Climate change and geopolitical shifts: Accelerating
the sustainable transition
Speech at the Eurofi Financial Forum 2022
Prague | Sabine Mauderer
1 Introduction
2 Time to act - more reasons
3 Financing the sustainable transition
4 Enhancing market transparency
5 Transition plans - from commitment to action
6 Conclusion
1 Introduction
Ladies and gentlemen,
Having just arrived from Germany, I'm enjoying the pleasant, slightly cloudy weather
in Prague. It is very different from what we have experienced over the summer. This
summer has been hot, unbearably hot - with temperatures reaching 40 degrees
Celsius or higher. Scorching heat coupled with little to no rainfall has caused an
unprecedented stress on water levels.
Two-thirds of Europe is subject to a drought warning or alert, according to the
European Drought Observatory. [1] This could be the worst drought in at least 500
years.
The severe rainfall deficit is increasing the risk of fires. The wildfire in the Bohemian
Switzerland National Park was terrible, the smell of smoke even reached as far as
Prague.
Of course, such weather extremes are not entirely new, but their magnitude and
frequency are frightening. It shows: The climate change is not a future problem. The
climate crisis is at our doorstep.
In addition to the human tragedy, the proliferation of extreme weather events has
economic consequences. The European Council estimates that the financial losses
caused by extreme weather and climate-related events exceeded 487 billion euro in
the EU (European Union) 27 over the last 40 years. [2] On average, only around 23%
of the total losses were insured.
And it is widely understood that climate-related extreme weather events will
become more frequent. Without mitigating action, they could result in even greater
losses going forward.
2 Time to act - more reasons
Ladies and gentlemen,
There is simply no time left to hesitate or delay. We need to pull together and speed
up the green and sustainable transition. Even more so now that the Russian war in
Ukraine is having global ripple effects. It has sent food, energy and commodity
prices soaring across the world.
In Germany, the year-ahead price for electricity reached a high record at the end of
August. Prices briefly rose to 1,000 euro per megawatt hour. Before the war, they
rarely rose above 100 euro. Overall, the World Bank expects global energy prices to
increase by 50 percent on average in 2022. [3]
And, in a recent analysis, the World Bank estimated that the energy shock could
lower global output by almost 1 percent by the end of 2023. [4] We are now paying
the price for our longstanding dependency on fossil fuels.
To dampen the impact of high energy prices, many countries have introduced price
caps or other subsidies. However, it is important to not dilute the price signals
completely and to not create misdirected incentives.
In addition, an adequate carbon price remains a key political tool on the road to
climate neutrality, with a clear steering effect. Of course it is important to keep an
eye on the social balance. But for this, policymakers have other, more appropriate
instruments.
Policymakers in Europe are rushing to find alternatives to Russian gas, too. In
Germany, for instance, coal plants are being reactivated amid debates about
extending the life span of the remaining nuclear power plants. But neither coal nor
nuclear power are the silver bullet for energy security. Due to low water levels, we
have seen instances where coal could not be shipped and nuclear reactors could not
be cooled down.
There is no simple solution.
Rather, we are dealing with a multidimensional problem. Thus, the situation might
even worsen in a non-linear way. It's time to speed up the renewable energy
transition to become independent and less vulnerable.
Greening the energy sector won't be enough. Moving carbon-intensive industries
towards a low-carbon future is at the heart of the transition.
We have to get the entire economy on track for net zero. Along this road,
policymakers are called on to set the right incentives for investment in the
climateneutral transition.
3 Financing the sustainable transition
There is no doubt that decarbonising our economies will be costly. The European
Commission, for example, estimates that additional investments of around 350
billion euros per year will be required up to 2030, just to convert the energy system.
[5] But delaying the sustainable transition will cost us more. To reach our goal of net
zero greenhouse gas emissions by 2050, the public and the private sector must pull
together.
Of course, targeted public spending is needed. National and European funding
programmes could be a vehicle through which companies and private individuals
receive grants, loan reduction and guarantees for sustainable projects. This would
mean the public sector assumes some of the risk, but the private sector has to pitch
in as well. The real economy itself will have to invest a great deal. Banks, capital
markets and institutional investors stand ready as funding partners. The financial
sector has a key role to play in mobilising the badly needed investments.
However, again and again, we have seen that investors struggle to identify what
qualifies as sustainable or green - and what does not. This ambiguity leaves the
door open to greenwashing. Investors need to be certain that their money is actually
contributing to the transition. Transparency is key for aligning investment with net
zero objectives.
4 Enhancing market transparency
High-quality climate-related data are crucial for aligning capital flows with
lowcarbon transition pathways. There is, however, room for improvement regarding the
quality and quantity of data. Acknowledging the need for better data, the global
Network for Greening the Financial System (
NGFS (Central Banks and Supervisors Network for Greening the Financial System))
has recently launched a new data directory.
It serves as a central catalogue of available climate-related data sources and
supports stakeholders in finding the sources relevant to them. The data directory
facilitates access to these data and, importantly, it is available to the wider public.
Currently, the data directory contains more than 700 links to relevant data sources.
In this way, the
NGFS (Central Banks and Supervisors Network for Greening the Financial System) is
helping to identify existing data gaps.
Similarly, the
NGFS (Central Banks and Supervisors Network for Greening the Financial System)'s
widely recognised scenario analyses also contribute to greater transparency. They
not only allow us to put a price tag on delayed policy action. They also highlight
how transition and physical risks would leave a mark on the world economy.
Moreover, regulatory ambition to enhance transparency has increased in recent
years. At the EU (European Union) level, promising steps are being taken to enhance
corporate sustainability reporting. EU (European Union) rules require large firms and
financial institutions to disclose the environmental and social impacts of their
activities - namely the Corporate Sustainability Reporting Directive (CSRD) and the
Sustainable Finance Disclosure Regulation (SFDR).
In addition, EU (European Union) sustainability reporting standards are currently
being developed. These should ensure consistency of reporting rules and are
envisaged to become part of the CSRD. The European Financial Reporting Advisory
Group (EFRAG) has been tasked with drafting them. A first set of standards is
expected to be adopted by October 2022.
While those steps are laudable, it is important to bear in mind complexity and
practicability. Aligning disclosure standards globally must take priority. Building on
and contributing to international standardisation initiatives will be vital.
In this regards, the newly established International Sustainability Standards Board (
ISSB (International Sustainability Standards Board)) can play an important role in
creating global coherence in sustainability disclosures. Close cooperation between
the EFRAG and the ISSB (International Sustainability Standards Board) will be
essential to harmonising data metrics for climate-related data.
Though consistency is the unambiguous goal, it will also be about balancing
interests across jurisdictions.
The new standards should be ambitious and in line with the Paris Climate
Agreement, at the very least. Thus, the concept of double materiality is an important
aspect. Companies should be required to report on how sustainability issues affect
their business, and on their impact on the environment and society.
Another example is the Common Ground Taxonomy. It compares the green
taxonomies of the EU (European Union) and China and identifies commonalities.
Harmonised standards and frameworks are key for more transparency.
Globally aligned disclosure standards have benefits ...
... for investors by ensuring consistency and comparability
... for companies by reducing reporting burdens
Broadly accepted reporting standards are enablers to the transition.
5 Transition plans - from commitment to action
Let's get down to the heart of the transition. I am looking at you - the
representatives of companies and financial institutions. Your action matters.
Indeed, more and more businesses and financial institutions are committing
themselves to reaching net-zero emissions. It is important to now put words into
action. This includes making your climate pledges verifiable.
Credible transition plans should meet four criteria:
First, organisations should define clear and transparent targets, such as emissions
•
reduction targets that specify how they plan to mitigate climate risks.
Second, short-term and long-term milestones must set out a path for reaching
•
these targets.
Third, actionable and deliverable steps must ensure that the targets remain
•
feasible.
Fourth, appropriate governance structures must be put in place to monitor and
•
steer the transition process. It is important that financial institutions build up
capacities to adequately implement their transition plans so as to ensure that
these plans are not merely an exercise in compliance.
A sound transition plan would have two effects. It would help organisations to
operate in a sustainable way and remain profitable in the future. And it would boost
market confidence and show investors that commitments and actions are aligned.
This, in turn, would help to mobilise investment and ensure that the funding actually
contributes to decarbonising the economy.
Investors increasingly expect businesses to disclose how they are managing their
transitions to net zero. Government action will also be crucial in influencing
corporate behaviour.
The United Kingdom has taken encouraging first steps. Companies and financial
institutions listed in the UK (United Kingdom) are expected to put forward transition
plans from 2023. This initiative sends a strong signal to firms and financial
institutions that they must deliver on their commitments.
In the EU (European Union), the disclosure of transition plans is also under
discussion. It is part of EFRAG's proposal for EU (European Union) sustainability
reporting standards. Companies covered by the CSRD should thus anticipate having
to disclose their transition plans in the near future. However, publishing net zero
transition plans early - before they become mandatory - could give institutions a
head start.
6 Conclusion
Ladies and gentlemen,
Let me recap. We are facing unprecedented challenges. The question is not if but
how our economies will change. The sustainable transition makes sense:
environmentally, economically and politically. We need all hands on deck. You are at
the heart of the transition. With your expertise and dedication, we stand a good
chance of succeeding.
Footnotes:
1. Daily News 23 / 08 / 2022 (europa.eu)
[https://ec.europa.eu/commission/presscorner/detail/en/mex_22_5123]
2. Climate change costs lives and money - Consilium (europa.eu)
[https://www.consilium.europa.eu/en/infographics/climate-costs/]
3. The energy shock could sap global growth for years (worldbank.org)
[https://blogs.worldbank.org/developmenttalk/energy-shock-could-sap-globalgrowth-years]
4. Global Economic Prospects (worldbank.org)
[https://www.worldbank.org/en/publication/global-economic-prospects]
5. State of the Union: Q & A on the 2030 Climate Target Plan (europa.eu)
[https://ec.europa.eu/commission/presscorner/detail/en/qanda_20_1598]