Transparency and market integrity in green finance

Introduction and opening panel remarks by Mr Agustín Carstens, General Manager of the BIS, at The Green Swan Conference - Coordinating finance on climate, Basel, 2 June 2021.

BIS speech  | 
02 June 2021

As General Manager of the Bank for International Settlements (BIS), let me welcome all of you to this conference. I would like to acknowledge the effective partnership with the Bank of France, the International Monetary Fund (IMF), and the Network for Greening the Financial System (NGFS) in organising this impressive event. The enthusiastic response from all of you – coming from a wide spectrum of sectors and regions – is a testament to the fact that the topic of climate change is of critical relevance.

As Minouche Shafik mentioned in her brilliant introductory remarks, it has been seven years since Mark Carney gave his seminal speech at Lloyd's of London where he argued that climate change posed serious financial stability risks.  Since then, central banks have increasingly improved their ability to recognise climate related issues, while also being mindful of the scope of their roles and mandates.

While the climate crisis is not the sole or the primary responsibility of central banks and financial authorities to solve, given the nature of the problem itself, the central banking community increasingly recognises that taking action against climate change is paramount, and that doing so requires a significant amount of coordination across and within jurisdictions and sectors. There is no "silver bullet", and no single country or organisation can be successful alone. Climate-related financial risks are both local and global; they require countries to work together, especially now that over one hundred Governments expressed commitment to a net zero (carbon) approach.

To address the key financial aspects related to a potential solution for the climate crisis, the essential players are:

  • Treasuries, because they have primary responsibility for carbon pricing, their role as investors in green infrastructure and the support they provide to research on sustainable policies;
  • International institutions like the IMF – and here Kristalina Georgieva has delivered a powerful message of commitment;
  • Development banks, because they can leverage financing costs for transition and mitigation;
  • Firms, commercial banks, insurance companies, regulators, standard-setters, and ratings agencies to ensure consistency with net zero commitments;
  • And of course central banks and supervisors, at the individual level and as a group, as they work together through the NGFS.

The BIS has been doing its part. 

We used the Black Swan image of the 2007-09 Great Financial Crisis to coin a new Green Swan concept: a series of severe climate events that are bound to happen because they are the result of our greenhouse emissions warming the globe's average temperature. We are seeing these events with greater frequency. Therefore, addressing these risks as soon as possible and in a coordinated fashion is the best way to preserve financial stability.

In addition:

  • We have contributed to developing a green bond database for the NGFS to monitor market developments.
  • Like many of you, we are incorporating sustainability criteria into our pension fund and other investments.
  • We are offering green bond funds to central banks to facilitate diversification of their international reserves.
  • We are working with other central banks in our BIS Innovation Hub on how to use new financial technology to foster "green finance". For example, we are developing a prototype for the introduction of tokenised green bonds in small denominations, giving greater access to retail investors. This project integrates real-time tracking and disclosure of green output for investors, showcasing technologies that can be used to reduce greenwashing and increase transparency.
  • And the BIS will deliver a dedicated portal, run by our Financial Stability Institute, for training on climate risks in partnership with the 26th United Nations Climate Change Conference of the Parties (COP26) work. I am pleased that the BIS will soon launch the Climate Training Alliance with the NGFS, the International Association of Insurance Supervisors and the Sustainable Insurance Forum. 

Not least, the BIS is actively involved in the widely recognised work of the NGFS, working together with the central banking and supervisory community on a wide range of relevant climate change related issues. Working with the Bank of France, one of our contributions has been to help frame climate-change issues for the central banking community as a new systemic risk issue.  The severe physical and transition risks of global warming fall squarely within the financial stability mandate of most central banks.

At the same time, we should be hard-nosed about what we are trying to achieve, and not get swept up by the sense of enthusiasm. Minouche asked each of us what we are expecting from this conference. Looking at the impressive agenda, we will hear about:

  • Development of new macro models, new risk metrics, new climate-related stress tests, and new scenarios for 1.5 degrees Celsius (potential future temperature increase) for the real and the financial sectors;
  • Elaboration of the scope and the role of macroprudential tools and how to achieve the right balance with monetary policy;
  • Advancements in financial knowledge to accelerate adaptation and transition toward a net zero goal;
  • Improvements to disclosure and accounting standards; and
  • Progress in the taxonomy of green investments.

All of this is excellent. But we will need to be able to go from general approaches to specific solutions.  For me, the last points on disclosure and taxonomy are particularly urgent in order to strengthen the integrity of markets which are being created around green finance.

Let me explain.

Investors are increasingly looking for investments with environmental benefits, and financial markets have responded by offering new products. The amount of outstanding bonds with a green label has surpassed the $1 trillion mark and stood at nearly $1.2 trillion at end-2020a. Investments in funds with Environmental, Social and Governance (ESG) mandates have reached $38 trillion on one measure – a quarter of the global total.b

Yet, green labels and ESG ratings are often not sufficiently clear on the promised environmental benefits, and offer little assurance that benefits will materialise. Part of the problem derives from the fact that these labels are based on inputs, which are easy to verify, rather than how well they are aligned with outputs or concrete outcomes, which are harder to verify. Further, such labels and ratings are seldom aligned with high-level policy goals such as the transition to a low-carbon economy. BIS research has shown that labelling bonds as "green" does not necessarily imply that issuers are carbon efficient or reduce emissions over time. ESG ratings have fairly low correlations across different providers, reflecting the variety of different inputs that providers use to arrive at their ESG ratings.  Similar results on the potential confusion around ESG ratings are shown by the work of the Organisation for Economic Co-operation and Development, the IMF and academics, which opens up the possibility of greenwashing.

Financial markets can make an important contribution to help the transition to a low carbon economy and protect our planet. Policymakers need to enable investors by enhancing market transparency and deter green-washing in three ways:

  • Develop taxonomies for climate transition and align them with high-level goals such as the Paris Agreement;
  • Develop standards that enable investors to understand exactly which environmental benefits can be delivered by assets labelled as "green";
  • Develop certification and verification processes that confirm that promised environmental benefits are actually achieved.

A structural change in financial markets is underway and is happening fast. Thus we urgently need to ensure market transparency and integrity in this transition. If we want to avoid a green bubble, we need to act now.

Thank you very much.

a Sources: Climate Bonds Initiative; Dealogic; Environmental Finance Bond Database; BIS calculations.

b Source: Bloomberg.