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Green Swan 2021 Global Virtual Conference 2 June 2021
Never too much and never too many: how to transform global discussion
into global action against climate change
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Ladies and Gentlemen,
This "Green Swan 2021 Global Virtual Conference" co-sponsored by the
Banque de France, the BIS, the IMF and the NGFS should have taken place in
Paris, birthplace of the Climate agreement and of the NGFS, but it is my
Central banks' commitment to the
pleasure to welcome you online. climate
cause may seem obvious today. But few issues have seen such a rapid and
massive change. My generation changed its mind, I changed my mind. Many of
us now share the imperative of Hans Jonas:
"In your present choices, include
the future wholeness of Man among the objects of your willi". In Amsterdam
three years ago, for the inaugural Conference of the NGFS, I referred to
our century".
greening finance as "new frontier for the 21st Today, the challenge
"doing too
could almost look inverted: we have gone from the risk of little, too
late" of
to the criticism by some "too many doing too much". No: we are not doing
too much (I), and we are never too many (II).
But before starting, I would like to draw two useful and cautious lessons from
the above-mentioned criticisms. First, we, central bankers and supervisors,
cannot do everything by ourselves; we are not the only green game in town.
Nothing will replace an appropriate carbon price. Second, we are acting in the
very name of our mandate: our consideration for climate change is neither an
abuse of our mission, nor a mere militant conviction, and we will act with the
same technical credibility and professionalism as we do in our traditional
domains.
Not
I. "too much": what it is our duty to do
"proliferating" environment, let me suggest some clarification,
In a somewhat
with a two-dimensional quadrant.
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The vertical axis the most obvious one relates to our missions as
supervisors and includes both climate-related risks for financial institutions and
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opportunities linked to green finance. The horizontal axis relates to our
missions as central bankers and includes responsible investment of our non-
monetary portfolio and monetary policy. For many central banks, implementing
responsible investment strategies has numerous benefits: central banks can
then practice what they preach as supervisors, protect their own balance sheets
and contribute to financing the green economy. Since 2019, the Banque de
France has been the first Eurosystem central bank to publish a yearly dedicated
reportii on our responsible investment policy. And we turn our words into action:
the Banque de France is completely exiting coal by 2024. As regards green
finance, climate change creates opportunities for investors: the expected
transition to a lower-carbon economy is estimated to require around $1 trillion
of investments a year.
I will now focus on the top right of the quadrant: climate-related risks of financial
"key battle
institutions and the greening of monetary policy. These are the two
fields". Regarding climate-related risks, there are two essential levers to win
the battle: (i) disclosure of present data and their standardisation; and (ii)
- The "snapshot" of the
forward looking assessments the stress tests. risks, and
their "video".
Disclosure will help markets to appropriately price climate-related risks and
ensure efficient allocation of capital. That is why disclosure should become
mandatory, at least as a first step for financial institutions, as it is already in
France, and for large corporates. The EU, here too, leads by example, having
decided standardised mandatory disclosure from next year on. Because of data
gaps and still a lack of clear transition policies, assessing individual or sectoral
exposure to climate risks remains nevertheless a thorny issue, as highlighted in
the latest NGFS report published last weekiii on bridging data gaps. Hence,
setting up an ambitious international reporting framework for climate-related
financial disclosure is another key priority. This means achieving a common
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framework basic but already significant for all jurisdictions with the possibility
to be more ambitious for those who want to. In addition, we should bring on
board the "double materiality" promoted by the European Commission: consider
both the risks that affect the reporting entity itself and the impact it has on the
environment through its activity, and also encourage a broad coverage of ESG
topics, not limited to climate change. In this respect, the IFRS initiative should
not be self-sufficient, as it could neglect the S and G dimensions, and as such
key standards are public goods, which require "co-construction" with political
authorities. Corporations, financial or non-financial, which proclaim themselves
"net zero by 2050" should also be able to disclose and provide a clear pathway,
a strategy to achieve this goal, to make sure their commitment is credible.
On stress tests, forward looking assessments with scenario-based climate risk
analysis will play a key role. Last month, the French ACPR published the first
climate pilot exercise worldwide covering both the banking and insurance
sectors. The exercise was of an unprecedented nature due to the time horizon
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30 years -, the active participation of financial institutions themselves, and the
inclusion of both physical and transition risks. Two lessons can already be
drawn: these stress tests are possible; and the risks are better controlled if the
transition is orderly and begins early. But we are still in the middle of the journey
towards completing our methodology. The ACPR urges all supervisors to
initiate their own exercise. Learning by doing is better than waiting for the perfect
solution before taking any action!
I now turn to the last part of the quadrant. Greening monetary policy is still the
hottest issue. This is no fashion, it is an imperativeiv. Long-term shocks related
to climate change are potentially difficult to manage for central banks because
of their stagflationary nature, as they may result in both upward pressure on
prices and a slowdown in activity. But climate change also has short-term
effects on prices. Part of the recent increase in energy prices in the euro area
was linked to higher electricity prices in Spain due to unusually cold weather,
and to a carbon surcharge on prices of liquid fuels and gas in Germany. More,
as is stated in the NGFS report on monetary policy of last March, "central banks
ought to be aware of climate risks that could threaten the integrity of their
balance sheets"v. Let's face it: the ECB's balance sheet is "exposed" to climate
risk through the securities it purchases and the assets pledged as collateral by
banks, to an extent that is insufficiently taken into account.
How, concretely, might we reduce this exposure? Next fall, we will decide with
Christine Lagarde, whose strong commitment I want to praise, and the
Governing Council on the conclusions of our "Strategy Review". To contribute
to this debate, I strongly hope the ECB will be the first central bank to decide the
three following steps: (1) forecast, and therefore model. This dimension of
economic research is often overlooked: it is nevertheless crucial to grasp
complex interdependencies between physical and economic phenomena,
across sectors and countries, and across time horizons (2) disclose: impose
transparency requirements including on counterparties; (3) incorporate climate
risk, into our operations on corporates (on both asset purchases and collateral
policies).
Not "too many": how
II. to transform global discussion into global
action
In less than 4 years, the NGFS has grown from 8 to almost 100 members, but
we will never be too many. This increasing number nevertheless raises the
challenge of our efficient work together at the international level. We must
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definitely transform global discussion into global decision and at the end of the
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day global action.
We have functioned with voluntary and expanding coalitions like NGFS, or
TCFD for business. And while Europe was key at the core of this coalition, from
the very beginning, our colleagues from China, Mexico and Singapore, were
around the table. Now, with the new administration in the United States,
"mandatory" bodies enter the stage.
Standard-setting bodies, international
organisations and international fora have now put sustainable finance as their
top priority. In this context, the NGFS is actively requested and involved in the
new international climate roadmap of the G20 and the FSB. To achieve this goal,
we have to build on the best assets of our network: its agility; its technical
"knowledge
competence as a hub"; and, if I may, the relentless efforts of its
Chair, my colleague Frank Elderson, and the commitment of the Banque de
France to its global Secretariat. A team of 14 people from the Banque de France
is the backbone of the Secretariat, strongly backed by our new Climate Change
Center chaired by Nathalie Aufauvre. Given the extension of the NGFS and the
deepening of its work, secondments from other NGFS members would be most
welcome to contribute to the dynamism of the Network, through one year stays,
on site, in Paris, or flexible options including remote work. And we intend to
strengthen our efforts to communicate and disseminate the work of the NGFS
among our membership and beyond.
We have increased means, and still many avenues to explore. If I had to stress
only two tasks where our whole global community needs the NGFS: (i) climate-
related economic scenarios. We released a first wave in July 2020, we will
update them next week. I read some unfounded doubts on them: NGFS works
with the best partner research institutes, publishes a range of plausible and
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differentiated futures not intended to be central forecast -, and will regularly
incorporate the development of scientific evidence. This provides, as a common
public good for COP26, the best reliable framework for financial risk
assessment. (ii) Data disclosure and stress test methodologies, in order to
measure more and more precisely and credibly climate-related risks of financial
institutions. It is a prerequisite before possibly deciding about additional capital
requirements. For these tasks, believe me: we in NGFS are ready to "roll up our
sleeves", and still have the enthusiasm of the pioneers.
**
In conclusion, acceleration has been the name of the game since 2017. Still, we
should further accelerate in 2021. We have an exceptional political alignment,
with major international milestones: the COP26 of course, but also a G7 summit
in June, a G20 conference in July in Venice, and a G20 summit in October in
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Rome. It is time for all policy makers us included to be up to Hans Jonas
requirement, for the future wholeness of Man. Thank you for your attention.
i
Hans Jonas, The Imperative of Responsibility: In Search of an Ethics for the Technological Age.
ii
Responsible Investment Report of the Banque de France 2019, June 2020.
iii
"Progress report on bridging data gaps", NGFS Report, 26 May 2021.
iv
"The role of central banks in the greening of the economy", Speech by François Villeroy de Galhau, 11 February
2021
v
"Adapting central bank operations to a hotter world: Reviewing some options", NGFS Report, 24 March 2021.