Leveraging technology to support central banks' green finance agenda

Fireside chat with Benoît Cœuré, Head of the Innovation Hub, Bank for International Settlements, at the Delphi Economic Forum VI, 12 May 2021.

Distinguished guests, ladies, and gentlemen, dear Professor Sakellaris,¹

Thank you for inviting me. It is a pleasure to join you virtually today at the sixth edition of the Delphi Economic Forum. In today's fireside chat on innovation in the financial sector, I would like to focus on how innovation can support central banks' green finance agenda.

While national governments are taking the lead in the global response to the climate crisis, there is an increasing and shared awareness of the urgent need for action by all economic players.

We will not solve climate change in the future without the private sector. The amount of money required is simply too large, and we need the private sector's insight and innovation.² But the public sector needs to step in to coordinate efforts and ensure consistency. Therefore, we also need central banks to tackle the problem. Indeed, they increasingly see scope in their respective mandates for adjusting their operational frameworks to reflect climate-related risks.³ It is also more and more accepted that financial risks arising from climate change through physical and transition risks should be considered alongside or as part of the more traditional risk categories.⁴

Against this background, central banks around the globe are seeking a greening of their own assets and are discussing the potential scope and the role of macroprudential tools and monetary policies in the response to the climate crisis.⁵ More broadly, through the Network of Central Banks and Supervisors on Greening the Financial System (NGFS) and other initiatives, central banks are contributing to work at the national and international levels on disclosure policies and accounting standards, as well as to the development of a more consistent taxonomy for green investment products.

As climate-related risks manifest in non-linear, massive, and irreversible ways after some tipping points, urgent innovation is required to creatively finance transition, adaptation, and risk mitigation.

This is where the BIS Innovation Hub comes into play. Established in 2019, the Hub's mission is to spearhead central banks' responses to digital innovation and foster international collaboration. Partnerships with other stakeholders are critical for this task.

Reflecting the global nature of innovation and technology, the Hub is headquartered in Basel and already has three centres: in Hong Kong (with the Hong Kong Monetary Authority), Singapore (with the Monetary Authority of Singapore) and Switzerland (with the Swiss National Bank), leveraging the strength of our host central banks and of the local fintech ecosystems. We have formed a strategic partnership with the Federal Reserve System in New York, and in the next few months we will open four new centres: in Toronto (with the Bank of Canada), London (with the Bank of England), Frankfurt/Paris (with the Eurosystem), and Stockholm (with the Swedish Riksbank and the central banks of Denmark, Iceland and Norway).

Our work programme is built around six key themes of critical importance to the central banking community: suptech and regtech; next-generation financial market infrastructures; central bank digital currencies; open finance; cyber security and last but not least, green finance.

Our work is directed towards practical solutions rather than conceptual research. We are building a portfolio of projects across these six themes – typically as proofs of concept or prototypes to be delivered to central banks. In doing so, we are helping them to harness the benefits of technology while understanding its limits and being prepared to choose between different solutions.

Multilateral collaboration and practical thinking will be essential for building a financial architecture that is future proof against a large range of shocks.

In this context, in 2020, the Hub co-hosted the first edition of the G20 TechSprint with the Saudi G20 Presidency. Last year's initiative was designed to showcase the potential for new innovative technologies to resolve operational problems in the areas of regulatory compliance (regtech) and supervision (suptech).

This year, we are happy to team with the Italian G20 Presidency, and in particular with Banca d'Italia, on the second edition of the TechSprint initiative, addressing issues in the field of green and sustainable finance.⁶

The 2021 initiative, announced last week, will focus on how technological innovation helps financial institutions and investors better collect, verify, and analyse data to understand whether their loan decisions and investments improve (or worsen) environmental outcomes; as well as how better to connect projects and investors.

This is a topical theme. Data and information availability has been highlighted as a major impediment to addressing climate change in recent years.⁷ The large number of standards and disclosure frameworks for corporate sustainability and climate-related issues, as well as different definitions and taxonomies,⁸ make it difficult to compare climate-related, green and sustainability information available to market participants. When firms make information public, they often do so across different reports, making such information difficult to locate, collate and analyse.⁹

Actual disclosure of the potential financial impact of climate and sustainability risks on firms' activities remains low¹⁰ and of varying quality.¹¹ Moreover, market participants often lack the tools they need to properly inform decision-making through a sustainability risk lens – current practices may not support well-functioning markets and may distort markets if information is used to incorrectly price risks, allocate capital inefficiently, or misrepresent sustainable financial products to financial consumers.¹²

The three problem statements identified for this year's TechSprint were developed in consultation with the G20 and represent common high priority gaps in the green and sustainable finance space. They are:

• Data Collection, Verification and Sharing: Presently, there is a perception of information asymmetry in the collection and sharing of environmental data to support environmental risk analysis. This stems from both a lack of consistent data methods and disclosure regimes, and a limited verification of self-reported returns, which negatively affect confidence in the reliability of aggregated data sets.
• Analysis and Assessment of Transition and Physical Climate-related Risks: One of the main difficulties facing non-financial corporations and financial corporations alike is the ability to accurately predict the vulnerabilities associated with transition and physical risks posed by climate change. As the world transitions towards climate-neutrality, there is a need to support institutions and relevant stakeholders with tools enabling them to visualize, predict, assess and monitor transition and physical risks.
• Better connecting projects and investors: New technologies can support project promoters such as small and medium size businesses, start-ups or even local authorities to raise funds for sustainable projects, while at the same time enhancing transparency and opportunities for investors to finance a bigger pool of sustainable projects. Additionally, smallholders (eg individual farmers) and small commercial businesses and households may be marginalized financially and fail to benefit from green financing opportunities.

Which technological solutions can be deployed to aid in better capturing and structuring relevant climate-related data? Can the Internet of Things remote sensing devices and satellites be used to expand and automate the collection and reporting of a wider range of data? Can artificial intelligence, machine learning techniques and natural language processing be used? And what can be the role of distributed ledger technologies? Answering these questions will help shape solutions to the three problem statements of this year's TechSprint.

I should also highlight that the BIS has been actively contributing to the green finance agenda.

On 2-4 June, together with the Banque de France, the International Monetary Fund and the Network on Greening the Financial System, the BIS will co-host the Green Swan Conference on "How in practice can the financial sector take immediate action against climate change-related risks?"

On the Innovation Hub side, as part of our inaugural Innovation Summit at end-March, I discussed with European Central Bank President Christine Lagarde and United Nations Special Envoy on Climate Action and Finance Mark Carney ways that innovation can support sustainable growth, particularly regarding data collection and analysis.

The BIS Innovation Network, which is open to all BIS member central banks, has established a Green Finance Working Group chaired by Central Bank of Ireland Deputy Governor Sharon Donnery to share experiences and identify technological solutions to common problem statements. We are also currently developing our first green finance project. Run by our Hong Kong Centre, it aims to develop a prototype for the introduction of tokenised green bonds in small denominations, thereby giving retail investors greater access to these products. The project will also integrate real-time tracking and disclosure of green output for investors via mobile apps, incorporating technologies that can be used to track carbon credits generated through the investment of bond proceeds in renewables, and to provide a foundation for carbon trading. The 2021 G20 TechSprint will be instrumental in scanning the technological universe to help refine the Innovation Hub's contribution to the green finance agenda.

The climate crisis is a global problem and therefore requires coordinated action by central banks and other public and private players. Technology can help us deploy solutions faster and more efficiently to finance the transition. The BIS Innovation Hub has made it one of its priorities.

Thank you for your attention.

¹ As prepared for delivery. All views expressed are mine and not necessarily those of the Bank for International Settlements (BIS).
² See Carney M (2021): Value(s), William Collins.
³ See Network of Central Banks and Supervisors for Greening the Financial System (NGFS) (2020): Survey on monetary policy operations and climate change: key lessons for further analyses, December.
⁴ See Basel Committee on Banking Supervision (BCBS) (2021b): Climate-related risk drivers and their transmission channels, April.
⁵ See NGFS (2020): Progress report on the implementation of sustainable and responsible investment practices in central banks' portfolio management, December; and NGFS (2021): Adapting central bank operations to a hotter world – Reviewing some options, March.
⁶ For further details, see https://www.techsprint2021.it/. See also Visco I (2021), The G20 TechSprint 2021 on sustainable finance, address at the G20 TechSprint presentation event, 7 May.
⁷ See BCBS (2021): Climate-related risk drivers and their transmission channels, April.
⁸ For examples of policies, regulations, and guidance on disclosure and reporting, see NGFS (2021): Report Sustainable Finance Market Dynamics, March, pp. 8-9; and Association for Financial Markets in Europe (AFME) (2021): ESG Disclosure Landscape for Banks and Capital Markets in Europe, April.
⁹ See BCBS (2021): Climate-related risk drivers and their transmission channels, April.
¹⁰ A recent report by the CDP evidenced that 49% of financial institutions indicate they do not conduct any analysis of how their portfolio impacts the climate at all. See CPD (2021): The Time to Green Finance – CDP Financial Services Disclosure Report 2020, April.
¹¹ The quantity and quality of public information is often a function of firm size, limiting comparability of smaller firms vis-à-vis large corporations. Differences in accounting principles and/or reporting schemes across jurisdictions adds additional comparability limitations. See BCBS (2021): Climate-related risk drivers and their transmission channels, April.
¹² See OECD (2020): OECD Business and Finance Outlook 2020 – Sustainable and Resilient Finance, OECD Publishing, Paris.