Thursday, 23 September 2021

BIS’ da Silva: “Banks must make the post-pandemic recovery as green as possible”

By Luiz Awazu Pereira da Silva

Bank for International Settlements (BIS) Deputy General Manager Luiz Awazu Pereira da Silva, in his keynote speech at Finance China Summit 2021, urged industry players to take advantage of innovations in green financial products and services to embark on a green and low-carbon journey as the global economy enters the post-COVID economic recovery period.

Here is the transcript:

Good morning. Good afternoon. Good evening.  I am Pereira da Silva, deputy general manager at the BIS. And it’s a pleasure and honour to participate in Finance China 2021.

So, I will be speaking about the challenges for the financial system after COVID-19 under climate change. I will touch upon three topics: new challenges for financial stability arising from climate change, new financial technologies and how these can reduce inequality and can also help to finance climate change mitigation and transition. Finally, I will talk about green project and green finance and their role in helping to foster the green economy.

So, on the first topic, it is not why finance needs to help combat climate change anymore. It’s how can it help? This comes from a recent positive evolution of mindsets particularly inside the central banking community, because people are realising there is no single actor, no silver bullets to address alone the challenges posed by climate change. You need to coordinate with other actors, particularly governments, but also the private sector. And you can do this within the existing roles and mandates of economic actors in society.

Indeed, for example, within central bank mandates, climate change directly impacts financial stability objectives and also price and macroeconomic stability objectives of central banks. So increasingly, central banks are aware of the need to address climate change-related risks. Other agents are also moving in civil society, in the private, real and financial sectors to help address these challenges. There is demand for transparency or consistency of policies. There is also creativity in the supply of new financial products.

The central banks and particularly the BIS have been coining a new systemic risk concept for climate change. We at the BIS have talked about ‘green swans’. It is different from the black swans of the global financial crisis because it is not anymore about events that are very rare and at the tail of the distribution. Climate change is almost certain, if not certain, to happen if we do nothing to stop the emission of greenhouse gases. These are going to trigger catastrophic events, particularly what we have been observing recently as weather-related events. Now, these are essentially triggering tipping points beyond, which it is impossible to control the cascading effects that climate change will pose to society. So, therefore the usual wait-and-see prudent attitude to see if changes will happen simultaneously are not warranted anymore and are very risky. So even with the uncertainty that we have about climate change, the reason that symmetry of risks posed by green swans requires immediate actions from the community.

We are observing the path of our greenhouse gas emissions. We will soon reach a very high and unsustainable level of concentration of carbon dioxide in the atmosphere that will particularly challenge the way in which we organise our societies, our production patterns and our consumption patterns. It will trigger, if we do nothing, the impact on temperatures in zones of the globe where we will not be able to live anymore.

The graph shows the areas around the tropical areas of the globe where you have a huge population that will become inevitable because of the rise in temperatures. It will also trigger, with physical and transition risks related to climate change, a set of very complex events that are very difficult to model in terms of risks. For example, the melting of polar ice sheets or the change in the Amazon rainforest and the changes in thermohaline circulation in the Atlantic.

So, facing these, the community of central banks are actually doing quite a lot. They are continuing to improve analytical tools to assess climate change-related risks and the resilience of our economies and our financial sectors. They are investigating how they can use their policies to reduce the risks posed by climate change. They are also looking at disclosure and accounting standards. And they are improving the taxonomy on green investment products as well as greening their own financial assets. Beyond that, we have to think of how new financial technologies can improve inclusion and reduce inequality. Because there is a dimension of redistribution that is related to climate change, new finance technologies can bring more inclusion and change policy design.

We know that faster payments are at lower cost. For example, usage of our smartphones can contribute to increased financial inclusion, together with digital identity with the use of artificial intelligence. All these can reduce poverty and inequality. And when you reduce poverty and inequality, it can help mitigate the effects of climate change because we know that these effects are largely regressive. These affect poor countries most and poor households in rich countries first.

These new financial technologies can play a double role. These can help to finance mitigation and transition strategies with more precise assessment of carbon footprint. It can also help finance new projects of alternative energies and move towards a low carbon economy. Of course, these have other types of risks, in terms of, for example, digital discrimination that needs to be monitored. But this is something that the community is also considering, an illustration of how finance can achieve gains in inclusion.

This is the path of progress in GDP per capital measured against the number of accounts ownerships as a percentage of the population. And you can see that digital finance can significantly shorten the path for countries. For example, in India, instead of taking many years to reach financial inclusion, it has been jumping with the possibility of digital ID and the new finance technologies. Technology can also allow for real time, instant payments. It can reduce the fixed cost of transfer for poor households and increase the speed for small financial transactions. This is the comparison between the classical real-time gross settlement (RTGS) system development and what is happening with fast-payment systems. Technology can also reduce the cost of migrants’ remittances. This is very important for many developing countries.

In this slide, the cost of money transfer operators has been falling thanks to financial development and payment innovations. Now, of course, there is also an aspect as I mentioned that needs to be monitored is the fact that when you have concentration in an industry, for example, with a big tax, it can also create potential and further inequalities. For example, the wages in the technology sector in the right graph of this slide, have been rising more rapidly than other sectors. This has to be also monitored.

Finally, how green projects and green finance can help a green recovery in accelerating the pace of the recovery towards a greener type of growth. In this stylised representation of GDP in the post-COVID-19 recovery, it can be seen that you can have either a more slow, ‘brownish’ type of recovery with traditional types of consumption and investment patterns or you can consider that with the green finance, you can push innovation up.

With these innovations and new investments and alternative sources of green energy, you can perhaps have a recovery that will be faster and with a lower carbon content than the traditional ones. And financing the transition, the mitigation and the adaptation can contribute precisely to help push up this recovery with the lower carbon content. A few examples of that are already happening in the public financial sector. For example, development banks and international financial institutions are working in fostering new green investment projects and accelerating the transition. And there are many examples of green infrastructure that are being favoured by green finance, urban forests, and rain gardens. These are multiple examples of how this has already happened.

It’s not only the public sector, but the private financial sector can also provide new financial instruments to help change the behaviour on the demand side from consumers and also apply on the supply side from investors. I’m sure you have observed that the private sector is eager to invest in new green financial instruments, including a true environmental, social and governance and green bonds. But the private sector needs a better taxonomy on green financial instruments. This is something that is already happening.

Meanwhile, to direct co-financing with the public financial sector, private public partnerships and research partnerships are underway to facilitate this transition process. There are concrete examples of initiatives in sustainability and anti-COVID-19 finance, such as the Net Zero Emission Coalitions, Net-Zero Asset Owner Alliances – many things that are also happening in Europe, Asia, and Americas through a set of policies to recover the post-COVID-19 economies with a lower carbon content, particularly on the infrastructure side.

As a conclusion, we should use the tragedy of COVID-19 as an opportunity to aim at the green recovery. We know that COVID-19 has produced an unprecedented contraction in the world economy. We anticipated with climate change physical and transitional risks. So never waste a crisis. The recovery campaign being as green as possible. On the demand side, for example, consumers are becoming more selective, they have now better information and they have better incentives now to favour the lower carbon economy. There is also a rising awareness of the risks posed by climate change. On the supply side, green financing investors are offering new, practical and diversification products and new paths to lower carbon in the recovery. They also have available products to finance the transition to a net zero.

I would end with a warning. We know that low carbon economy requires the transition. This transition to net zero has distributional consequences in terms of who are going to be affected by some of the necessary policies to lower the carbon content of or production and consumption patterns. Therefore, we need to think of these distributional consequences as well.


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