Speech Steven Maijoor - Sustainable finance: on the role of capital markets, central banks and supervisors
On 8 June 2021, Member of the Governing Board of De Nederlandsche Bank Steven Maijoor spoke at the Euronext ESG Summit: Financing the blue and green economy. “[…] today, I will talk to you from the perspective of a prudential supervisor and central bank. And let me be really clear: from that perspective, I see the climate crisis as a major source of financial risk, requiring immediate and strong action”, he said. He continued by saying a few words on how Europe is currently a frontrunner in sustainable finance. Next, he talked about the role of capital markets. And finally, he reflected on the role of central banks and supervisors.
Date: 8 June 2021
Speaker: Steven Maijoor
Location: Online event
It is a pleasure to talk to you today.
And thank you Euronext for inviting me in my new role, as Member of the Governing Board of De Nederlandsche Bank.
The last time I spoke to you, I was still Chair of ESMA, the European Securities and Markets Authority. And at ESMA, we used to joke how central banks always had much grander offices and catering compared to any of the European markets authorities.
But to be honest – compared to my last year at ESMA – not much has changed since I joined the Governing Board of De Nederlandsche Bank. As far as the offices go, most of the time I still find myself at the same desk as before, which is at my own desk, at the house. And as far as the catering goes, I still pretty much have to rely on my own kitchen at home.
So today, I will talk to you from the perspective of a prudential supervisor and central bank.
And let me be really clear: from that perspective, I see the climate crisis as a major source of financial risk, requiring immediate and strong action.
I would like to start by saying a few words on how Europe is currently a frontrunner in sustainable finance. Next, I want to talk about the role of capital markets. And finally, I want to reflect on the role of central banks and supervisors.
So how has Europe become a frontrunner in sustainable finance?
First – the European green bond market is estimated to be worth around one trillion euros. This is twice as big as the US market, and three times larger than the Asian Pacific market.
Second – the European ETS is the world’s first international emissions trading scheme. And today, it still represents the largest carbon market in the world.
Third – European investment in renewable energy sources has increased by 160 percent over the period 2013 to 2020. This is the strongest growth rate worldwide.
And fourth and finally – the EU has already proposed several major regulatory changes to green the European financial market. This includes the EU green taxonomy – for which the first screening criteria were presented in April.
With the forthcoming EU Renewed Sustainable Finance Strategy, Europe will be expanding its efforts even further.
And we can be proud of our achievements. But of course, we not only need Europe to green its financial system. It is a global problem that requires global action.
The new direction of the US under the Biden Administration is a game changer in this respect. And I am optimistic that Europe will team up with the new American government, and possibly with China, India and others, to form the powerhouse, the engine, that gets the world on track to meet the Paris Agreement.
But currently, we are still far from achieving the ambitions set out in the Paris Climate Agreement. And if we want to achieve these ambitions, we will need large-scale investments in sustainable energy services, agriculture, manufacturing, and so on, combined with increased efforts to reduce carbon emissions.
Now, what role can capital markets play in this?
The slower the pace of the energy transition to a climate-neutral economy, the greater the likelihood of abrupt adjustments later on. And abrupt changes could severely damage the economy and the financial sector.
Partly because of this transition risk, we, as a central bank, advocate accelerating and scaling up climate investments.
But what do we see if we look at financing flows?
Currently, we see that financing flows, whether in capital markets or bank finance, are mostly directed towards large, low-risk, and often carbon-intensive companies.
However, the energy transition hinges on successful technological innovations. And early on, these are often less competitive than fossil alternatives.
And for banks, this level of uncertainty leads to higher capital requirements. That means banks are more hesitant to finance these higher risk activities.
And at the same time, start-ups are often too small to attract capital market financing.
So this is where governments come in. They are the primary actors in greening our economies, and I see three ways they could step up their efforts.
First, carbon emissions are currently under-priced. This harms the business case for climate investment, and removes the incentive for private parties to help finance the transition. Governments need to ensure a level playing field, to make sustainable investment more appealing. And they can do so by improving the carbon pricing system. In addition, governments have a key role to play in increasing investor certainty by providing clear and credible transition paths for different sectors.
Second, uncertainty also needs to be reduced in order to reallocate private capital to innovative and more risky sustainable technologies. Governments could contribute to this with a consistent and reliable policy mix of subsidies, co-financing and guarantees. The impressive amounts of Covid-stimulus are, in this regard, an opportunity to rebuild our economies in a sustainable manner.
Third, corporate reporting of sustainability data must improve – in terms of quantity, quality, but also consistency. And this credible and comparable information should be readily available for all market participants, shareholders and other stakeholders, and subject to assurance.
So I very much support the IFRS Foundation in developing international sustainability reporting standards. Especially their modular, building-block approach, where you have a joint baseline, but also the possibility for jurisdictions to level up.
I also support the Corporate Sustainability Reporting Directive. The CSRD was recently presented by the European Commission, and is likely to improve sustainability reporting in Europe.
It is the European Commission’s intention to align these draft standards with the IFRS efforts. And this really reassures me. Because until the IFRS reporting standards have been developed, it is important we avoid fragmentation. We need to make sure that the national and regional requirements currently being put in place, can be easily fit together later on.
In this regard, I am also glad that the Financial Stability Board and the G20 Sustainable Finance Working Group aim to play a coordinating role.
So how do I regard the role of supervisors and central banks?
As supervisors, we expect financial institutions to manage their climate-related risks. And this requires a more forward-looking approach from us as supervisors, in which stress tests and scenario-analyses are an integral part of our toolbox.
And to ensure the soundness of financial institutions, we need to investigate where and how climate-related risks can be further integrated in the current prudential framework. So I welcome the work of the EBA and the Basel Committee in this area. The uncertainties surrounding climate-related risks make them harder to quantify, but this certainly does not mean we can afford to ignore them. We should make sure financial institutions are able to absorb unexpected losses, including those related to climate change. And with respect to prudential regulation for banks, one option to explore is whether concentration limits could be a suitable instrument to address climate risks.
In our macroprudential supervision, we have designed a climate stress test. And in the future, we aim to integrate climate-related risks in our regular macroprudential supervision.
As a central bank, we should also, of course, ‘practice what we preach’ and ensure our own reserves are aligned with international sustainability goals and Corporate Social Responsibility standards.
At De Nederlandsche Bank, we are currently exploring whether we can align the equity portion of our own-account portfolio with the agreements set out in the Paris Climate Agreement. And we will start identifying the physical climate risks of our investment portfolios, such as the impact of increasing drought and extreme weather conditions on our investments.
By setting a good example, we aim to advocate transparency on climate risks in financial markets. This is also why we have added a climate annex to our annual report this year, fully in line with the recommendations of the Taskforce for Climate-related Financial Disclosures.
And last, but definitely not least, central banks should take into account climate-related risks in their monetary policy decisions. They must do so because these risks can affect price stability, monetary transmission and central bank balance sheets.
Furthermore, as part of their secondary objective, euro area central banks shall support the general economic policies of the EU as long as it does not interfere with the primary objective of price stability. And with the Green Deal, the EU has an ambitious climate agenda. The ECB is considering how best to take account of climate change in its current monetary policy strategy review.
Let me conclude.
In my new role, I feel like I am in a new kitchen, compared to ESMA.
And the kitchen I find myself in today, is definitely different. With a lot of new pots, pans, kitchen utensils at my disposal.
But what matters even more, is what is not different. And that is the passion of the people I’m lucky enough to work with. The passion for what they do. And at De Nederlandsche Bank, people are passionate about greening our economies.
And I am thrilled I get to share in their passion – and that I get to share it with you, here, today.
Thank you very much.