Speech on Sustainable Finance
The European Central Bank delivers a speech at the Sustainable Finance Lab Symposium on Finance in Transition, summarizing the ECB’s progress in sustainable finance.
The European Central Bank believes that there is a close connection between climate, nature, and macro finance. The ECB has taken action to incorporate climate and nature related factors into regulatory policies and promote sustainable financial development.
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Climate, Nature, and Sustainable Finance
Network for Greening the Financial System (NGFS) was established in 2017, dedicated to addressing climate and natural risks faced by central banks. Under the actions of the NGFS, these risks have become a focus for the Basel Committee on Banking Supervision, Payments and Market Infrastructures, and Financial Stability Board. Europe has revised the Capital Requirements Directive to explicitly mention climate and financial risks.
The impact of climate and nature on sustainable finance is well known in the market. The intensification of global warming and natural degradation will lead to increased macroeconomic volatility, but existing actions are still insufficient to achieve climate and environmental goals. The United Nations Emissions Gap Report believes that based on the current carbon reduction path, global temperatures will increase by 2.9 degrees Celsius by 2050. This means that regulatory agencies need to consider increasing transition policies and reducing investment demand that is detrimental to climate and nature.
European Central Bank’s Sustainable Finance: Monetary Policy
In 2021, the European Central Bank conducted a strategic review of its monetary policy, acknowledging the impact of climate change on the economy and developing a climate action plan. Subsequently, the ECB incorporated climate factors into its macroeconomic analysis to better evaluate the green transition. The ECB has also recognized the impact of physical risks on price stability, such as the risk posed by rising food prices after hot weather. In terms of monetary policy tools, the ECB’s bond portfolio began to tilt towards issuers with better climate performance in 2022, in order to reduce the climate risk faced by financial assets and align with its monetary policy.
In 2021, the ECB began accepting sustainability linked bonds as collateral for bank lending operations. With the implementation of the Corporate Sustainability Reporting Directive (CSRD), collateral also needs to meet corresponding requirements. The ECB collaborates with the European Securities and Markets Authority and the European Banking Authority to encourage issuers to disclose climate information. ECB plans to increase the allocation of supranational bonds in the future and consider using Targeted Longer term Refinancing Operations to support green loans.
European Central Bank’s Sustainable Finance: Banking Supervision
In 2020, the European Central Bank released guidelines outlining prudent management of climate and natural risks, and assessing whether banks’ risk management methods meet expectations. The ECB has set two temporary deadlines and one official deadline for banks. In March 2023, banks need to assess climate and natural risks in their investment portfolios, and in December 2023, banks need to incorporate climate and natural risks into their governance, strategic, and risk management frameworks. Banks that fail to comply with requirements may pay fines.
The official deadline set by the European Central Bank is December 2024, after which banks need to manage climate and natural risks in accordance with regulatory expectations. Subsequently, banks need to continuously update their risk management practices based on regulatory policies, data methods, and other factors to ensure that they are commensurate with the scale of climate and natural risks. As the banking regulatory authority, the European Central Bank will continue to use regulatory tools to monitor whether banks meet these requirements.
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