NGFS
Network for Greening the Financial System- conference,
Paris, 17 April 2019
Central banks and supervisors taking action on climate change
Introductory remarks by François Villeroy de Galhau,
Governor of the Banque de France
-
Risque Climatique Call to Action
Ladies and Gentlemen,
the Banque de France's premises
It is a great pleasure for me to welcome you to
to kick off this public session of the NGFS conference. We have been waiting for
this moment for a while, and here we are. The NGFS is releasing today its first
for
comprehensive report, entitled "A call action", including its six
recommendations.
Thomas Paine, an English-born political philosopher and citizen of the world, said
The American Crisis
in (circa 1776): "If there must be trouble, let it be in my day,
that my child may have peace."
Climate change is real, it is global and
irreversible. Even if policymakers bear the primary responsibility, we need all
hands on deck to tackle climate change, as demonstrated today with this wide
Indeed, "preventing the airplane from crashing" remains a continuous
audience.
endeavour, which is now undertaken by many more institutions every day.
In mainstreaming sustainable finance, finance cannot replace policymakers but
finance can help. And as a central banker and supervisor, the Banque de France
is determined to help. Last year, in Amsterdam, I even said that this challenge is
our "new frontier".
This is why we initiated the Network of central banks and
supervisors for Greening the Financial System (NGFS), during the One Planet
Summit on December 2017. And, in 16 months, our club of the willing has
increased almost fivefold, from 8 founding members to over 40 members and
observers with its Chair Frank Elderson and the Banque de France as
Secretariat. We are now represented on the five continents; NGFS members'
jurisdictions cover 44% of global GDP and 45% of greenhouse gas emissions.
We collectively supervise two-thirds of systemic financial institutions, banks and
insurers alike. What appears obvious to most of us today was not previously set
in stone.
With our global effort to ensure that the Paris Agreement produces results, the
first for action"
NGFS' "A call report has the potential to lever the financial system
"paradigm shift"
and I hope that it will pave the way for a in the wider community
of central bankers.
take stock of central bankers and supervisors'
In my remarks today, I will (i)
achievements towards tackling climate change, which are significant and (ii)
discuss four important tasks that still lie ahead.
I. Central banks and supervisors are promptly moving ahead regarding
the snapshot of risks
In its first progress report, released in Bali in October 2018, the NGFS
unanimously concluded that
"climate-related risks are a source of financial risks.
It is therefore within the mandates of Central Banks and Supervisors to ensure
the financial system is resilient to these risks." So what do we do?
a. Integrating climate-related risks into micro-supervision
This is an ambitious but complex task, on which progress has been made in
many countries. Looking at the potential courses of action for supervisors, I
believe that our main priority should be the disclosure of existing exposures in
call "the snapshot of
the financial sector, what I usually risks". A number of
supervisors have paved the way, including the DNB, the Bank of England/PRA
and the French supervisory authority (ACPR). The ACPR published last week a
second report on the exposures of French banks and insurers to climate risks.
This report gives a clearer view on climate risks and opportunities: asset
exposures of financial firms to physical risks remains non-material in France
thanks to investments in very low risk zones; banks' exposures to transition-
related risks were slightly reduced between 2015 and 2017 and now represent
roughly 12% of credit risk's exposures at default. Our supervisor also has a
clearer view on the blind spots in the risk management framework, which must
be addressed: executive bodies are committed to embracing further climate risks
at the highest level of decision-making but the degree of implication across the
French financial sector is still heterogeneous; the granularity of the analysis
provided by banks and insurance companies is not sufficient.
This step should be widely promoted among NGFS members, who, I believe,
need to leverage best practices throughout its membership. I therefore very
much welcome the supervisory handbook that will be prepared as a NGFS
technical deliverable for 2019-20.
b. Integrating sustainability factors into own-portfolio management
Central banks must send the right signal and lead by example in their investment
and disclosure policies. The DNB has signed up to the UN Principles for
Responsible Investment. Norges Bank, which manages the Norwegian sovereign
wealth fund, has advocated a diversification of the portfolio and is implementing a
divestment strategy dedicated to selling off some oil and gas stocks. We, at the
Banque de France, adopted in March last 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, in March 2019 we were the first central bank to
publish our climate-related risks' exposures. We are also working to further align
our reporting with a TCFD-like approach that would fit the specificities of central
banks. We trust our experience will be useful to the NGFS membership in
defining some best practices as far ESG investment for central banks is
concerned.
"time to roll up
We can be proud of what we have achieved in 16 months, but it is
our sleeves":
the merciless perspective of a more than 2°C world requires us to
strive to do better and to do it now. Developing practical solutions now tops the
"Season 2".
agenda of the NGFS
II. The road ahead for central banks/supervisors and other players too
a. Disclosures and taxonomies, two faces of the same coin
We are currently facing a chicken and egg dilemma. In order to bridge the data
gaps, we must rely on enhanced disclosures that need to be built on sound
taxonomies. But we need some data to set out a proper taxonomy!
It is time to follow the path set by the TCFD on one side and the European
Commission on the other to address all issues at the same time. It means
working jointly on disclosures and taxonomies. It will notably help to enhance the
quality of disclosure and, ultimately, its relevance in internalising the current
climate change externality for all firms.
We will then be in a position to move gradually towards compulsory transparency
based on a "comply or explain" principle, such as
that of Article 173 of the French
Energy Transition Law that could usefully serve as a reference.
b. Integrating climate-related risks into financial stability monitoring
Substantial work remains to be done to achieve "the video of risks".
Our feeling is
that risk premia do not currently appropriately reflect climate risks. And therefore
I believe that we, as central banks and supervisors, must push for a forward
looking vision of the impacts of climate risks. In order to properly size the
financial effects of climate change, our goal is clear: we should be able to design
some comprehensive climate stress tests.
What does it mean in practice? The snapshot of risks provides information on
exposures. But achieving a forward looking scenario analysis implies bringing
together three "bricks":
- A handful of severe enough but realistic transition path scenarios all the
way to 2050. The NGFS is working on those and plan to publish some
technical papers soon.
- Macroeconomic assumptions to capture the impact of climate change on
macroeconomic variables (productivity, inflation, unemployment, etc.)
- The direct and indirect exposures of the financial system to climate risks.
Here of course, disclosure can help.
We are not there yet, climate risk analysis needs to rely on new methodological
tools in order to deal with challenges related to long-run impacts, accounting for
technological change and shifts in political priorities and social behaviour for
instance, non-homogeneity and non-linearity of impacts, and irreversibility of
effects. We need to look beyond the standard one-year horizon for default
probabilities that does not fit the climate agenda.
c. The green economy is still in its infancy and needs to mature
As time goes by and our ability to achieve a 1.5 to 2°C scenario is seriously
challenged, the amount needed to finance the transition is increasing steadily.
The demand for green assets is high, but the supply of green assets fails to keep
up. This quantitative challenge to match demand is linked to the massive
investment required to promote further development of technologies and to
accompany shifts in social behaviour. 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 amount to USD 900 billion per year
whereas climate-aligned bonds issued in 2018 reached USD 149 billion. Green
financing requires an innovation-friendly framework: green loans, green
securitisation, green covered bonds, green derivatives, green crowdfunding
platforms and green private equity should all be promoted, keeping in sight our
heading, which is preserving financial stability. The work of the Technical Expert
Group on Sustainable Finance of the European Commission on green bond
labels and sustainable benchmarks should be well understood as a game
changer by the financial system: green finance should definitely mature, upgrade
be
its professional standards and "greenwashing proof".
Green finance has actually the ability to be a powerful transformational force but
there will be no transition to a low-carbon future without further engagement from
corporates, from large companies to SMEs. Financial institutions can provide a
trickle-down effect, thanks to comprehensive disclosures or divestment
CO2
strategies. But the real economy must embrace the transition on its own. Once
again, appropriate public policies, like a credible carbon price, will set the proper
incentives.
d. Further developing the climate agenda in an inclusive manner
Climate change will trigger strong distributive effects: agriculture in Sweden might
benefit from an increase in global mean surface temperature while 145 million
people in China are threatened by sea rise in a +4°C scenario. There will be
winners and losers internationally but also within countries.
This calls for a deeper international cooperation which will promote a globally fair
-
transition to a low-carbon economy. And each and every one of us civil society;
States and regional regulators; academics, NGO's and
think-tanks; corporates
-
and financial institutions; central banks, supervisors and standard setters has a
part to play: it is a shared challenge that no one can tackle alone.
We should also focus our efforts and attention on emerging countries and
developing economies. They are usually hit harder by climate risks and on top of
that also face environmental risks at large, (such as air pollution, water pollution
and scarcity of fresh water, land contamination, harming biodiversity and
deforestation). In 2017 alone, almost 5 million people worldwide died due to air
pollution. Even if environmental degradation and associated (financial) risks are
often more local in their reach, there are nevertheless compelling reasons for the
NGFS to look at environmental risks relevant to the financial system and
differentiate more in the recommendations provided between the types of
financial systems.
Conclusion:
The success of the Paris Agreement will depend on our ability to move forward in
an inclusive manner. The world is in the hands of all of us. But certainly some
have a greater influence on its fate than others. Central banks and supervisors,
within the NGFS and alongside men and women of good will, are playing their
part in mitigating the disruption caused by climate change. If we want our
children to have peace, I am calling on all of you to act too.