"From 1 to 17?"
Lecture Frank Elderson at UNEP Finance Initiative (FI) Positive Impact Finance
Amsterdam, 23 November 2017
If you would take a closer look at all the things done, perhaps we can be a bit more critical. So far, most
of our climate-risk related work is focused on climate-related risks. We've looked at how the energy
transition could impact the economy, we've looked at how the financial sector is at risk from climate
change and the energy transition. But being critical, from our supervisory mandate we're mostly just
focusing on climate risks. But isn't climate just one of the SDGs? Aren't there 16 other SDGs? And
couldn't each of these SDGs have physical or transition risks for our economy and therefore for our
financial sector?
The Principles and the Manifesto pose serious questions for serious times. Questions that we also ask
ourselves and that we struggle to answer.
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Good afternoon everyone, and welcome to DNB.
It's a pleasure for us to host UNEP Finance Initiative (FI) today and its work on Positive Impact Finance.
As many of you know, DNB has been quite active on the topic of sustainable finance. Hosting a third
party event however is not something we very often do. The main reason is that Positive Impact Finance
is unambiguously ambitious and we recognize some of that trait in our own character.
Challenges...
Our societies are facing tremendous challenges, and are facing a lot of them at the same time. In terms
of our climate; our world is now already more than one degree warmer than it was before the industrial
era. For one thing, this has caused the amount and the severity of storms and floods to increase,
worldwide often with deadly result, as we have seen far too often this year.
But climate is just one challenge: Nearly 2 billion people worldwide do not have access to clean drinking
water. 700 million people are living under the poverty line of almost 2 dollars a day. And in Sub-Saharan
Africa, four in five people are undernourished and 45% of children die before they are 5 years old
because of malnutrition.
The good news is that we have international agreements targeting these issues. We have the
Sustainable Development Goals and the Paris Agreements. Wouldn't it be wonderful if just like a
multinational, the world would have a clear strategy?
Well, not only does the world have such a strategy, we, increasingly, see many governments, business
and investors taking steps to pursue it and to tackle these challenges.
But we also need to be realistic: we are a long way from achieving the goals. Let's take a look at China
for example. Sure, it's the green energy and green finance power house of today. It's the world's leading
producer of solar and wind power, and it's the largest green bond market in the world.
But it also uses and produces 50% of all the coal burnt globally. It's responsible for 25% percent of all
daily energy consumption. And CO2 emissions are rising worldwide again, mostly because of China. So
the challenges remain.
Funding the transition
And what's more all of these challenges have a financing element. For climate for example, it is
estimated that an additional 1.5 trillion dollars are needed annually to finance the required investments.
And for all of the SDGs combined, an estimated 5-7 trillion dollars are needed annually until 2030.
As the UNEP FI Manifesto rightly states, all of the current initiatives together, however impressive, will
most likely not be enough to finance the SDG investment gap. And so, what is needed, according to the
Manifesto, is a financial sector that jointly considers the three pillars of sustainable development:
economic, environmental and social.
And that any investment should deliver a positive contribution to one of these pillars, once any potential
negative impacts to the other pillars have been identified and mitigated.
Eric Usher - and we are very proud to welcome him here on our premises - will explain the thinking
behind UNEP FI's conclusion that in their assessment a transition to a new finance paradigm is required.
That's right, ladies and gentleman, a new paradigm no less! Talking about ambition...
Getting to a financial sector that bases itself on an appraisal of both positive and negative impacts will
not be easy, I'm afraid. In fact, it ́ll be hard. And if it were to be done, it would require courage,
practice and perseverance. And there will probably be moments where you might simply think: this is in
fact impossible; there is simply no way to achieve this, so why am I even hurting my brain over this?
Dutch initiatives
Well, should that be the case, please allow me to share two considerations with you that might make
your struggle more bearable.
One: I'd dare to say, somewhat chauvinistically, that The Netherlands is among the frontrunners in the
world in terms of incorporating sustainability considerations in finance.
Many of our financial institutions assess ESG factors in their investment decisions. Based on a survey we
recently conducted, 17 out 28 surveyed financial institutions measure the carbon footprint of at least a
part of their balance sheet. And 9 of those have even committed to lowering that carbon footprint.
Furthermore, our banks have collectively issued a climate statement, an SDG-dialogue document, and
an international covenant on human rights in project finance. They are key players in the Equator
Principles, in carbon disclosure and divestment initiatives. Many of our insurers and pension funds, bring
up ESG-issues in investor calls, and have ESG-engagement strategies. And three out of the top 10 of
most sustainable companies worldwide according to the Canadian Investment advisor Corporate Knights
are Dutch.
In short, the Dutch are rather active indeed on this issue and we've already in fact come quite far. And
we're probably a lot further than where people thought we would be 5 or 10 years ago.
So, whenever you feel the challenge is insurmountable, just think back to where we stood 10 or, if you
go through a moment of particular pessimism, 20 years ago, and where we stand today. Hopefully the
realization of how far we've progressed already, will give you enough energy to keep going.
DNB initiatives
The second consideration - because I promised you two - is that you are not alone in facing this
challenge. Of course, there are all the signatories to the principles of this manifesto. But actually, your
central bank and supervisor faces a similar challenge.
You see, DNB, as I'm sure many of you know, has been quite active on the topic of climate risks: both
on physical risks stemming from climate change, as well as on transition risks, stemming from
legislation or market developments.
About 2 years ago, we issued a report called Time for Transition. In this report we investigated the
potential impact of the energy transition on the Dutch economy, and we noted that the upcoming
transition is in fact one of the biggest medium to long term challenges to our economy and therefore for
our financial sector.
And a few weeks ago we published a report called Waterproof?, in which we took a closer look at climate
risks in the Dutch financial sector. In this report, we concluded that in both a 1.5 degrees and 3.5
degrees scenario, climate-related damages are expected to go up due to an increase in the frequency
and intensity of severe weather events. This means that insurance premiums may have to go up and
that insurers may need to hold more capital, as they hold capital for severe events. We also found that
models currently being used by insurers to predict damages do not adequately take climate change
trends into account.
In terms of the energy transition, we warned of risks stemming from new sustainability legislation for
offices. The Dutch government requires office buildings to have a minimum energy label of C as of 2023.
This means that all office buildings that don't meet this requirement now, have five years to reach the
required level, or their cash flows will dry up. Our financial sector finances large chunks of the real
estate sector. When cash flows dry up, that will jeopardize the value of these loans.
So how big is the problem? We found that on average 46% of bank loans to commercial real estate
parties, has an energy label of less than C, representing some 6 bn euros. These loans run serious risks
the coming years, and banks need to manage this risk. In doing so, by the way, they will discover,
indeed they of course already have, that there are also ample and sound business opportunities to help
their clients meet these legislative deadlines, thus creating a win win situation for business and climate.
But that's not all. As a follow up to this work, we are right now developing both physical and transition
related stress tests. And we hope to present the results of the physical stress test in the coming few
months.
We've also done some work on the broader question of sustainable finance. About a year ago we
published a report on responsible investing in the pension sector. This was based on a requirement in
Dutch law for pension funds to be transparent as to whether and how pension funds take ESG factors
into account. We assessed whether indeed all pension funds included their ESG investment policy in
their annual report, and we shared the good practices that we saw.
Last but not least, using our convening power, we've founded a national Platform for Sustainable
Finance, which brings together our government, supervisors and industry representatives from the
entire financial sector. The aim of this platform is to promote and encourage a dialogue on sustainable
finance in the financial sector. In addition, the Platform also allows for financial institutions to form
cross-sectoral working groups to tackle existing problems. One of these working groups, called the
Platform Carbon Accounting Financials, or PCAF, has developed a methodology on how to measure the
carbon footprint of six different asset classes. They will launch this report soon.
Another working group has worked on SDG Impact Measurement. It developed, and recently launched
its report, and I'm very proud that they're here.
So we've been quite active as you can see. And as a central bank and prudential supervisor, we're
actually rather proud of all the work we've done. And we'd even dare to say that we are among the
frontrunners in Europe and perhaps even worldwide.
A critical look at all initiatives...
But if you take a closer look at the things we've done, perhaps we can also be a bit more critical. So far,
most of our work is focused on climate-related risks. We've looked at how the energy transition could
impact the economy, we've looked at how the financial sector is at risk from climate change and the
energy transition.
So if we're a bit critical, from our supervisory mandate we're mostly just focusing on climate risks. But
isn't climate just one of the SDGs? Aren't there 16 other SDGs? And couldn't each of these SDGs have
physical or transition risks for our economy and therefore for our financial sector?
Let's take a look for example at SDG #15, Life on Land. Every year we gain 3.5 billion hectares of
desert. And every year we lose 13 million hectares of forest. Biodiversity is also declining at an alarming
pace. A recent study done in Germany showed that the average insect population has declines with 75%
in the last 30 years.
If governments don't take action to stop the loss of biodiversity, this might for example one day lead to
crop failures. And this might not happen slowly, but could perhaps be caused when we reach certain
tipping points. If that were to happen, obviously, one of our basic human needs would be jeopardized.
But from a financial point of view, agricultural companies might face difficulties, and that might impact
banks financing the agriculture sector. And so it might not be too far reaching a thought that is would
seem important for such a bank to be aware of potential risks from biodiversity loss.
Or what about SDG #12, sustainable consumption and production? About making sure that we use all
natural resources in a sustainable way? What if governments introduce legislation to ensure sustainable
use of resources? Unsustainable companies would be relatively hard hit, and their profitability could be
at risk. And thus, the financial sector that invested in them through stocks, bonds and loans.
Move from 1 to 17?
In short shouldn't we move our work on sustainability from 1 to 17 SDGs? Couldn't there be more risks
than just climate? Need these risks not be managed? Should the prudential supervisor not broaden its
focus?
And what about impact? Couldn't we do research into access to finance? Into potential bottlenecks for
financing the SDGs? Couldn't DNB have anything to say about striving for impact towards achieving the
SDGs? Would that bring us to the fringes of our mandate? Or possibly beyond? The answer is not yet
clear.
Fortunately, this is exactly what we will look into in 2018. How do the SDGs fit in our mandate? It won't
be easy for us. We don't have an exact answer. It's pioneering. It's challenging. It's a struggle. But it's
one we're happy to undertake.
Even doing this, however, we'll probably still fall short of the new paradigm advocated in the Manifesto.
Because we would most likely be looking at each of the SDGs separately and assess to what extent they
pose risks for the financial sector (both in terms of "physical" and in terms of "transition" risks). To the
extent they do, we would squarely be within our mandate. But I know Eric will call for a more far
reaching approach. Moving from risk to impact, and looking to all SDG's holistically.
So we have a lot of work to do. A lot of thinking to do, a lot of pioneering to do.
The Principles and the Manifesto pose serious questions for serious times. Questions that we also ask
ourselves and that we struggle to answer. So whenever you're feeling like the task ahead of you is
insurmountable, perhaps you will find comfort from the fact that your supervisor is struggling just as
much as you are.
But we're all struggling in the right direction.