What role do central banks play in combatting climate change? This question was discussed by more than 100 participants at a two-day academic conference in Berlin. This conference on the impact of climate risks on financial markets, financial stability and monetary policy was hosted by the Central Banks and Supervisors Network for Greening the Financial System (NGFS) and the Council on Economic Policies (CEP) at the Deutsche Bundesbank Regional Office in Berlin.

Mauderer: Increasing significance of a green financial system is a clear trend

For Bundesbank Executive Board member Sabine Mauderer, promoting a green financial system for society as a whole is, in light of the unprecedented challenges posed by climate change, no longer a question of “if”, but a question of “how”. In her speech, Mauderer explained some of the proposals put forth by the NGFS to win more market participants over to green investments. These include a standardised classification process for green assets, a common framework for disclosing climate-related risks, as well as closing data and information gaps for investors.

ECB intends to support transition to lower-CO₂ economy

Benoît Cœuré, member of the ECB Executive Board responsible for market operations, gave a comprehensive speech on the impact of climate change on monetary policy. In his view, climate change can make it even more difficult to correctly recognise shocks for the medium-term inflation outlook and can also increase the risk of extreme events. This would lead, more often, to conventional monetary policy having less room for manoeuvre. In this context, Cœuré drew parallels between potential climate disasters and the global financial crisis. He predicted that such extreme cases could even lead central banks to rethink their monetary policy frameworks. Overall, Cœuré argued in favour of the ECB actively supporting the transition to a lower-CO₂ economy – within the scope of its mandate. With regard to the question of how well suited securities portfolios are for promoting a greener financial system, Cœuré made a distinction between portfolios for pension funds of external clients, central bank portfolios without a monetary policy purpose, reserve assets, and monetary policy portfolios. In the cases of reserve assets and monetary policy portfolios in particular, Cœuré highlighted the current priorities, which include liquidity, market neutrality, and the goal of price stability. Furthermore, Cœuré announced that the ECB would support market participants, legislators and standard setters in identifying climate-related risks and drawing up a clear framework for reorienting financial flows.

© Andreas Pein

© Andreas Pein

© Andreas Pein

© Andreas Pein

© Andreas Pein

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Wuermeling: Green investments are a rising star in the world of finance

The subsequent panel discussion tackled a wide range of topics: the participants debated macroprudential climate stress tests, appropriate consideration of climate-related risks in microprudential supervision, as well as an EU action plan for a sustainable financial system. With the EU action plan, Europe would have the opportunity to set standards – not only for the EU, but far beyond, as Paul Tang, Member of the European Parliament, explained. Such standards would also be suited to ensuring more risk-appropriate prices on the markets. This is a particular concern of Bundesbank Executive Board member Joachim Wuermeling, who described green investments as a rising star in the world of finance. Ivan Odonnat from the Banque de France encouraged participants to focus not only on green bonds, but also on improving the sustainability of all financial instruments as well as promoting this process. Tanveer Hussain from the Bank of England saw scope for elements of climate policy even in narrower monetary policy mandates.

Sustainability and yield need not be mutually exclusive

On the second day of the conference, there was an in-depth discussion on how the short-term focus typical amongst investors might be reconciled with the long-term potential for returns arising from climate-protection measures. In this regard, however, the diverse challenges facing increased growth in sustainable capital investments became clear – such as how long-term climate risks can specifically be taken into account when evaluating securities. Nevertheless, the conference participants were broadly in agreement that sustainability and yield in financial instruments do not in any way need to be mutually exclusive.

NGFS progress report planned for April 2019

By hosting this conference, the NGFS and the CEP have continued to promote academic exchange with experts outside of the central banking sector. It is planned that the host of ideas put forth by the participants will be incorporated into the NGFS progress report scheduled for publication in April 2019.