1. As a central bank, why are we publishing sustainability figures right now?
Climate change is clearly a relevant topic for the financial sector. More and more, we are seeing how climate change is affecting society, the financial sector and our economy. This includes physical risks that we hear or read about in the news such as floods or drought. In addition, there is a growing expectation that the financial sector will play a role in financing the energy transition.
We need much more data if we are to monitor these developments properly and collectively take effective decisions.
Statisticians from central banks in the euro area have therefore recently been working hard with the European Central Bank (ECB) to generate sustainability data. DNB has taken an active role in these efforts with a team of statisticians and the Director of our Statistics Division, Fabienne Fortanier, who, as co-chair of the ECB Expert Group on Climate Change and Statistics, is one of the leaders in charge of developments in this area.
Part of our task is to provide objective and reliable figures on issues relevant to financial stability and monetary and economic policy, such as the relationship between the financial sector and climate change. And not just for policymakers and the financial sector, but for any interested party.
2. What figures have we made available?
We have defined three types of indicators. First, the carbon footprint of the financial sector's investments, which can be used to gauge the degree of exposure of the sector to transition risks, for example. Second, indicators for “physical risks” due to climate change to which financial institutions are exposed through their loans and investments (such as flooding and hail damage). Finally, indicators for green and sustainable bonds. We previously published figures on such bonds in October 2022.
3. What are we measuring?
When it comes to green bonds, we look at the extent to which banks, insurers and pension funds have invested in bonds aimed at promoting sustainability. The carbon emissions indicator measures how much of companies’ carbon emissions from companies can be “attributed” to financial institutions through their investments, and thus the extent to which financial institutions are exposed to transition risks. Using the final indicator, we monitor the financial sector’s exposure to physical risks from climate change (e.g. damage from floods, forest fires and droughts) through institutions’ investment portfolios.
4. How good are the figures?
The figures are not yet complete, and their quality is not yet comparable to that of our “normal” statistics. By statisticians’ standards, we developed these new datasets in a very short time. Because these figures are so urgently needed, we have decided to make them available as soon as possible to anyone who wishes to use the data. We have considered this carefully, bearing in mind that existing indicators used by researchers and others suffer from the same shortcomings. It is essential that these shortcomings are clear when using the data.
And we are not talking about futile adjustments around the edges or behind the decimal point: we have published figures that in some cases currently only cover half of the investment portfolios. This means that in most cases the figures can be interpreted as a lower limit of the actual transition and financial risks.
Other examples for the enthusiast: in the indicators for physical risks, we have by no means been able to include all the locations of companies in which the financial sector invests. Also, time trends have not yet been adjusted for price effects (e.g. inflation or shocks such as the COVID-19 crisis), even though we know that these effects can have significant impact. We have previously shown that such price effects can explain up to a third of the change over time.
Another apt example is whether “green bonds” are in fact so green. This appellation is currently applied by the companies issuing the bonds themselves. Indeed, there is an ongoing debate about what makes a bond truly “green”.
Much more emphatically than with our regular statistics, we wish to underscore a particular caveat when it comes to drawing conclusions or setting policy based on these figures: “be especially critical when using this data".
5. If there are so many doubts, why publish now and not wait a few more years for better figures?
When it comes to climate, waiting for perfect data is not an option. Our figures are already at least as good as those published in scholarly research. Moreover, they are based as much as possible on public data sources and on information provided by euro area central banks. They are fully comparable across countries. We are also completely transparent about our methodology and current indicator shortcomings.
By publishing them now, we can also immediately start discussing how to improve the figures and take the next steps more quickly. We also hope that being transparent about our methodologies will help financial institutions facing the same challenges. Finally, by publishing these figures now, we are providing clarity on what we do as a central bank and there will be no guesswork as to which climate indicators we will publish and update going forward. It goes without saying that we will continue to work hard to improve the data in the period ahead.