Climate Finance Day 2018 - Paris, 28 November 2018
The role of finance: Anticipating climate risks, financing transition
opportunities
Closing session: Speech by François Villeroy de Galhau
Governor of the Banque de France
Press contact: Mark Deen (mark.deen@banque-france.fr).
Page 1 sur 6
Ladies and Gentlemen,
It is a great pleasure to be here to conclude this fourth edition of Climate
Finance Day. This event gives a concrete picture of what I like to call the
"powerful coalition of the willing". Each and every one of us - public
authorities; academics, NGO's and think tanks; corporates and financial
institutions - have a part to play in this coalition. It is a shared challenge that
no one can tackle alone, and you have worked during these last three days to
bring tangible solutions to quickly and effectively finance the transition.
Paris, chère Madame la Maire, has been a driving force committed to
translating momentum into concrete action. Let me mention three key
milestones: the COP 21 back in 2015, the "One Planet Summit" in December
2017, and this fourth edition of Climate Finance Day.
To better address concretely the financial risks stemming from climate change,
the Banque de France initiated a Network for Greening the Financial
System (NGFS) at the One Planet Summit, with eight founding members.i In
ii
less than one year, we have been joined by 13 other members and five
observersiii from the five continents. They work together with great energy and
enthusiasm.
In my remarks today, I will (I) take stock of the NGFS' achievements and then
outline the decisive steps that are still ahead of us in order to (II) anticipate
climate risks and (III) seize opportunities.
**
I. The NGFS' first achievements
As highlighted by the winner of the 2018 Nobel Prize in economics,
William Nordhaus, although "there is substantial uncertainty about the path of
climate change and its impacts [...] this does not reduce the urgency of taking
strong climate-change policies today.iv"
Tackling climate change to "prevent the airplane from crashing" is first and
foremost the responsibility of appropriate public policies in energy - as
Page 2 sur 6
announced yesterday for France -, transportation, housing or - yes - taxation
and carbon pricing. Finance cannot substitute them, but finance can help; and
as central bankers and supervisors, we are determined to help. I would even
say that this challenge is our "new frontier", comparable to the financing of
growth and major infrastructures in the 19th century or the management of
great financial crises in the last 100 years.
The progress report of the NGFS, released in October is hence an important
step. Indeed, for the first time, this coalition of the 21v willing central banks and
supervisors, has unanimously agreed that climate-related risks - as a source
of financial risk - are within a central bank's mandate. The NGFS will not stop
there and next year will publish its first comprehensive report, which will
provide - on a voluntary basis only - policy recommendations for central
banks and supervisors. This will take place at the upcoming NGFS
Conference, at the Banque de France in Paris, on 17 April 2019: you are all
most welcome!
To prevent the airplane from crashing, we can help by shedding light on
climate risks in order to take accurate and timely decisions, and by seizing
opportunities while aligning incentives and mobilising capital.
II. Anticipating climate-related risks
1/ Our first priority should be the disclosure of existing exposures in the
financial sector, what I call "the snapshot of risks". The recommendations of
the Task Force on Climate-related Financial Disclosures (TCFD), chaired by
Mr. Bloomberg with sponsorship from the Financial Stability Board (FSB), have
been groundbreaking as they provide a practical framework allowing
companies to disclose their climate-related financial risks. However, an
accurate and consistent vision of the risks requires a wider implementation of
the TCFD's recommendations.
Significant room for progress remains in this area. To enable markets to price
risks, we need comparable metrics - thanks to a common taxonomy - and
better access to higher quality and more consistent data. I therefore fully
Page 3 sur 6
support the work of the Technical Expert Group on Sustainable Finance of the
European Commission which is concretely developing a taxonomy; our first
NGFS workstream is also working in this field.
We should then gradually move towards compulsory transparency based on
a "comply or explain" principle. Article 173 of the French Energy Transition
Law - as it sets the Environmental Social Governance (ESG)-Climate
approach as a new market standard - could usefully serve as a reference
studied at the European level.
2/ Beyond the "snapshot of risks", the NGFS is working on a "video of risks",
with long-term forward-looking stress tests to assess the dynamic effects of
climate change on the economy and financial stability. The NGFS is currently
developing economic scenarios based on climate change that could be used
to conduct stress tests. Meanwhile, the ACPR has conducted a survey on
banks and insurance companies to evaluate how they integrate physical and
transition risks in their risk management. The results will be published by early
2019. They will be a good point to assess the progress made so far by the
industry towards taking both risk factors into account. I would at this stage
suggest caution on some NGOs' analyses concluding that French banks have
a "fossil energy bias". Their large exposures to the oil and gas sector have
indeed decreased between 2015 and 2017. This survey will also be valuable
as inputs in designing the new framework needed to perform stress-test
exercises and assess climate risk across the French financial system as a
whole.
III. Financing transition opportunities
Like any good pilot, we want our plane to "gain some altitude". And our goal
here is not only to manage climate change-related risks, but also to align
incentives to make sure the transition is adequately financed.
As time goes by and our ability to achieve a 1.5 to 2°C scenario is being
seriously challenged, the amount needed to finance the transition is increasing
steadily. This quantitative challenge is linked to the massive investment
Page 4 sur 6
required to promote further development of technologies, notably carbon
capture and storage and electricity generation from renewable sources. The
amounts at stake vary, but as an illustration, the last Intergovernmental Panel
on Climate Change (IPCC) report, published last October, estimates that until
2050, the energy-related mitigation investments to limit warming to 1.5°C
reach USD 900 billion per yearvi. The needs are so considerable that public
financing alone will never be sufficient. But, per year this amount represents
less than 1% of the 2017 gross world product. The burden is a heavy one, but
it is far from insurmountable if we join forces. Let me turn to the private sector
before coming back to central banks.
1 / Fortunately, the private sector is already showing a growing interest in
green finance. I could cite many examples, including the sharp rise in the
global climate-aligned bonds market which reached on outstanding amount
of USD 1.45 trillionvii in 2018 or the success of the issuance of France's first
green sovereign bond in January 2017. All this looks very promising... but it is
still insufficient. The success of the transition will also depend on our ability to
broaden the sources of financing: we should not rely solely on green bonds.
We also need more green loans, and more green financing in general,
accessible to individuals, SMEs and start-ups.
Mobilising this capital raises also some qualitative challenges. An orderly
scaling up of green finance requires keeping markets away from green
washing practices. The emergence of a new ecosystem of financial "good
products", such as green, social, impact or Sustainable Development Goals
(SDG) bonds would appear to be great news. But we should be cautious not to
create a confusing diversity of definitions that could undermine the reputation
of green markets and impede progress. An EU-wide standard based on high
level common principles regarding the management of the funds and impact
assessments, articulated with a common green taxonomy is critical to protect
market integrity. It would certainly make sense to build, notably on the two
most widespread standards: the Green Bond Principles (GBP) and the Climate
Bond Initiative (CBI).
Page 5 sur 6
2 / Central Banks must also send out the right signal and lead by example in
their investment and disclosure policies. We at the Banque de France have
adopted in March this year a Charter on Responsible Investment for the
management of our own funds and our pension portfolios: this means
allocating them to socially and environmentally responsible investment funds.
With respect to disclosure, we are going to disclose in March 2019 the
climate-risk exposures of our own funds and pension portfolios. We are
also working to adopt in the near future a TCFD-like reporting which would fit
the specificities of central banks.
Regarding the role of monetary policy, some voices have been calling for a
"green quantitative easing". But monetary policy has to be broad based and
remain neutral to ensure proper functioning through its transmission channels;
it cannot be targeted towards achieving specific social or sectoral impacts.
However, this does not preclude the Eurosystem from buying green assets
when they fall in the remits of the eligibility criteria of its purchase
programmes. For instance, the ECB currently holds around EUR 79 billionviii
of eligible green universe bonds from both the public and the private sector,
which is already significant.
It does not mean though that monetary policy should ignore the question
of climate change. Within our price stability mandate, I really believe further
analytical work is needed to better understand the medium to long-term impact
of climate change on intermediate monetary policy objectives and ultimately on
our monetary policy strategy. To this end, a substantial research agenda
remains before us and I hope the NGFS can play a role in helping to bridge
the "knowledge-gap" in that area. In addition, from an operational perspective,
if evidence shows that transition and physical risks have an impact on the risk
profile of certain assets, central banks should draw a logical conclusion and
incorporate these financial risks in their collateral framework.
**
Page 6 sur 6
I would like to conclude with the message that Paul Romer gave during his
Nobel Prize speech: "Humans are capable of amazing accomplishments if we
set our minds to it." On climate-related risks, in less than one year, central
banks and supervisors have accomplished concrete steps to mainstream
green finance in all their activities. Notwithstanding the political progress we
would all wish for at international level, we are determined to follow our "flight
plan" as financial authorities. Thank you for your attention.
i
Banco de Mexico, Bank of England, Banque de France/Autorité de Contrôle Prudentiel et de Résolution, De
Nederlandsche Bank, Deutsche Bundesbank, Monetary Authority of Singapore, People's Bank of China, Swedish
Finansinspektionen.
ii
BaFin, Banco de España, Bank al Maghrib, Bank Negara Malaysia, Bank of Finland, Banque centrale du
Luxembourg (BCL), Banque nationale de Belgique (BNB), EBA, European Central Bank (ECB), Japan FSA,
Oesterreichische Nationalbank (OeNB), Reserve Bank of Australia, Reserve Bank of New Zealand.
iii
Bank for International Settlements (BIS), European Bank for Reconstruction and Development (EBRD), OECD,
Sustainable Insurance Forum (SIF), World Bank (Group) + World Bank (IFC/SBN).
iv
William D. Nordhaus, "Projections and uncertainties about climate change in an era of minimal climate
policies", NBER WORKING PAPER SERIES, 2016.
v
8 founding members plus 13 new members (excluding 5 observers).
vi
Intergovernmental Panel on Climate Change, 2018.
vii
Climate Bonds Initiative, "Bonds and climate change the state of the market", 2018.
viii
Roberto A. De Santis, Katja Hettler, Madelaine Roos and Fabio Tamburrini, "Purchases of green bonds under
the Eurosystem's asset purchase programme", ECB Economic Bulletin, Issue 7/2018.