Sabine Mauderer at the Spring Conference in Eltville ©Oliver Ruether

Mauderer: “Central banks and supervisors also need to consider nature-related risks and biodiversity loss”

Central banks and supervisors also need to consider nature-related risks and biodiversity loss, urged Sabine Mauderer, member of the Bundesbank’s Executive Board and Vice-Chair of the Network for Greening the Financial System (NGFS), as she kicked off the Bundesbank’s conference. Because there will be no stable climate without a healthy natural world – and vice versa. Climate change is one of the dominant issues of our time and has an impact on the economy, society and the financial system. Ms Mauderer pointed out that climate change not only destroys livelihoods but can also hurt output and influence inflation. The conference, held on 11 and 12 May, was organised by the Bundesbank’s Research Centre and was dedicated to the topic of “Climate Change and Central Banks”. It brought together experts from the world of central banking and academia to talk about what climate change means for the work of central banks.

Climate change and biodiversity cannot be separated

Central banks and supervisors must watch climate-related risks as closely as they watch any other risk, Ms Mauderer argued.

She explained that biodiversity loss affects our economies, communities and lives as well. Ms Mauderer illustrated her point by citing figures from the World Bank, according to which the collapse of selected ecosystem services could knock more than 2% off of global gross domestic product annually by 2030. According to Ms Mauderer, central bankers and supervisors around the world must keep improving their economic models to better capture climate risks and take account of nature-related risks and biodiversity loss. She spoke of the importance of addressing nature-related and climate-related risks together, rather than separating them.

Geoffrey Heal (Columbia University) at the Spring Conference ©Oliver Ruether
Professor Geoffrey Heal of Columbia University, known for his work on economic theory and environmental and resource economics, joined Ms Mauderer in emphasising the vital importance of biodiversity. Without it, the human race would not have come into existence and would not continue to exist, he warned in his presentation. Biodiversity, he reasoned, is important not just for the natural world but also matters to the economy and society as a whole. Professor Heal explained that many of the services that biodiversity provides can be characterised as long-lasting public goods, for which willingness to pay is too low on the part of economic agents. Despite this challenge, interest in investing in biodiversity is growing. He insisted that the ability to assess the value of biodiversity in economic terms is crucial for preserving it, as damage to biodiversity is irreversible. Further efforts are urgently needed to find ways to integrate biodiversity’s value into economic decisions, he cautioned.

Price stability is important for the green transition

Audience at the Spring Conference in Eltville ©Oliver Ruether
In his welcome address, Bundesbank President Joachim Nagel highlighted how important it is to make safeguarding price stability the starting point for any consideration of climate-related issues in monetary policy. According to Mr Nagel, pursuing price stability supports the green transition in three ways. Low and stable inflation allows households and enterprises to adjust their behaviour, making it easier to distinguish policy-induced price signals from general price movements. Second, price stability facilitates decision-making and financing when it comes to large-scale investment in technological innovation and renewable energy. Third, it reduces the risk of persistently higher term premia. The President also stressed that central banks need to contribute to a common understanding of how climate change affects the economy and have to be on top of climate-related financial risks to their own balance sheets.

Esteban Rossi-Hansberg from the University of Chicago drew attention to the global impact of climate change, making the point that it will be protracted and vary greatly between different regions. He said that quantifying its macroeconomic effects is a complex task as the costs associated with adapting to climate change are dependent on the mobility of people, goods and investment. Because of this, researchers need to enhance existing dynamic models to enable them to properly account for the costs of adaptation.

Other contributions from the academic community saw researchers discussing the interplay between climate change and price stability, financial frictions, and innovation and employment, with findings from some of the Research Centre’s own projects being presented in the process, too.

Falko Fecht in conversation at the Spring Conference in Eltville ©Oliver Ruether
In his closing remarks Falko Fecht, head of the Bundesbank’s Research Centre, addressed the approximately 80 researchers in attendance and the team who organised the event, expressing his thanks for two interesting and informative days. The conference has shown that liaising with the academic world is crucial in making sure that central banks are well-equipped to tackle the challenges of climate change. The programme of the Spring Conference will thus be a source of motivation and inspiration for our work going forward.