Banque de France (BdF) Emmanuelle Assouan, general director of financial stability and operations tells Green Central Banking’s Maria Costa that the world is getting warmer, and extreme weather events are becoming the norm. But some big polluters, such as the U.S., have been slow to act. Others, like France and the European Union, are making combatting climate change a core priority. But it is not enough for the EU to be at the forefront of the green transition, she says.
“[It’s] quite a pity that the other big jurisdictions are not where we are because climate change is a global issue, and acting solely in Europe might not be enough to change the big picture,” she says.
Assouan’s comments come as France receives the top grade in the most recent Green Central Banking scorecard, published today by research and campaign group Positive Money. Now in its fourth edition, the scorecard tracks the progress made by G20 countries in adjusting monetary and financial policies to address the climate and environmental crises.
In the updated rankings, the top positions are all held by European countries, in large part due to efforts made at the European Central Bank (ECB). France, Germany and Italy received a B+, while the EU received a B. However, economies such as Canada and the UK are falling behind, while the US is languishing in 17th place.
France has topped the scorecard in all but the first edition and in many ways it is becoming a de facto leader on using central bank policy to address climate change risk.
France has topped the scorecard in all but the first edition and in many ways it is becoming a de facto leader on using central bank policy to address climate change risk.
Combatting climate change embedded in BdF’s mandate
Like the ECB, the BdF considers combatting climate change to be part of its remit, as it could have direct economic consequences. Assouan says she cannot understand how a central bank fails to consider climate change when it also takes into account other shocks to the financial system, such as oil prices or wages.
“When you have risks stemming from climate change, it affects both the real economy but also the actors which fund the real economy,” she says.
Just as central banks are not responsible for negotiating wages but still take them into account when making decisions, supervisors can also consider climate change, as their job is to ensure that financial institutions are managing any risks they face, she says.
Assouan points to the fact that there is no explicit mandate to consider cyber security risk, yet eurozone central banks must take this into account as it forms part of the EU’s regulatory framework.
“It would be completely at odds with our mandate if we would discard this part of the risk, only taking into account cyber risk, not climate risk for instance, because it has not been stated explicitly that it is our mandate,” she says.
But Assouan says there are some things that are not part of BdF’s monetary policy mandate, such as green dual interest rates, a concept that French president Emmanuel Macron has supported and that the ECB has said it could consider.
While other central banks, such as the Bank of Japan, have set up green investment incentives, it is a tool considered to be outside of the monetary policy framework. Implementing a pricing signal like having a lower rate for green energy projects is a fiscal policy tool, she says.
And while there are perhaps not enough market signals for green investments, such as carbon pricing, the BdF is “not responsible for making the price signal.”
“[That’s the limit] we see with such an instrument… It’s challenging because [with the] Banque de France remit, it’s not possible,” she says.
“Just as central banks are not responsible for negotiating wages but still take them into account when making decisions, supervisors can also consider climate change.”
Leading by example
The French central bank has become a leader in many issues related to combatting climate change on a macroeconomic scale, largely because it considers climate change a core part of its remit. It helped found the Network for Greening the Financial System (NGFS) in 2017 and hosts the network’s secretariat offices in Paris.
For Assouan, who co-chairs the NGFS taskforce on nature-related risks, everything starts with the network.
“It’s absolutely critical to have this collaboration, because we started with a table with nothing on it, so we had to build everything from scratch. And it was much easier to build and to progress together, sharing and making a lot of synergies,” she says.
One way the BdF has become a leader is by showing that it is possible to align equity portfolios with the Paris Agreement without degrading their yield, which the bank does on a voluntary basis.
Numbers in brackets indicate country rank in the 2022 edition of the scorecard.
“If we can manage that, it means that the other financial actors can as well,” Assouan says.
In managing its equity portfolios, the BdF first considers how to protect France’s balance sheet from climate change risks, from the perspective of both physical and transition risks. It then tries “to minimise the risks that we consider will lead to stranded assets or to amplifying the developments in terms of climate change.”
French law requires most companies, including financial institutions, to disclose investments linked to fossil fuels, and how any climate change and biodiversity strategies align with the Paris Agreement.
On top of this, the BdF also discloses the footprint of its portfolios in its sustainability report every year. It has a tool called a climate indicator to help both financial and non-financial institutions analyse transition and physical risks in relation to their business models. The tool allows businesses to assess where they could improve and how they compare to their peers. The central bank plans to expand it to other sectors in France this year, Assouan says.
If nature is ignored, there “could be a feedback loop which could annihilate the efforts on the climate side.”
“It’s not that easy [for] middle size corporates to have the means, to have the human resource to do that and we provide that to them, which is very valuable,” she says.
The need for nature stress-testing
But looking just at climate change risk is not enough as nature risk also needs to be considered, Assouan says.
“If we want to address one, we cannot ignore the other,” she says. If nature is ignored, there “could be a feedback loop which could annihilate the efforts on the climate side.”
Assouan says there is also a plan for the NGFS to create stress test models in the same way they do for climate scenarios, but for nature instead. However, there are several challenges, as nature is complex and global but at the same time very local.
At the moment, there is no single type of metric to measure nature, says Assouan. Current economic models don’t reflect the importance of nature in the economy’s value chain, as they still rely on the assumption that labour can be replaced with capital. But considering nature risk is vital because “at one point in time, it will not be available as it used to be.”
For now, the NGFS is trying to see how it can better integrate nature and biodiversity into economic stress testing models but it’s still a work in progress, she says.
Assouan wants to make sure risks, both in climate and nature, are managed well and while some of the tools might not be perfect, there is no time to wait for the optimal framework. It means taking daily steps to get better, being open-minded and inclusive, and collaborating with other stakeholders such as scientific experts.
“In French, we have an expression about the jardin à la française, where everything is neat, everything is beautiful, everything has the right size, the same colour. It’s perfect. With the NGFS, we know that we have to progress, so we have to give a little bit of leeway and to be confident enough that we can start with a little and that we will progress and enrich and make it better. To not let the perfect be the enemy of good.”
Featured photo: Emmanuelle Assouan. Source: Banque de France
