François Villeroy de Galhau: Past progress induces new challenges -
raising the stakes for standard disclosure, supervisory requirement
and collective governance
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the
Climate Finance Day, Paris, 27 October 2022.
* * *
Ladies and Gentlemen,
It is a great pleasure to give this "Perspective" speech at the Climate Finance Day, here
in Paris, as my 5th participation. Central banks and supervisors are delivering what they
promised: the Eurosystem is incorporating climate change into the ECB's monetary
policy operations, as announced by President Christine Lagarde in early July. As
supervisors, the French ACPR conducted the first pilot stress tests dedicated to climate
risks in 2021, followed by the ECB in 2022. Our NGFS (Network for Greening the
Financial System), based in the Banque de France with an Asian chair, Ravi Menon,
now has more than 120 members. Moreover, regarding our non-monetary policy
portfolios, the Banque de France has already achieved the 2°C objective. I am happy to
announce today that we will now align them with the 1.5°C objective, starting with
European equities by end-2023, and completely by end-2025.
Our accelerated pace is more than needed given the ever greater climate emergency:
the extremely warm summer and autumn we are experiencing this year vindicate the
latest IPCC reports. Although the global warming is currently 1.1°C, it gives us a clear
insight into what future will look like should we let temperature rise above 1.5°C. The
most recent research suggests that the first global climate tipping points are likely to be
crossed between 1.5°C and 2°C : the collapse of the ice caps of Greenland and West
Antarctica, which would lead to a huge rise in sea levels; abrupt melting of carbon-rich
permafrost; and possibly the disappearance of a key current in the north Atlantic,
disrupting rain upon which billions of people depend for food.
Other stakeholders, private and public, are obviously playing their part too. Yet our past
progress induces new challenges. I would like to address three of them today: the shift
from voluntary to mandatory disclosure (I); the shift from stress tests to prudential
capital requirements for banks (II); and the collective governance of green finance in
France, shifting from individual commitments to an "ecological planning" framework (III).
I. The shift from voluntary to mandatory disclosure
Two days ago, the ACPR and the AMF published their third joint report in which they
assess the climate commitments published by French financial institutions. This report
calls for a swift bridging of the gap between the current level of disclosure and
upcoming regulatory requirements. Europe has been a pioneer in drafting new
regulations to make sustainability disclosure mandatory. EFRAG (the European
Financial Reporting Advisory Group) with the strong involvement from Patrick de
Cambourg has accordingly developed draft standards which encompass all CSRD
(Corporate Sustainability Reporting Directive) topics. These European standards will
include biodiversity and nature-related risks, where we must some years later follow the
same roadmap as for climate.
In the meantime, the newly born ISSB (International Sustainability Standards Board)
has thanks to Emmanuel Faber - another strong French contributor - published two
draft standards on general disclosure requirements and climate-related disclosures,
directly inspired by the work of the TCFD. Furthermore, the US Securities and
Exchange Commission (SEC) has also published a proposal on new climate-related
requirements, which would - if adopted - gradually come into force between 2024 and
2026.
These international initiatives are obviously welcome: climate change is a global topic.
And we cannot, even if we wanted it, have a single standard: to give an obvious
example, the European requirements can be expected to be more advanced than
others. Therefore, we collectively have to ensure that these standards are interoperable
to the maximum extent: as a bottom line, when an entity complies with a set of
requirements from any jurisdiction, it should mean that it also complies with the global
baseline provided by ISSB. We cannot afford to create a jigsaw of national or regional
regulatory standards; the current divergences between the major sets of norms must
consequently be overcome.
None of them are carved in stone at this stage, and we should use the time available to
us to work towards convergence. EFRAG and ISSB must ensure full interoperability -
notably in detailed definitions. I understand that significant progress is already
underway, thanks to continued efforts on both sides of the table, which is good news. I
hope that we will reach full convergence by end-2022 at the latest. In parallel,
cooperation between US SEC and ISSB is as much needed to ensure another vital
alignment, and hence a prerequisite for the global baseline to prosper around the
globe.
II. Supervisory tools: from stress tests to capital requirements
Let me now turn to the second shift underway, towards supervisory requirements that
take into account climate risks to which banks and insurers are exposed. The first
assessment of these risks was carried out in the context of climate stress tests. France
and Europe were pioneers, as said, but many jurisdictions (36 at this stage) are now
following the same road, to "test and learn". So far, they generally concluded that
climate risks should be manageable for most institutions, but also revealed a significant
under-estimation of probabilities of default, and the need to improve risk governance.
The release last summer of six updated NGFS scenarios, which better incorporate the
combined macroeconomic impacts of transition and physicals risks, as well as the effort
to develop short-term scenarios, will allow for enhanced assessments. Moreover, in
Europe, the Commission has requested supervisory agencies to carry out a coordinated
exercise by 2024 in the context of its "fit for 55" strategy. We should now go further.
To complement stress tests, we will have a measure as faithful and comprehensive as
possible if we rely on robust transition plans . Transition plans are not only advocated
by private sector initiatives such as GFANZ, they will also be required from banks in
Europe under the forthcoming European CRD6 (Capital Requirements Directive 6), and
are foreseen by other standards for corporates in general (CSRD, ISSB, SEC). This
would allow for a dynamic, holistic and risk-based approach, which in my view is far
preferable to static and not risk-based green-supporting and brown-penalising factors.
The question now is how to "operationalise" these stress tests and transition plans. In
my view, the simplest and most international way forward is to integrate them into Basel
capital requirements, in Pillar 2 on risk governance, as a first-stage approach.
Regulations should explicitly cater for additional own fund requirements in case banks'
individual transition plans appear deficient or misaligned. This will raise a number of
methodological questions, to be addressed by the EBA in Europe.
At this stage, if progress has been made on both pillar 2 and 3, pillar 1 still raises
several issues. Its implementation - which could come at a later stage - will require
standardised and usable data, which do not exist today, as well as the analytical
capacity to disentangle the risks to be covered respectively by supervisory and
regulatory approaches. Last, the macroprudential approach is in any case less relevant
than microprudential actions and requirements.
III. What governance for green finance in France?
Let me now elaborate on the third and last question of the day: what governance is best
suited for green finance in France? An "ecological planning" process is launched by the
government this year, which is to be implemented on a ministry-by-ministry basis, with
overall steering from the Prime Minister's office. When it comes to green finance, we
might also build on the vision presented by Yves Perrier, and two of his important
messages. First, the need to initiate (and sustain) a collective momentum of
transformation - a momentum within the financial community in all its diversity as well
as a momentum that brings together financial and economic players. Second, the
importance of building capacities: I welcome the fact that French business schools and
universities are working toward offering courses and masters' programmes.
Let me briefly convey a few personal convictions to build a strong and efficient
collective governance, which is obviously key.
First, French influence in Europe is at least as decisive as a sound French governance.
Even the best designed plans and initiatives in Paris are likely to miss their objectives if
they remain circumscribed within our borders. Indeed, the ecological transformation is
set to be deployed at the level of European economy, and eventually the global
economy. French voices are needed in Europe, within your professional associations -
Insurance Europe, AFME, PRI or GFANZ among others -, in your engagement with
European authorities, in your exchanges with European peers.
Second, we should elaborate the "compatibility path" between the present energy crisis
linked to the war in Ukraine, and the ecological transition. Public support to households
and firms is understandable but it shouldn't foster energy demand. "Tiered" pricing
mechanisms, such as planned in the Netherlands and probably in Germany, subsidize
energy prices only up to a certain volume of consumption. The threshold can be the
same for everyone as decided in the Netherlands, or in proportion of past consumption
as considered in Germany, up to 80% for households and 70% for firms. The marginal
tranche above this threshold remains at market prices, thus maintaining the incentive to
reduce energy consumption, and we should obviously keep the long-term course of a
higher carbon price.
Third, a sound collective governance should go hand in hand with common sense. For
example, when it comes to reporting and disclosure, it is vital to clarify, unify and
apply common reference frameworks: achieved, and achieved well, is better than
perfectionism. Each company, each financial institution can no longer have its own
favourite standard or referential. Furthermore, beyond repeated commitments, we need
concrete results; otherwise the impression of "déjà vu" in repeated announcements will
soon turn into a suspicion of green washing. Finally, not too many public bodies and
Committees, but a stronger coordination, and a stronger governance within the financial
sector and private firms, involving people, institutions and NGOs at the right level. What
we need to deliver requires efforts, time and money, things that are too scarce to
misuse them.
If Paris and its financial ecosystem succeed there, I genuinely believe that they can be
a driving force for Europe as a whole on green finance.
To conclude, let me take Henry Ford's words "Coming together is the beginning.
Keeping together is progress. Working together is success". All the more so when it
comes to the fight against climate change. There is still a long road ahead, but since
December 2015 and the Paris Agreement, since December 2017 and the creation of
the NGFS, we have already come together, and we are keeping together. The urgent
task know is implementing governance at the international and national levels, as well
as that of individual firms, to ensure that we indeed work together. In this task, you can
rest assured of our relentless commitment.