“Climate risks are financial risks, too” Interview in Handelsblatt, issue 91/2022

Interview conducted by Jan Mallien and Frank Wiebe.

Sabine Mauderer is the Bundesbank Executive Board member responsible for Human Resources and Markets. She is involved in a network with other central banks for greening the financial system.

Ms Mauderer, you are working to make the financial system more sustainable. Given the war and supply bottlenecks, wouldn’t you agree that the priority has now shifted more towards safeguarding supplies?

As I see it, energy security and transformation are two sides of the same coin. The current crisis – with the high dependence on fossil commodities from Russia – shows more than ever that we need to pivot towards sustainable sources of energy. That is especially true for countries like Germany which have no major fossil resources of their own.

So if anything, this topic has gained importance in our part of the world.

What can be done to speed up the transformation?

The crisis has sent fossil commodity prices rocketing, and that is making renewable energies more competitive. Many renewables are already competitive today, but at the same time we are seeing price pressure from the brisk demand and supply chain issues. One thing is for certain: the challenge we face is momentous. You see, it is a matter of transforming the entire economy, not just certain sectors. The longer politicians need to stake out a reliable framework, the more arduous and costly the task will become.

Who is footing the bill for this?

In the European Union (EU), we are going to need roughly €350 billion in additional investment each year up to 2030 just to finance the restructuring of the energy system. That is a huge amount of money. Government won’t be able to foot the bill alone. This is a field where the public and private sectors will have to work together. That is why banks, capital markets, pension funds and insurers, and philanthropists are also called upon to finance the transformation.

What role do you think the financial sector plays in all this?

The financial sector will have to mobilise the funds needed for the green transformation. We are seeing demand for investments geared to this objective clearly outstripping supply.

One major topic is ESG. What can be done to ensure that these criteria do indeed spur greater investment that can mitigate climate change?

What matters is that the transformation away from the old carbon-intensive structures towards climate neutrality is a success. So it is not just a question of financing assets that already satisfy the ESG criteria. It is also about providing today’s carbon-intensive enterprises with the funding they need to make a gradual transition.

How can that be credibly achieved?

Investors need to be certain that the financial resources they invest will indeed help fund the transformation. Three things are needed for that. First, a clear definition of sustainable activities. Second, good data, and that’s something you get by setting out harmonised international disclosure requirements. And third, we need product standards, where compliance can be verified by qualified and independent experts. That is how we ensure that financial products with a sustainable label do indeed make a positive contribution to the transformation.

That kind of financing would be provided for enterprises that are still “brown” to begin with and only transition to the “green” zone later on.

Sustainability-linked bonds (SLBs) are a good example of this. Their financing terms and conditions are tied to certain targets. If these targets are missed, the bonds become more expensive for the borrower. That’s a way to set the right incentives.

What role can the Bundesbank play in the transformation?

Let me begin by making it clear that we do not set climate policy, but we do take into account climate risks which are financial risks, too. And that concerns all the areas in which we operate.

How exactly does the Bundesbank intervene?

Our banking supervisors examine the risks on banks’ balance sheets. And it is a topic for financial stability, too. Furthermore, we have our own non-monetary policy portfolios, like those we hold for pension obligations, where climate risks play a growing role in our investment decisions. And we manage money for public corporations such as central government and certain Federal states. For nearly all of our 16 clients, we are implementing a sustainable investment strategy.

And what is the situation with bonds purchased for monetary policy reasons?

Government bonds play the main role here, since they account for between 80% and 95% of the assets in question. The call here would be to make government budgets more sustainable. In addition, we also purchase corporate bonds as part of the asset purchase programmes in the Eurosystem. These account for a smaller percentage. The ECB Governing Council decided last July to take greater account of climate change considerations in corporate sector asset purchases.

What might that look like?

That’s something we’re still discussing. There was a whole raft of decisions on topics such as plans to expand our economic models to take account of climate risks. Many topics remain a subject of debate. A first step will be to measure and disclose the carbon footprint of our non-monetary policy portfolios, which the Bundesbank will start doing this summer.

The EU has presented plans for a taxonomy to boost transparency surrounding the ESG criteria. What role will this play for central banks?

There are many approaches and taxonomies worldwide but they differ significantly in some cases. The EU taxonomy is complex, and implementing it will present a challenge for some enterprises. The requirements in Asia, such as those in Malaysia and other ASEAN countries, are looser, being based more on principles than on detailed rules. The approach is more flexible, but it allows greater leeway and thus more uncertainty.

What is your take on the dispute within the EU on whether nuclear power and gas should be labelled as sustainable energy sources?

Transparency is what counts as far as these topics are concerned. It means that investors can decide for themselves what position they wish to take. On this note, I believe the initiative to incorporate climate risks into the International Financial Reporting Standards is important. This will also help achieve the necessary harmonisation. I therefore welcome the work of the International Sustainability Standards Board (ISSB), which aims to achieve just that. It was important that the German financial centre succeeded in attracting the ISSB to Frankfurt am Main.

Ms Mauderer, thank you very much for the interview.

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