprehensively about economic, social and environmental inequalities?
-How much can the global economy grow while accounting for all
And how to distribute this "remaining growth
planetary boundaries?
potential" between rich and developing countries, as a fair transition is
key?
-What could be the impacts of lower growth rates or potential no growth
on global value chains, on employment, on different economic sectors
that could win or lose from the transition?
-Which assumptions do we make about demographic trends? I actually
greatly appreciated that in his review Professor Dasgupta mentioned
demography. I am aware that this is a delicate issue but it has several
ecological and macroeconomic implications and we should be able to
assess them.
-How should we tackle climate change and biodiversity, taking into
account the complexity of each of both issues but also their interaction?
If you think that this is too political for central bankers, let me strongly
what would be too political is to deny all the evidence
oppose this view:
gathered by natural and social scientists for the past decades.
Just one year ago, before the war, it would have been unlikely to think about
potential energy constraints linked with a hybrid war. I wish more people had
dared to work on disruptions of energy supply (or global value chains) a few
years ago.
Likewise, the latest report of the Working Group III of the IPCC (dedicated to
climate mitigation) contains a chapter (#5) that places great emphasis on the
need for sufficiency and behavioral changes, and it discusses the literature
exploring how we could thrive as societies and individuals without depending so
much on GDP growth. Professor Dasgupta also invites us not only to
acknowledge that GDP growth will be limited at some point even if you are a
techno-optimist, but also to think about new approaches to economic value and
social well-being that do not rely on GDP.
All this begs us, and especially the young scholars present today, to ask what
will be essential in 5 to 10 years from now.
In addition to this need to promote new approaches, it is urgent to act.
afford to lose time or to wait until we have elaborated "perfect"
We cannot
tools. We need to seek how transformative changes can be implemented as
soon as possible and if needed, develop and revise our scenarios, metrics,
approaches.
The responsibility to revert nature loss falls first and foremost with governments,
-
and no central bank above all in a democracy - can replace them.
But we can accompany the movement and even lead some parts of the
transition:
-we can do our best to incorporate climate and biodiversity dimensions
within our non-monetary portfolios (the equity components of our own
funds and pension liabilities portfolios). This is what we have started to do
at the Banque de France.xxvii
-we can also push for innovative approaches to integrate nature-related
concerns within our as the ECB has started to do
monetary operations,
for climate change, looking in particular at its collateral assessment.
-we can also promote new nature-related stress testing exercises
(including both climate and biodiversity shocks) for banks and financial
institutions and for global financial stability; and improve our knowledge,
as we have started to do with our NGFS task force and as we are doing
with this conference.
Regulators can also facilitate the work of central bankers. For example, the
European Union has been at the forefront of the reflections around the
question of what is material for investors. We consider that financial
institutions and non-financial corporations are not only vulnerable to
environmental risks (dependent) but also contribute to environmental
degradation through their actions (they have an impact).
In line with this concept, the article 29 of the 2019 French energy-climate law
makes it mandatory to disclose not only on climate- and biodiversity-related
risks, but also on how financial institutions and corporations align their strategies
with international climate and biodiversity goals.
Of course, the implementation of double materiality raises significant theoretical,
legal and operational challenges.xxviii But we should be thinking about this
seriously rather than ignoring the topic, if we truly understand that preserving
ecological stability is a prerequisite to price and financial stability.
4. Conclusion
Let me conclude with two brief messages.
The task ahead looks like an uphill battle: academic economic departments,
policy makers, central bankers and supervisors remain far behind the curve
when it comes to acknowledging that our socioeconomic systems need to
operate a radical transformation. We know that those who dare to question the
status quo face strong pushback or even reputational risks for their careers.
They may be considered "activists" or "dreamers".
However, we have no choice but to restore nature as much as possible, as
quickly as possible and finance can play a role in this task.
The magnitude of the change require makes it difficult but also promising. No
generation on earth for the past 12,000 years had such a responsibility to keep
the world alive.
Moreover, paradigm changes sometimes occur faster than expected, and
there are great rewards for those who dared to explore new frontiers. It goes
without saying that exploring these new frontiers of climate and nature in
macroeconomics and finance should be done as seriously as possible, as we
will be held to an even higher standard than our peers. It is my hope and belief
that this conference will be a step forward toward this end.
I thank Romain Svartzman for his assistance in preparing these remarks
*
i
Dasgupta, P. (2021). The Economics of Biodiversity : The Dasgupta Review.
ii
Steffen, W., Grinevald, J., Crutzen, P., and Mcneill, J. (2011). "The Anthropocene: Conceptual and
Historical Perspectives." Philosophical Transactions of the Royal Society A: Mathematical, Physical and
Engineering Sciences 369 (1938): 842-67. https://doi.org/10.1098/rsta.2010.0327.
iii
Ceballos, G., Ehrlich, P. R., & Raven, P. H. (2020). "Vertebrates on the brink as indicators of biological
annihilation and the sixth mass extinction". Proceedings of the National Academy of Sciences, 117(24),
13596-13602. https://doi.org/10.1073/pnas.1922686117
iv
WWW (2022). Living Planet Report 2022.
v
Rockström, J., Steffen, W., Noone, K., Persson, Å., Chapin, F.S., Lambin, E.F., Lenton, T.M., et al. (2009).
"A Safe Operating Space for Humanity." Nature 461 (7263): 472-75.
https://doi.org/10.1038/461472a. ;
vi
IPBES (2020). Workshop Report on Biodiversity and Pandemics.
vii
WHO (2021). Statement - A bold new strategy for health and sustainable development in the light
of pandemics.
viii
IPBES & IPCC (2021). IPBES-IPCC Sponsored Workshop: Biodiversity and climate change. Scientific
outcome. https://ipbes.net/sites/default/files/2021-06/20210609_scientific_outcome.pdf
ix
I should also mention that others have questioned the term Anthropocene, either from a geological
perspective or from a socioeconomic perspective because they think it wrongly places the burden of
our ecological predicament on humans at large, without acknowledging that different social groups
contributed much more than others (e.g. rich men in Western world have clearly contributed more to
our ecological crisis more than indigenous women in the global South). Those interested in these
debates can read the following book: Christophe Bonneuil and Jean-Baptiste Fressoz's book "The shock
of the Anthropocene: The Earth, History and Us".
x
Crutzen, P.J. (2002). "Geology of mankind: The Anthropocene". Nature 415: 23
xi
See e.g.: Feynman, J., and Ruzmaikin, A. (2007). "Climate Stability and the Development of
Agricultural Societies." Climatic Change 84 (3-4): 295-311.
https://doi.org/10.1007/s10584-007-92481
xii
Steffen, W., Rockström, J., Richardson, K., Lenton, T.M., Folke, C., Liverman, D., Summerhayes, C.P.,
et al. (2018). "Trajectories of the Earth System in the Anthropocene." Proceedings of the National
Academy of Sciences of the United States of America 115 (33): 8252-59.
https://doi.org/10.1073/pnas.1810141115.
xiii
Ripple, W.J, Wolf, C., Newsome, T.M., Barnard, P. Moomaw, P.R. (2019). "World Scientists' Warning
of a Climate Emergency." BioScience. https://doi.org/10.1093/biosci/biz088.
xiv
Article 1 of the NGFS states the following: "Objectives of the Central Banks and Supervisors Network
for Greening the Financial System The Central Banks and Supervisors Network for Greening the
Financial System (NGFS) is a group of Central Banks and prudential supervisory authorities willing, on
a voluntary basis, to exchange experiences, share best practices, contribute to the development of
environment and climate risk management in the financial sector, and to mobilize mainstream finance
to support the transition toward a sustainable economy".
xv
See NGFS Statement: statement_on_nature_related_financial_risks_-_final.pdf (ngfs.net)
xvi
NGFS and INSPIRE (2021), Central banking and supervision in the biosphere: An agenda for action
on biodiversity loss, financial risk and system stability. NGFS Occasional Paper.
xvii
van Toor, J., Piljic, D., Schellekens, G., van Oorschot, M., & Kok, M. (2020). "Indebted to nature
Exploring biodiversity risks for the Dutch financial sector". De Nederlandsche Bank (DNB) and
Planbureau voor de Leefomgeving (PBL). https://www.pbl.nl/en/publications/indebted-to-nature
xviii
Calice, P., Diaz Kalan, F. A., & Miguel Liriano, F. (2021). "Nature-Related Financial Risks in Brazil".
Policy Research Working Paper no. WPS 9759. World Bank Group, Washington, D.C.
http://documents.worldbank.org/curated/en/105041629893776228/Nature-Related-Financial-RisksinBrazil ; World Bank and Bank Negara Malaysia (2022). "An Exploration of Nature-Related Financial
Risks in Malaysia".
xix Svartzman et al. (2021). "A "Silent Spring" for the Financial System? Exploring Biodiversity-Related
Financial Risks in France". Banque de France Working Paper 826.
https://publications.banquefrance.fr/en/silent-spring-financial-system-exploring-biodiversity-related-financial-risks-france
xx
The title of the study, of course, pays tribute to Rachel Carson's famous book "Silent Spring"
published sixty years ago, in 1962.
xxi
Namely the French development agency (AFD), the French office for biodiversity (OFB) and CDC
Biodiversité.
xxii
See mandate of the task force: task_force_nature_related_risks_mandate.pdf (ngfs.net)
xxiii
Herweijer, C., Evison, W., Mariam, S., Khatri, A., Albani, M., et al. (2020). "Nature Risk Rising: Why
the Crisis Engulfing Nature Matters for Business and the Economy", World Economic Forum.
xxiv
Costanza, R., De Groot, R., Sutton, P., Van der Ploeg, S., Anderson, S. J., Kubiszewski, I., ... & Turner,
R. K. (2014), Changes in the global value of ecosystem services. Global environmental change, 26,
152158.
xxv
IPBES (2022). Summary for Policymakers of the Methodological Assessment Report on the Diverse
Values and Valuation of Nature of the Intergovernmental Science-Policy Platform on Biodiversity and
Ecosystem Services. Pascual, U., Balvanera, P., Christie, M., Baptiste, B., González-Jiménez, D.,
Anderson, C.B., Athayde, S., Barton, D.N., Chaplin-Kramer, R., Jacobs, S., Kelemen, E., Kumar, R., Lazos,
E., Martin, A., Mwampamba, T.H., Nakangu, B., O'Farrell, P., Raymond, C.M., Subramanian, S.M.,
Termansen, M., Van Noordwijk, M., and Vatn, A. (eds.). IPBES secretariat, Bonn, Germany.
xxvi
I note here that Professor Dasgupta referred to green swans, which is a concept that was developed
by researchers at the Banque de France among others. See: Bolton, P., Després, M., Pereira da Silva, L.
A., Samama, F., & Svartzman, R. (2020). "Green Swans": central banks in the age of climate-related
risks. Banque de France Bulletin, 229(8). https://publications.banque-
france.fr/sites/default/files/medias/documents/820154_bdf229- 8_green_swans_vfinale.pd
xxvii
Banque de France (2022). Rapport investissement responsable 2021.
xxviii
Boissinot, J., Goulard, S., Le Calvar, J., Salin, M., Svartzman, R., and Weber, P.-F. (2022). "Aligning
financial and monetary policies with the concept of double materiality: rationales, proposals and
challenges". INSPIRE Central Banking Toolbox - Policy Briefing no. 5, LSE Research Online Documents
on Economics.