One of the clearest signs that climate finance is being taken seriously is the involvement of central banks, most recently shown by the remarks of Finland’s Olli Rehn (see separate story).
Rehn’s remarks very much come in the context of the new Central Banks and Supervisors Network for Greening the Financial System (NGFS).
Here, we speak to Morgan Després, the senior Banque de France official who heads the NGFS Secretariat.
Last year, a group of eight central banks and financial supervisors formed a network to help strengthen the global response to the Paris climate accord and help the financial system to become more environmentally sustainable. Since then the group has grown to 15 members, with more set to join. The European Central Bank came on board a few months ago.
Després, head of financial regulation policy and coordination at the French central bank, says the network started with the idea that there was a need for a specific forum for central banks and supervisors to work on the issue of climate risks and look at how the financial sector could mitigate it and measure its exposure.
“The green finance G20 group has done a great job under the Bank of England and People’s Bank of China chairmanship but a G20 group is a very complex animal to handle, in particular at the current political juncture. We had the impression that, beside the G20 process, there was a need for a dedicated forum for central banks and supervisors who wanted to talk and move forward.
“There were a number of organizations interested in bi-lateral cooperation. So we decided to set up NGFS.”
It was launched to coincide with President Macron’s One Climate Summit in Paris.
“We thought it could be a good opportunity to announce the kick-off of the network. We like to call ourselves a club of the willing because we want to be with people willing to work together and move forward on this,” says Després.
Institutions must have a track record of work on climate change to join the NGFS. It is chaired by Frank Elderson, an executive director at Dutch central bank DNB that has already done much work on climate risk.
The Banque de France acts as the secretariat; members include central banks from Mexico, Singapore, China, Morocco, Germany, Sweden and the UK.
There will be a NGFS plenary, including all members and observers, meeting physically at least once a year. The NGFS Steering Committee, under DNB’s Elderson, will map out the network’s strategy and work.
Currently the NGFS has three workstreams, but Després says more could be added. They will run from 2018 to April 2020. But there is no set end date for the network as yet.
Workstream 1 is focused on microprudential and supervisory work and is chaired by Ma Jun, advisor to the Governor of the People’s Bank of China and Chair of the Chinese Green Finance Task Force.
“Workstream 1 is doing three things,” says Després. “The first thing is a review of supervisory practices. We will ask each network member whether in its supervisory practices there are tools to identify exposure [to climate change], to mitigate risk, to measure exposure.
The aim is to “take a wide look at what people are doing”. He adds that some participants are “pretty well advanced and some are at the beginning of the journey”. So the idea is to identify best practices and recommendations.The second focus of Workstream 1 is disclosure practices. It will look at things like the recommendations from the Taskforce on Climate-Related Financial Disclosures (TCFD) and legal frameworks for disclosure such as France’s famous Article 173.
The third focus of the Workstream 1 will be green supporting factors and brown ‘penalising’ factors; broadly this is about reflecting the “greenness” of an asset in prudential regulation.
“It’s not really the issue of whether it is something desirable or not,” says Després. “Our idea is to encourage and conduct some analytical work. Look at the data. Look at the facts. And see if it is true or not that for green assets the probability of default is lower that brown assets. To what extent can we prove it?”
Workstream 2 is a macrofinancial effort chaired by the Bank of England’s Sarah Breeden. Després explains it is more research orientated, looking at the impact of climate change “on inflation, on interest rates, growth, productivity”.
Després says this type of work is difficult and currently a ‘work in progress’ that will probably lead to a literature review looking at the models which are used by different central banks. “On the basis of that we can identify some blind spots and call for more research in that area.”
Després says the end-game is to have the micro and macro perspectives come together.
Workstream 3 is focused on scaling up green finance and is chaired by Joachim Wuermeling, a board member at Germany’s Bundesbank. Després says: “We have to find our own way to add value. So what we are planning to do is try and find out what central banks and supervisors can do in their own capacity to scale up green finance. It means for example looking at their investment polices and the management of their own funds.”
The Banque de France is already leading on this having earlier this year developed a responsible investment policy.
Workstream 3 will also look at what central banks and supervisors can do in terms of monitoring the market. “At this stage, what is lacking is this aggregated view of the development of the green finance market and central banks are pretty well placed to do the monitoring of the market,” says Després.
Després also says Workstream 3 will look at issues that are not usually in the remit of central banks such as taxonomies, green bond labelling and investor protection.
Many of these topics are currently the focus of the European Union as part of its Action Plan on Sustainable Finance. The NGFS is an observer to the European Commission’s Technical Expert Group on Sustainable Finance that is developing parts of the Action Plan including a sustainable taxonomy and green bond labels.
The NGFS’s work follows important efforts from individual central banks on climate change. Such as the Bank of England and Dutch Central Bank DNB which have been trying to assess the exposure to climate change risks of banks and insurers and the Monetary Authority of Singapore which is working with the IFC to accelerate the green bond market in Asia.
This is the first in a two-part series on how central bankers are engaging on the sustainable finance agenda. Part two will look at civil society and political pressure on central banks and how their approaches to ‘green’ differ around the world.