Marja Nykänen: Maintaining the EU as global leader in sustainable
finance
Speech by Ms Marja Nykänen, Deputy Governor of the Bank of Finland, at the European SSM
Round Table, digital conference, 21 May 2021.
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MAINTAINING THE EU AS GLOBAL LEADER IN SUSTAINABLE FINANCE
Ladies and Gentlemen,
The EU has been the global leader in sustainable finance for as long as sustainable finance has
been a thing. And this does not mean only green bonds and similar traditional green investment
instruments; it also covers more recent instruments such as sustainability-linked loans. And
while in this speech I will be focusing mainly on the green, it is worth remembering that the EU is
also among the world leaders in social finance.
It is worth noticing that the EU is not alone in increasing green investments. Other countries and
regions are also growing and, in some cases, even faster than the EU, albeit from lower initial
levels. Therefore, we should not become complacent.
After all, with constantly increasing climate goals it is evident that the investments in a
climateneutral economy will need to increase significantly. And this is where sustainable finance comes
into play. Many of the world's largest institutional investors have committed to invest responsibly,
so there is ample investor demand for sustainable finance opportunities.
This naturally begs the question of what we need in order to maintain our global leadership in
sustainable finance. The EU Green Deal and the Next Generation EU will be important drivers
that will mobilize capital for financing the EU's climate goals. These initiatives are not only about
public money; through various programmes, they will also attract private capital.
There are also barriers to increasing sustainable finance in the EU, from the lack of green
investment opportunities to the fragmented capital markets within the EU. Putting these
obstacles to one side, I would like to highlight some aspects more closely related to sustainable
finance.
Firstly, we need a taxonomy and common standards for sustainable investments. These will
create certainty and eliminate the need for all actors to verify the greenness of an investment.
This will lower the costs associated with green investments, which is one of the requirements for
further mainstreaming sustainable finance.
But taxonomy and standards alone are not enough unless we have proper data. Only with proper
data will it be possible to actually determine the environmental impact of companies and their
business models. Thus, we need timely and wide-ranging reporting from companies.
The EU is well on its way in bringing all these into being, but the last steps might be the most
difficult. The taxonomy and standards need to be credible to prevent greenwashing, but inclusive
enough to allow sustainable investment products to be developed. Similarly, the company
disclosure regime needs to be credible. But at the same time, it should not place an undue
burden on companies.
Thus, with sustainable finance we constantly need to balance between different perspectives.
We need to try to make sustainable finance inviting, but not at any cost. This is best exemplified
in the discussion on promoting sustainability with the prudential framework.
We still have no idea to what extent the greenness of an investment correlates with the financial
risks. And as we should preserve the prudential framework to insure against risks, we should
figure out other ways for incentivizing sustainable investments.
For financial institutions and supervisors, my advice is to take climate risks seriously. Many
already do, despite the difficulties with the data and methodologies, and especially in
communicating the results of climate risk analysis. The ECB climate stress test coming in 2022
will further ensure that everyone starts thinking about climate risks.
Central banks and supervisors all around the world have joined forces in the Network for
Greening the Financial System, or NGFS for short. This network is, among other things, working
to bridge the data gaps and build scenarios for the long-term forward-looking analysis required
for climate risks. The results of this are available to all. I encourage you all to take a look at them
and investigate if these can help you in your own efforts.
Helping the financial institutions in analysing their climate risks is not the only thing that central
banks do. Many central banks want to lead by example and are measuring the climate risks in
their own portfolios, while embracing responsible investment policies. The NGFS is doing its part
in identifying best practices and spreading them across all central banks.
According to the latest NGFS survey, central banks mentioned "reputational risks" and "to set a
good example" as their main motivations to adopt responsible investment practices. It is worth
mentioning that the NGFS survey is a global, not a European survey, with 40 central banks in
over five continents participating.
I would also like to highlight the joint decision made by Eurosystem central banks earlier this year
to measure and disclose the climate-related risks of the euro-denominated non-monetary policy
portfolios. Non-monetary policy portfolios fall within Eurosystem national central banks'
independent decision-making. Yet, all the 19 national central banks and the European Central
Bank decided to adopt a common stance.
At the Bank of Finland, we have been working very actively on responsible investments and are
increasing our own non-financial disclosure. Within the last year alone, we have published our
responsible investment principles as well as several articles and blogs on climate-related issues.
In our most recent annual report, we have substantial sections on sustainability issues. And not
just for our asset management activities, but on our other central banking activities too, such as
the environmental impact of issuing and circulating bank notes.
By setting a good example through transparent disclosure, we also feel more confident to ask for
more disclosure from the entities we invest in. This in turn leads to better data quality and better
data coverage. More importantly, as we all know, what gets measured, gets managed. This also
helps to fill the data gaps and improve the data quality.
Through analysing, identifying and managing climate risks and opportunities we can all do our
part to combat climate change and biodiversity loss. Climate issues seem like a walk in the park
compared with biodiversity. Let us hope that it won't take us as long to wake up to the importance
of biodiversity as it took us to notice climate change.
Central banks should not be the primary actors in mitigating climate change and reducing
biodiversity loss. Value judgements should be left for the representatives chosen at general
elections. Central banks need to respect their mandates in order to not become politicized. But
our efforts are needed to support the policymakers, just like everyone else's. If we don't set a
good example, how can we expect others to act and follow in the right direction?
In this short keynote I have painted the picture of where we are and where we should be heading
in terms of sustainable finance. I hope that this SSM Round Table will bring you new ideas on
what to do next. For sustainable finance is not only an opportunity for the EU, it is an opportunity
for all financial institutions. And, therefore, we should all be asking what we can do.