Olaf Sleijpen: When economists agree - the role of central banks in
the green transition
Speech by Mr Olaf Sleijpen, Executive Board Member of Monetary Affairs and Financial
Stability of the Netherlands Bank, at the Green Finance Symposium at Tilburg
University, Tilburg, 21 November 2024.
* * *
Thank you. And congratulations, Asli, on your honorary doctorate. Given your
impressive track record of academic and policy contributions, I think this is very well
deserved. And I feel honoured to speak here today at this symposium. If I had to pick
one thing from your work, and there is many to pick from, it would be that strong, stable
and inclusive institutions are a precondition for financial and economic development.
Strong institutions are also a precondition for the green transition. And central banks
are one such institution. Let me put this into context.
Climate change and nature degradation pose risks to monetary and financial stability.
We all know the examples. We may see asset and collateral depreciation because of
flooding, or investments in polluting industries becoming stranded assets. We may see
an increase in the price of agricultural commodities due to more frequent droughts. And
we have all seen that the impact of the energy mix and energy policies on the general
price level can be extremely strong.
Whether the transition will be orderly or not, central banks and financial supervisors
have a role to play. Because climate change and nature degradation will have an
impact, one way or the other. If we do not succeed in putting a stop to it, it will increase
the cost of adaptation and will pose serious risks to the economy. But policies that
mitigate climate risk also come at a cost in the short term. A cost that may impact the
economy, financial institutions and financial stability. Having said that, the long-term
cost of dealing with the consequences of climate change, if we do nothing or too little,
far outweighs the short-term cost of an orderly and timely transition. Central banks and
financial supervisors, having a long-term view, will therefore always prefer a predictable
and orderly transition path.
Shaping that transition, and accelerating it, is a responsibility we all share. Each in our
different roles. Governments for instance have the democratic mandate and the position
to lay down a long-term vision and strategy, to set goals, and to design and implement
policies. They also have the economically most effective and efficient tools at their
disposal. Here I think of setting standards and imposing regulation, adequate pricing of
externalities, and encouraging innovative, sustainable investment, for instance through
subsidies. At the same time, governments have to manage social and economic
transaction costs, as we all tend to be myopic. The lessons from behavioural economics
also apply to the energy transition. Indeed, striking the balance between the medium- to
longer-term gains of the energy transition and short-term transition costs may be the
most complicated task for governments, whose mandates are in most cases no longer
than four or five years.
But also the private sector and households have a role to play. It is not appropriate to
only rely on the government. The difficult message is that all economic actors bear a
responsibility and their actions are not substitutes; that is, if we want an orderly
transition to be successful.
At De Nederlandsche Bank, we definitely also play a role. As a supervisor and
regulator, as a central bank and as a leader by example.
As a supervisor and regulator, we have a responsibility to make sure that financial
institutions manage their climate- and nature-related risks. These risks have an impact
on the soundness of financial institutions, which is something we watch over. And
ignoring these risks is not compatible with sound risk management.
In general, financial supervisors are intensifying their focus on climate- and
environment-related risks. The ECB has put climate- and nature-related risk high on the
agenda. Banks under its supervision must comply with the supervisory expectations for
good risk management by the end of this year. At DNB, we are on the same track for
the banks, insurers and pension funds under our supervision. While there has been
progress, we are still not where we need to be. As supervisors, we are doing what we
can to nudge the sector in the right direction. For example, by publishing good
practices, like the Guides on managing climate and environmental risks from the ECB
and DNB. But if these efforts prove insufficient, enforcement will come into view as a
viable option.
As a central bank, our objective is to maintain price stability and to safeguard financial
stability. Climate change and nature degradation have an impact on both and, hence,
fall squarely within our mandate. Also, as a central bank, we are an adviser to the
government, as economic and financial policies impact monetary and financial stability.
In that role we aim to contribute to stable long-term climate and environmental policies
by providing economic analysis and research. Showing decision makers what the
economic consequences are of the various policy options they may choose. A good
example is the research we did together with the Netherlands Environmental
Assessment Agency on the economic and financial impact of nature degradation. It
revealed that more than 500 billion of investments by Dutch financial institutions is
highly dependent on services provided by nature. Services that may come at risk due to
biodiversity loss.
In our role as adviser, we are part of a broader community to which Tilburg University
also belongs, and of which you, Asli, are a prominent member. Without the work of this
broader research and policy-advise community, climate policies would be a shot in the
dark.
As a public institution at the heart of the financial sector we want to lead by example
and contribute to international sustainability goals ourselves. This is why we are
committed to integrating sustainability considerations in all our core tasks by the end of
next year. For example, we are in the process of making our investment policies more
sustainable. In our internal operations, too, we are working to be as sustainable as
possible in the choices we make, for instance in the renovation of our headquarters
building.
We also use our position on the crossroads of research, policy and finance to bring
various parties together. On the national scale, we work together with the financial
industry, academics, and ministries in the Platform for Sustainable Finance.
Internationally, we are a member of the Network on Greening the Financial System, an
organisation of over 140 central banks and regulators. The NGFS focuses on topics
that are core to central banks and supervisors around the world, providing expertise,
capacity building support and training.
So that's how we see our role in the green transition. This role is legitimised by the fact
that climate change and nature degradation directly affect the economy and financial
stability. But this also indicates the limits of our involvement. As I said, we all have a
responsibility in shaping the transition, each in our different roles. The central bank
cannot take up the responsibility of other parties, because as a non-elected body we do
not have the mandate or policy instruments to do so. We cannot tell financial firms
where to invest their money. Similarly, the primary objective of monetary policy is to
maintain price stability. It is in the end up to society to choose the transition path it
deems most fit and appropriate. In case society is not willing to pay the short-term price
of an orderly and timely transition, then, our task is to research the effects of alternative
scenarios. But even then, we must continue to explain that a timely and orderly
transition is the first-best policy. As George Bernard Shaw famously said: if all the
economists were laid end to end, they'd never reach a conclusion. So if two economists
can agree on the economic sense of a green transition, just imagine the impression a
whole room full of them can make. It is not always easy to be the voice of economic
reason in the room. But nobody is served with fact-free policies. So we should continue
to research the effects of alternative policies, present the facts, speak truth to power.
That's our role, that's how Asli does it, and that's what we should deliver.
Thank you.