Denis Beau: Sustainability challenges in the missions and operations
of the Banque de France
Introductory speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at
the Climate and Territory Conference, Reims, 26 September 2024.
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Presentation accompanying the speech
Introduction
A very good morning to you all,
I am delighted to be taking part in this conference on the fight against climate
change, the economic and financial challenges it presents and the actions we
can take to address this. I wish to thank the RECOM circle, which brings together
institutions in the department of the Marne that are committed to economic
development, and the NEOMA Business School, for inviting me to take part in this
conference. Thank you also for giving me the opportunity to introduce the exchanges
between the experts that you have invited and to present the objectives and actions that
the Banque de France is developing in this area.
[Slide 2] The Bank's commitment to fighting climate change, and more broadly to the
challenges of sustainability, has been embodied for many years both in its internal
management methods and its responsible investment activities, launched in 2018, as
well as in the exercise of all the major missions entrusted to it by the legislator. We
have just published a report that consolidates all of our commitments and actions for
the first time, leading to recognition of the Banque de France as the first G20 central
bank to incorporate climate risks into its activities.
[Slide 3] In light of the debate over central banks' role in contributing to public policies
that combat climate change and its effects, my presentation will focus on measures
which we have adopted at the Banque de France. Our role consists in incorporating our
contribution to fighting climate change into the way in which we exercise and comply
with the mandates entrusted to us by the legislator in the areas of monetary policy,
financial stability and services provided to economic stakeholders. The main aspects of
this incorporation, which I will outline later, reflect our desire to avoid two potential
pitfalls: doing too much - by interfering in public policies, which are a matter of
government decisions, and which must incorporate appropriate incentives in the form of
regulations, carbon pricing and subsidies - and not doing enough.
1. Conducting monetary policy
We incorporate climate risk into our monetary policy activities based on the observation
that climate change has macroeconomic implications for growth and inflation that need
to be taken into account. [Slide 4],
Climate change is already affecting prices and economic activity: for example,
1
severe droughts have cost Argentina 3% of its GDP, floods in Pakistan have caused
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damage and losses equivalent to 8% of GDP, not to mention the recent rise in global
food prices.
Moreover, a variety of climate shocks are likely to materialise in the future, with
potentially massive consequences for growth and inflation.
This quadrant [slide 5] presents four categories of potential climate-related
shocks attributable to physical risks (i.e. climate disasters) or transition risks (i.e.
disorderly transformation of our economies):
Negative supply shocks, such as a disorderly introduction of a carbon tax
(transition risk) or frequent and severe natural disasters (physical risks).
Negative demand shocks, such as a crisis of confidence linked to regulatory
uncertainty (transition risk).
Positive demand shocks, such as increased public spending and investment.
Positive supply shocks, such as a productivity boost from green innovations.
These shocks may occur together or consecutively. Their individual probabilities are
difficult to assess at this stage, although the negative supply shock (top left) would
appear slightly more likely than the others. This uncertainty is due in particular to the
political decisions to be taken by each State. For example, changes in carbon pricing,
volumes of 'green' investment and public subsidies will all impact the climate change
trajectory and its economic consequences.
Given this broad range of possible shocks, incorporating climate risks into the conduct
of monetary policy means incorporating them into our macroeconomic assessment and
forecasting models and using climate scenario analyses. And this is what we are doing
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as part of the ECB's climate agenda finalised in July 2022, by working specifically to
take better account of the risks to price stability in the macroeconomic forecasting
models we use. We are also working on short- and long-term scenarios under the aegis
of the Network for Greening the Financial System (NGFS), a network of nearly 140
central banks and supervisors, co-founded in 2017 by the Banque de France
(which provides the Secretariat of the Network) and other partner institutions. The
NGFS carries out research, and defines and promotes best practices for mainstreaming
climate risk into the activities of central banks and supervisors.
Seven long-term scenarios, with a 50-year time horizon, have been developed by
the NGFS [slide 6] in line with the approach taken by the IPCC. Some of these
scenarios assume that ambitious climate policies will be introduced quickly and will
gradually become more restrictive. Others assume that these policies will be introduced
too late or in a piecemeal and uncoordinated manner between different countries. This
translates into different climate change impacts: a rise in global temperatures of 1.1°C
by 2100 under the most optimistic scenario, and by 2.8°C under a more pessimistic
one. [ left-hand chart ] According to NGFS estimates, this would have a negative impact
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on global GDP of 4% to 6% by 2030, and a negative impact of almost 14% by 2050. [
Middle chart] Obviously, certain regions would be more affected than others. Regarding
inflation, under the 'Net Zero in 2050' scenario, it would rise by almost 1.5 percentage
points per year in Europe within two years, and by almost 4.5 percentage points per
year in China. This scenario indicates a sharp short-term rise in inflation. The 'Delayed
Transition' scenario predicts that inflation will start trending upward around 2030 [right-
hand chart]. These scenarios will be updated by the NGFS between now and the end of
the year; the new version is expected to present even more severe economic medium-
and long-term climate change impacts.
This work on scenarios and models to incorporate the impacts of climate risks
into the definition of a monetary policy stance that ensures price stability also
goes hand in hand with efforts to adapt our operational framework for
implementation purposes. Consequently, working with the ECB, we are already in
the process of greening our corporate bond purchase programme and adapting
our collateral arrangements.
We have taken these decisions not only because they reduce the exposure of our
balance sheet to climate risk, and are therefore justified in the context of prudent
management of the risks to which we ourselves are exposed, but also because they
can influence the behaviour of our counterparties and act as a catalyst in the transition
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process to a green economy. This will thereby enable us to contribute to protecting
the environment, which is one of the secondary objectives of monetary policy set out in
the European treaties.
2. Financial stability and financial system supervision
The Banque de France and the Autorité de contrôle prudentiel et de résolution
(ACPR - Prudential Supervision and Resolution Authority) have also been
- particularly climate, environmental and
working to integrate sustainability issues
social issues - into their financial stability mission.
[slide 8] In its role as supervisor, the ACPR began a sustained dialogue with the
financial community in 2015 in the wake of COP 21, focusing on how climate-related
risks should be taken into account by the financial sector. This dialogue together with
the analytical work performed by the ACPR, particularly within the framework of the
French law on Energy Transition for Green Growth (LTECV), culminated in good
practices for climate-related and environmental risk management for banks. This
pioneering guide, published by the ACPR in 2020, is a reference for the thematic
reviews that we have been conducting since last year with banking institutions not
directly supervised by the ECB. It was adapted for insurance undertakings in 2022.
At the same time, a climate stress testing pilot exercise was conducted in the
banking and insurance sectors in 2020. We called it a 'pilot' exercise because, once
again, we were a pioneer among the main central banks and we showed the way by
developing methodologies and raising awareness among banks and insurers of
the need to strengthen their capacity to measure and anticipate the
The ACPR repeated this exercise in July 2023 for
consequences of climate change.
the insurance sector only and published its findings last May.
These stress tests are important because they allow to assess the robustness of banks
and insurers, and therefore their ability to finance and insure localities and regions
under adverse climate risk scenarios involving either extreme events or the
implementation of policies to transition to a low-carbon economy.
[slide 9] Driven by this conviction, the Banque de France and the ACPR made a major
contribution to developing and conducting the
first Europe-wide climate stress
testing exercise in 2022, by making their findings available to the ECB. They also
played a major role in developing the scenario deployed by the three European
supervisory authorities (EBA, EIOPA and ESMA) for conducting a stress test this
year dedicated to assessing the transition risks associated with the 'fit for 55'
legislative package, which aims to reduce EU greenhouse gas emissions by 55%
between 1990 and 2030.
As well as carrying out stress tests at European level, the ECB was also able to draw
on the work of the ACPR to develop its prudential expectations in terms of
governance and management of climate-related risks. These expectations are
closely monitored by the ECB, particularly through the Supervisory Review and
Evaluation Process (SREP), and must be fully met by the banks it supervises by
the end of 2024 if they wish to avoid being subject to sanctions.
The role of supervisors in monitoring and assessing efforts to incorporate climate risk
into the management of financial institutions will be strengthened by the revised
and the
Capital Requirements Directive (CRD) requirement for banks to develop
prudential transition plans. The exact content of these plans is currently being
defined by the EBA and EIOPA. They will have to reflect both transition and physical
risks, and their robustness will be assessed by the supervisor.
Finally, the Banque de France and the ACPR continue to participate in both
, particularly to take greater account of
climateEuropean and international efforts
related risks in prudential regulations, still using a risk-based approach, and more
generally to improve knowledge and understanding of nature-related risks.
3. Services to the economy and support for businesses
In 2019, the NGFS clearly stated that climate risks are above all a societal and human
risk, but also a financial risk. "As central bankers and supervisors, we therefore have a
duty to concern ourselves with climate change in order to perform our monetary and
financial stability mandates" (F. Villeroy de Galhau). The increasing risks associated
with climate change are creating major challenges even for businesses. As such,
to round out France's ecological planning strategy, the Ecological Transition Financing
Committee (CFTE) has tasked the Banque de France with "devising a national
climate indicator for businesses ".
The aim of the climate indicator project is to provide companies with a free assessment
of their transition, their exposure to climate hazards and the extent to which they are
incorporating climate issues.6
[Slide 11] The climate indicator, which aims to cover all aspects of climate risk, is
broken down into three dimensions:
Transition (ICT), drawing on ADEME's Accelerate climate transition methodology
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(ACT), measures alignment with a low-carbon world. It compares the business's
greenhouse gas emissions trajectory, projected on the basis of tangible actions in
its transition plan, with its baseline trajectory, built around its activity volumes and
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sector baselines.
Physical risks (ICP) predict future trends in various climate hazards (heatwaves,
precipitation, hail, fire, drought, snow/frost) projected under the IPCC's SSP2-4.5
scenario, in the geographical areas to which the business is exposed.
Maturity (ICM) reflects a more qualitative assessment of the company and
measures its degree of awareness of climate issues and its preparedness, or
even implementation, of decarbonisation and adaptation measures.
[Slide 12] Following an initial testing phase, the climate indicator will be rolled out
progressively, with priority given to sectors facing major decarbonisation
challenges. "It will be deployed in liaison with all the players and sector-based
(F.
initiatives, with the aim of not overburdening our businesses and SMEs"
Villeroy de Galhau).
To devise a reliable and useful assessment for companies and in order to avoid any
'greenwashing', it is necessary to collect certain data from businesses, including
information on tangible decarbonisation initiatives either undertaken or planned.
Naturally, to avoid overburdening companies, the Banque de France will capitalise on
existing reporting, especially CSRD data and EFRAG standards.
To perform this mission, the Banque de France relies on its local branches, which are
present in each département , together with its existing relations with hundreds of
thousands of companies forged through its traditional business of providing company
ratings. Data collection will be facilitated by "Manager Portals", the Banque de France's
new online channel for communicating with businesses.
The amendment to the French Green Industry Act in respect of the climate indicator
provides for the creation of a monitoring committee by the French Ministry for the
Economy and Finance, bringing together all players with an interest in the climate
indicator (i.e. public institutions, businesses, financiers, qualified individuals) and tasked
specifically with assessing the climate indicator methodology, its consistency with
European standards and the reporting workload for companies.
To ensure that our methodology is transparent, the Banque de France regularly meets
with businesses, professional federations, financial players and public authorities and
keeps them informed of developments. Between now and 2027, the Banque de
France climate indicator should become the most accurate tool for assessing the
transition achieved by companies, their exposure to climate hazards and the degree to
which they have incorporated climate issues. For France, this approach is an essential
component in the success of the Paris Agreements.
Conclusion
I hope I have clearly explained both the foundations and the reality of the Central
Bank's pro-climate actions and convinced you that we are striving to make a full and
fair contribution in line with the mandates with which we have been entrusted. But
central banks cannot be the only players involved in greening our economies. As the
Governor of the Banque de France recently stressed: "[-] we are faced with huge
investment needs for the ecological transition [-] But monetary financing cannot fund the
transition; and central banks - and green finance - cannot be the only green game in
town; they cannot replace sound public policies and corporate transition plans."
So, we all need to play our part and combine our efforts in the fight against
climate change. Now, without further ado, I'm going to hand over to Julien Bouillé from
the Union, to lead the debates and have my fellow experts express their opinion
concerning the many issues raised by climate change and the actions that have been or
need to be taken.
1
Bolsa de Comercio de Rosario, The cost of the 2022/23 drought already amounts to
more than USD 14.14 billion for soybean, wheat and corn producers, 10 March 2023
2
World Bank, Flood damages and economic losses over USD 30 billion and
reconstruction needs over USD 16 billion, October 2022
3
ECB climate agenda, 4 July 2022
4
NGFS, NGFS Scenarios for central banks and supervisors, November 2023
5
ECB climate agenda, 2022
6
By 2027, 20,000 businesses will be targeted across 14 sectors, accounting for 60% of
France's greenhouse gas emissions.
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The trajectory must be compatible with keeping global warming to 1.5°C by 2100, in
line with the IPCC's SSP1-1.9 scenario.
8
Provided mainly by the International Energy Agency (IEA)