Introduction to Sustainable Investing Workshop
It is a privilege to gather here in Paris at the Banque de France for the workshop titled “Sustainable Investing for Public Investors,” co-hosted with the World Bank. In today’s climate, it is reassuring to witness such a high-profile assembly focused on sustainable investment. Following a period of excitement and broad commitment, we now find the climate agenda facing challenges in various regions due to geopolitical conflicts, economic strains, and shifting priorities.
The Urgency of Addressing Climate Change
Despite the shifting tides, the harsh realities of climate change and ecological degradation remain unchanged. The crucial opportunity to keep global warming below 1.5°C by the century’s end is rapidly diminishing. Current Nationally Determined Contributions (NDCs) indicate a potential temperature rise of 2.6 to 2.8°C, according to the United Nations Environment Programme. Furthermore, research from the Potsdam Institute for Climate Impact Research reveals that we have surpassed seven out of nine critical planetary boundaries, notably with ocean acidification now in peril.
Central Banks’ Responsibility in Climate Crisis
The risk of falling into denial or inaction is palpable. However, as central banks and regulatory bodies, we adhere to our clear mandate: to recognize climate change as a significant threat to both price stability and financial stability. As investors, we aim to safeguard our balance sheets and set a precedent for responsible practices. We are also advocating for reliable standards and transparent reporting practices within the financial sector, which are essential to mitigate systemic risks linked to climate change and the transition efforts.
Global Consensus on Climate Risks
The imperative for central banks and regulatory authorities to address climate change is evident; it is essential to uphold our core responsibilities regarding price and financial stability. Nearly 150 central banks and supervisory bodies worldwide share this concern and are eager to better understand and evaluate risks associated with climate and nature. These institutions are part of the Network for Greening the Financial System (NGFS). The Banque de France proudly supports the NGFS by hosting its Secretariat in Paris, with the World Bank participating as an Observer on its Steering Committee.
Economic Impacts of Climate Events
This past spring, the NGFS released a groundbreaking series of short-term scenarios detailing the economic ramifications of severe but plausible climate events across different regions. These scenarios predicted that a combination of heatwaves, droughts, and wildfires could lead to GDP declines of 4 to 5 percent in North America and Europe, and up to 12 percent in Africa, compared to a hypothetical scenario where climate change does not occur. Such extreme weather events not only threaten economic growth but also jeopardize price stability. A recent study from the Banque de France suggests that temporary disruptions to major crops caused by environmental degradation could increase food inflation by over 2 percentage points and overall inflation by 0.5 percentage points within two years.
The Interconnectedness of Sustainability and Financial Stability
These economic impacts directly correlate to risks for financial institutions. A study by the European Central Bank found that 72% of companies in the Eurozone rely heavily on at least one service provided by natural ecosystems, with nearly 60% of loans in the region tied to companies lacking adequate flood protection. As public investors, it is crucial for central banks to not only advocate for but also exemplify responsible investment practices.
Commitment to Sustainable Investment
The NGFS has made significant strides in publishing various reports on Sustainable and Responsible Investment, as well as on climate-related disclosures for central banks. These documents offer valuable recommendations for integrating sustainability considerations into governance frameworks and assessing exposure to sustainability-related risks. At the Banque de France, we are committed to this cause. Our latest Sustainability Report reiterates our dedication to integrating sustainability issues—including climate change and ecological degradation—into our strategic framework and operations.
Recognizing Achievements in Sustainable Finance
For the third consecutive time, the Banque de France has been recognized as the top institution in the G20 Green Central Banking Scorecard. We have established “Paris aligned” exclusion thresholds for fossil fuels, completely eliminating coal and unconventional hydrocarbons from our investment portfolios. Having aligned our equity holdings with a 1.5°C warming target by the end of 2023, we are also set to extend this target to our corporate bond investments by the end of 2026. Our sustainability strategy now encompasses nature and biodiversity, exemplified by a partnership with Caisse des Dépôts, which has enabled our asset management arm to adopt a thematic investment strategy that incorporates biodiversity assessments.
Collaboration Towards Sustainable Finance
We are also proud participants in the Eurosystem’s climate-related disclosure initiative, launched in 2021, which practically applies the NGFS recommendations. However, while we proudly uphold our principles and set a leading example, it is clear that central banks cannot achieve sustainable objectives in isolation. The European Commission estimates that around €1.2 trillion in green investments annually is required to meet its 2030 goals. It is evident that central banks can only play a small role in this broader effort.
Enhancing Sustainable Finance through Transparency
Sustainable finance has gained notable momentum in recent years, yet it requires further enhancement through effective disclosure practices. Global green bond issuance has surged 30-fold over the past decade, escalating from €20 billion in 2014 to approximately €600 billion by 2024. However, the expansion of green finance cannot rely solely on voluntary measures. It necessitates an effective carbon pricing strategy to help markets internalize climate risks—an area that lies beyond the oversight of central banks and regulators—as well as a trustworthy set of standards and reporting requirements. Confidence remains essential in sustainable finance, just as it is in traditional finance.
Balancing Simplification and Regulation
In Europe, the recent Omnibus proposal introduces beneficial simplifications, but these must not compromise the ambitious standards of the sustainable reporting framework. There have been critiques regarding the complexity of initial reporting guidelines, prompting a trend towards simplification. Nevertheless, simplification should not equate to deregulation. If we can streamline the reporting process while ensuring access to robust and comparable data necessary for the transition, we can create a mutually beneficial situation that enhances both efficiency and acceptability.
Conclusion: The Need for Collective Action
In conclusion, sustainable finance and climate-related issues are currently facing challenges at a time when they need to be amplified. Now more than ever, collaboration, dialogue, and the sharing of best practices are essential. This seminar serves as a crucial platform for such interactions. As we approach COP 30, I hope to see renewed dedication and concrete actions from all stakeholders to accelerate the shift towards a more sustainable and resilient future. It is a pleasure to see all of you here, and I wish you a productive seminar.
