Sustainable taxonomies are not yet fit for purpose


In September, the inaugural Symposium of the Sustainable Policy Institute sparked debate and encouraged discussion on how the global financial system can revolutionize finance for net zero. The two-day event explored the role of central banks in driving the sustainability agenda, the latest developments in tools and transition measures to achieve net zero goals and what we can expect from COP26 next week.

The symposium brought together over 700 participants from all over the world. With more than 50 stakeholders from central banks, multilateral institutions, sovereign wealth funds, investors and agencies, a global network of public and private sector actors have come together to lead the action. After each session, participants were invited to participate in a poll to gauge public opinion on key issues.

Carbon pricing is high on the global agenda and will undoubtedly be a huge topic of discussion at COP26. In his opening speech, Bo Li, deputy director of the International Monetary Fund, insisted that “carbon pricing must increase to $ 75 per tonne by 2030 to meet the 1.5 ° C target” set by the agreement from Paris.

Figure 1: Survey Respondents Support Strong Carbon Pricing

It was echoed in a round table with Mário Centeno, Governor of the Banco de Portugal, Yannis Stournaras, Governor of the Bank of Greece, and Gabriel Makhlouf, Governor of the Central Bank of Ireland. Governors stressed the need for a strong carbon price to achieve net zero and described it as an essential part of creating transparency in markets. Ignazio Visco, Governor of Banca d’Italia and leader of the G20, stressed that an increase in carbon pricing would lead to an increase in inflation, but that this would be temporary.

Governments must take the lead in establishing clear policies on taxation, subsidies and investment, as well as standardization of disclosure and reporting. As Nathan Fabien, responsible investment director of the United Nations-backed Principles for Responsible Investment, argued investors are still unaware of the scale of the change needed. However, once precise and clear objectives and regulatory frameworks are defined, it will be easier to define pathways for the transition.

Added to this is the need for international cooperation, including the participation of China, in the development of standards and taxonomies. This was emphasized by panelists throughout the symposium, with Visco praising the deeper “trust” between all parties in climate discussions as well as technical cooperation with agencies.

Figure 2: Current sustainable taxonomies are not fit for purpose

Many central banks are reviewing their market policy in relation to climate action. There was a consensus among the speakers at the symposium that climate change mitigation is part of central bank mandates if it can have an impact on risk and price stability. Stournaras argued that central banks have an obligation to align monetary portfolios with sustainability, but stressed the need for defined accounting principles and clear rules derived from European Union taxonomy.

Sabine Mauderer, member of the executive board of the Deutsche Bundesbank, observed that central banks provide value through “great credibility and exceptional analytical skills”. She identified the main task of central banks as “[raising] awareness at government level ”. Their aim is to make market recommendations, to maintain and safeguard price stability, to use public finances prudently and to reflect the obvious risks of climate change in the financial market.

Graph 3: Respondents are divided on central bank mandates

Figure 4: No clear consensus on how central banks should manage portfolios

Central banks play a crucial role in developing risk frameworks and mitigation tools and considerable progress is being made. The Network of Central Banks and Supervisors for Greening the Financial System has developed stress testing and scenario analysis tools to assess physical and transition risks on balance sheets and translate the language of climate scientists to the financial sector . Central banks strive to incorporate scenario analysis into their frameworks to set clear goals, with notable examples from the Bank of France and the Bank of England.

Sylvie Goulard, Deputy Governor of the Banque de France, underlined the need for prospective scenarios when examining risks and a global vision integrating biodiversity. She added that the financial sector must accept a level of uncertainty when integrating these tools. Prospective data is essential to fully understand the extent of physical and transition risks and to develop disclosure measures, but accessing quality data is a challenge. Speakers throughout the event emphasized the importance of interdependence and open information to maximize the use of datasets in the financial industry.

The review of environmental, social and governance reserves and asset management, as well as developments in the conduct of sustainable capital markets were the main themes of the symposium. Participants highlighted the link between climate, price volatility and inflation, and the importance of screening processes and transition benchmarks in managing risk and transitioning to net zero. The debate between excluding certain issuers and assets versus transitioning to active ownership continues to cause friction, with speakers stressing the importance of being able to assess the potential for alignment.

There is clearly growing investor demand and developments for green bonds, with increasing liquidity and transaction size. This is particularly the case in Asia-Pacific and in emerging markets. However, Chuchi Fonacier, deputy governor of Bangko Sentral ng Pilipinas, Adrian Orr, governor of the Reserve Bank of New Zealand, and Serey Chea, managing director of the National Bank of Cambodia, spoke of the need for more resources and of green instruments in emerging countries. markets.

The the panelists argued for the importance of managing reserves, ratings and credit risk in building sustainable financial markets. High-income countries must increase their financial assistance to ensure that developing markets are not left behind in the green transition. This includes the need to stop driving carbon lock-in in resource-rich countries.

Patrick harker, chairman of the Philadelphia Federal Reserve, echoed this in another session. He stressed the need for a just transition in greening the economic system, noting the risk of stranded assets when switching to alternative energy sources, which can be managed if action is taken now.

Figure 5: Monetary policy incentives are needed for an effective transition

The symposium ended on a stimulating note, with Kirsten dunlop, CEO of the European Institute of Innovation and Technology’s Climate Knowledge and Innovation Community, challenging the current global economic model and capitalist growth. She underscored the need for new thinking, tools, solutions and systemic innovations to truly mitigate climate change.

The financial sector needs to change dramatically to meet the net zero goals and make financial flows green. Nonetheless, there are positive signs, with the NGFS going to great lengths to fill data gaps and develop stress test models. As sustainable financial products and assets become more mainstream, and investors increasingly engage in efforts to go to net zero, it is imperative that the global financial sector is able to understand and understand. mitigate climate-related financial risks.

Symposium sessions are available to view upon request.

Emma McGarthy is Head of Policy Analysis, Sustainability, at the Sustainable Policy Institute.

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