Published Date: 31 May 2022
"Gearing Up for Climate Action - The Road
Ahead for the NGFS" - Opening Address by Mr
Ravi Menon, Managing Director, Monetary
Authority of Singapore, Chair, Network for
Greening the Financial System, at the Green
Swan Conference 2022 on 31 May 2022
Distinguished guests, ladies and gentlemen.
It is an honour and a pleasure to address the Green Swan Conference again.
As chair of the Network for Greening the Financial System (NGFS), I would also like to
express my gratitude, on behalf of the NGFS, for the opportunity to co-host this
conference with the Bank for International Settlements, the European Central Bank, and
the People's Bank of China.
From a climate perspective, 2020 to 2030 is the "critical decade". While everyone is
busy making net zero commitments for 2050, let us not forget that the trajectory towards
net zero will be substantially determined by 2030.
Looking at where we are in our transition journey, the urgency to act is greater than it has
ever been.
Global greenhouse gas emissions are continuing to rise.
In 2021, fossil fuel use and associated carbon emissions rebounded in tandem with
the global economic recovery.
The demand for coal has risen, not fallen. Fossil fuels continue to account for more
than 80% of global primary energy consumption.
Renewable energy generation capacity has grown significantly in recent years, but the
current pace is not sufficient to reach net zero by 2050.
Global temperatures have already risen by 1.1 degrees Celsius above pre-industrial levels.
The recent report by the Intergovernmental Panel on Climate Change (IPCC) is
sobering.
To limit global warming to 1.5 degrees Celsius, global greenhouse gas emissions must
peak by 2025 and come down by about 45% by 2030 relative to 2019 levels.
This is far from the emissions trajectory we are currently on.
Climate change is a long-term risk but whether and how that risk materialises
depends on what we do in this "critical decade".
The already tepid transition to net zero has been thrown into disarray by the war in
Ukraine.
In the short term, the imperative facing some major economies to cut dependence on
Russian supplied gas could see them turn to readily available fossil fuel alternatives,
including coal.
It will take some time for reliable renewable alternatives to fossil fuels to scale up and
be widely available at viable costs.
At the same time, governments' fiscal resources are being stretched by the need to
provide support to cushion against macroeconomic stresses arising from the war as
well as humanitarian relief.
This means less fiscal space for public investments in green technologies and
infrastructure.
But there are also promising efforts to turn the tide.
Many governments recognise that environmental sustainability and energy security
are complementary goals. We have seen, in recent weeks, new policy proposals that
may lead to a more decisive pivot towards renewable energy.
The European Commission's REPowerEU proposal includes targets to further boost
renewables development and quadruple green hydrogen supplies by 2030.
The German government has announced a package of measures which aims to
increase the share of renewable energy in Germany's energy mix to 80% by 2030, up
from an earlier target of 65%.
Concerted action by policymakers, corporates, financial institutions, and individuals will
be key in the drive to mitigate climate change.
It is in the name of facilitating such concerted action, that we are gathered here today
at the Green Swan Conference.
The financial system can be a powerful lever to enable a credible and inclusive
transition to net-zero.
Central banks and financial regulators, whatever their mandates, have a role to play
in greening the financial system to support the net-zero transition. It is this vision
that led to the formation in 2017 of the Network of Central Banks and Regulators for
Greening the Financial System, or NGFS.
The NGFS has grown significantly, from 8 founding members to 114 today,
representing a diverse group of advanced, emerging, and developing economies.
The Network has accomplished much in the last four years, breaking new ground and
providing valuable guidance on integrating climate and environmental risks into the
work of supervisors and central banks.
The integration of climate-related and environmental risks into financial stability
monitoring and prudential supervision is becoming a reality.
The next phase of the work of the NGFS is to move from awareness to action. The
NGFS Glasgow Declaration, issued at COP26 in November last year, reiterated our
commitment to expand and strengthen our collective efforts towards greening the
financial system. This means two things:
improving the resilience of the financial system to climate-related and environmental
risks; and
encouraging the scaling up of the financing flows needed to support the transition
towards a sustainable economy.
To give substance to its Glasgow Declaration, the NGFS has just announced its new work
programme. It comprises six key initiatives:
enhancing supervisory practices with respect to managing climate risks;
designing actionable climate scenarios;
assessing the implications of climate change for monetary policy;
providing guidance for central banks on their own net-zero transition;
analysing nature-related financial risks; and
building capacity among its membership.
Let me start with SUPERVISION.
The NGFS will take to the next stage its ongoing work to incorporate environmental
risks within supervisory frameworks and practices.
One of the new areas of focus will be financial institutions' transition plans to manage
environmental risks.
To be credible and impactful, financial institutions' transition plans must be based on
how they will facilitate the transition of their clients and customers towards greater
sustainability. This will in turn depend on the respective industry transition pathways
relevant to their clients and customers.
The NGFS will examine the role of supervisors in assessing financial institutions'
transition plans.
We will study potential ways to assess transition plans' resilience to environmental
risks.
We will identify good practices among supervisors on overseeing financial institutions'
transition plans, along with the necessary data needs.
We will examine how financial institutions should consider their counterparties'
transition plans with respect to exposure analysis, transition risk management
processes, and their own transition plans.
The NGFS will not do this work in isolation. There is some existing work in this space by
others, such as the Glasgow Financial Alliance for Net Zero or GFANZ, and the Science
Based Targets initiative or SBTi. It is important that we have a consistent and comparable
approach to assessing financial institutions' transition plans.
Next, CLIMATE SCENARIOS.
The NGFS will enhance its climate scenarios to sharpen understanding of the impact
of physical and transition risks on the financial system.
To make sense of the deep uncertainties surrounding climate change, financial
institutions need to adopt forward-looking approaches based on scenario analyses as
opposed to risk models based on historical data. This is an especially technical area of
work where the principle of being science-based cannot be overstated.
The NGFS scenarios are widely used. The IMF has started using them for some of its
Financial Sector Assessment Programme, or FSAP, work. The scenarios could also
potentially be used in future disclosures of climate-related financial risks under the
International Sustainability Standards Board, or ISSB, template for better comparability
of risk implications.
The NGFS will promote wider application of its climate scenarios through
enhancements in several areas.
We will strengthen the modelling of physical risks, both acute and chronic.
We will enhance sectoral granularity and geographical coverage - especially to
emerging economies.
We will develop short-term scenarios suitable for stress testing and analysis.
We will continue to update input data to reflect changes such as new technologies and
policies, and the evolution of the economic environment.
Third, the impact of climate change on MONETARY POLICY.
The NGFS will seek to gain an understanding of how climate change and mitigation
actions should be considered in the conduct of monetary policy.
From a central bank perspective, climate change is the ultimate supply-side shock. The
effects of climate change and mitigation actions are likely to be of a scope and intensity
that will affect the economy across both cyclical and structural dimensions. This is a
complex endeavour, given the considerable uncertainty surrounding these effects.
The NGFS will seek to provide central banks with the requisite tools to make sense of
the implications of climate change for monetary policy.
We will focus on macroeconomic modelling of critical transition issues, to help central
banks better analyse their impact on the economy.
We will explore climate-related adjustments that central banks could implement to
ensure the smooth conduct and efficacy of monetary policy operations.
We will explore how monetary policy operations could potentially support the
transition to a net-zero economy.
Fourth, NET ZERO FOR CENTRAL BANKS.
The NGFS will provide guidance on how central banks can make the transition to a
net zero environment.
It is important that we central banks who are part of the Network for Greening the
Financial System "lead by example" and make an effort to green ourselves. This would
include adopting some of the good sustainability practices central banks and supervisors
have been espousing to financial institutions. Undertaking the net zero journey
themselves will help central banks and supervisors gain a better understanding of the
challenges that financial institutions face when considering climate-related and
biodiversity risks in their activities.
The NGFS will provide guidance on integrating sustainability considerations across the
range of central bank functions.
We will follow up on past work relating to sustainable and responsible investment
(SRI) principles for central banks1.
We will explore suitable metrics for central banks' disclosure of climate-related and
environmental risks, including climate-related governance structures and strategy.
We will consider how disclosures for internal operations should be prepared,
including a stocktake of how central banks are reducing their environmental and
carbon footprint.
Let me now move on to NATURE-RELATED RISKS.
The NGFS will mainstream the consideration of nature-related financial risks across
our work.
Nature-related risks and biodiversity loss have garnered significant attention in recent
years, and rightly so. Biodiversity supports all life on our planet. But we are eroding this
biodiversity at a pace that is damaging the natural ecosystems that provide us food,
water, and clean air. This in turn could pose significant risks to economic, financial, and
social stability.
Failure to address nature-related risks could adversely affect financial institutions and
financial system stability. It is imperative that central banks and supervisors consider
these risks in fulfilling their mandates. The financial sector should align itself with the
transformations that are necessary to deliver a global economy that is positive for nature.
The NGFS has acted quickly in looking into nature-related risks, well ahead of the
financial industry. We collaborated with INSPIRE2, an independent research network, to
produce reports setting out the importance of biodiversity for the macroeconomic and
financial systems. These reports also made preliminary recommendations on how
central banks and supervisors might align themselves with the structural transformations
required to deliver a nature positive global economy.
The NGFS, in the next phase of its work, will aim to equip central banks and supervisors
with a common base of knowledge of nature-related risks.
We will provide recommendations on how nature-related risks can be integrated into
the other work programmes of the NGFS, including supervision, scenario analysis, and
monetary policy.
We will make nature-related risks more tractable, by focusing on nature-related risks
with a nexus to financial risks.
We will identify a few local case studies to work through concrete examples where the
link from ecosystem degradation to climate change is clear, such as in deforestation.
Finally, CAPACITY BUILDING AND TRAINING.
The NGFS will provide guidance on how central banks and supervisors can build up
their capabilities in climate-related and environmental risks.
The importance of building capacity and expertise on climate issues within the central
banking and regulatory community has been consistently espoused by the NGFS since its
beginning. Our members are at different stages of progress in their ability to address
climate-related and environmental risks. We want to make sure they have the support
they need to make meaningful progress in addressing these risks.
The NGFS will facilitate the upskilling of central bankers and supervisors, especially
from emerging and developing economies, in climate-related and environmental
risks.
We will develop a training and capacity building strategy for central banks and
supervisors, mapping training needs to supply.
We will develop a training curriculum, to help central bankers and supervisors build
up their capabilities in a progressive manner, from foundational knowledge to more
advanced and specific skillsets.
As a final remark, let me stress: climate change is a shared crisis, and the efforts to
fight it must be a shared responsibility. Inclusivity is the key to our success.
And inclusivity is at the heart of what the NGFS does. We have a diverse membership,
across geographies, across stages of economic development, and across a variety of
climate related risks and transition challenges. The NGFS will continue to ensure that our
work on greening the financial system is inclusive - uncompromising in our ambition to
support a Paris-aligned pathway to net zero while meeting the economic and social
development needs of our members. In short, a just transition to a sustainable planet.
Inclusivity is also a feature of the NGFS when it comes to partnering the financial industry,
academia, and standard-setting bodies in charting policies and strategies on how the
financial sector can support decisive climate action. We will cast our net wide and tap on
the ideas of a range of stakeholders. Given the magnitude and complexity of the
challenge before us, nothing less will do.
At the Green Swan Conference, we have a diverse and inclusive assembly comprising
some of the best minds and influential figures. I am confident that the conversations we
will have over these two days will add impetus to what we can do together in the fight
against climate change during this "critical decade".
Thank you, and I wish you all a fruitful conference.
[1] Examples include the Sustainable and Responsible Investment Guide for Central
Banks' Portfolio Management and the subsequent update in a progress report.
[2] International Network for Sustainable Financial Policy Insights, Research and
Exchange (INSPIRE).
© 2022, Government of Singapore.