Speech by Jens Weidmann at the Second Financial Market Conference ©Nils Thies

Weidmann and Mauderer: Protecting the climate a hugely important topic for central banks

Bundesbank President Jens Weidmann has warned against overburdening monetary policymakers with climate policy objectives. “I am very critical when people say that monetary policymakers need to ‘go green’ by launching ‘green QE’, say, or granting specific privileges to green assets within the collateral framework,” he said at the Bundesbank’s second financial market conference in Frankfurt am Main. “Our mandate is to preserve price stability, and policy implementation needs to be in line with principle of market neutrality,” Weidmann explained, and skewing asset purchases to green bonds would run counter to this principle. He also noted that a trade-off could arise once monetary policy considerations call for applying the brakes and scaling back the bond purchases. “In this situation, I dare say there would be calls to press ahead with the green asset purchase programme.” He does, however, regard a decisive and effective climate policy as the right course of action – but noted that it needed to be implemented using the right instruments and by agents which have the democratic legitimacy needed for that purpose.

Central banks can pave the way for more sustainability

Nevertheless, Weidmann does see scope for the Bundesbank to help green the financial system within the constraints of its mandate. This broad range of possibilities was outlined in the speech by Sabine Mauderer, whose Executive Board remit includes the Bundesbank’s market operations. “Central banks can pave the way for more sustainability,” Ms Mauderer emphasised, “particularly with portfolios that are not geared towards monetary policy, but also as fiscal agents.” The Bundesbank is currently reviewing how sustainable its euro-denominated own funds portfolio already is and where there is still room for improvement. Besides this, in its role as a fiscal agent, the Bundesbank holds portfolios for external public sector clients. She explained that the example which the public sector is setting is crucial to the acceptance of sustainable finance in Germany.

Climate change a source of financial risks

Weidmann and Mauderer also used their speeches to touch upon the role played by financial supervisors. Their task, Weidmann explained, is to gauge the significance of climate-related risks for the financial system: “not just the risks caused by transitioning to a low-carbon economy, but also the ones triggered by climate change itself – such as the damage caused by an accumulation of extreme weather events.” Up until now, not enough attention has been given to the costs of environmentally harmful behaviour, he complained. Sabine Mauderer called for a climate stress test for financial supervisors, “but before this can happen, we need the right data and a better understanding of the basic issues.”

Mauderer: Protecting the climate calls for a clear allocation of roles

Sabine Mauderer also used her conference speech in Frankfurt to highlight the role played by politics, the financial sector and the real economy in making the necessary transition a success. “From politicians, we need solid guidelines for green finance reforms, ideally at the international level,” she argued, even if financial regulation is not a climate policy instrument but serves instead to safeguard the stability of the financial system. The German government’s climate package is a “good start”, she remarked, adding, though, that it is clear that further steps will also be needed.

Ms Mauderer urged financial institutions to take climate risks into account and at the same time leverage the opportunities which the transformation offers. “By allocating capital in a smart way, the financial sector can generate returns and at the same time act as a driver of innovation and growth in the fight to mitigate climate change,” she announced. Financial institutions and financial markets, she noted, play a central role in the effective and efficient allocation of capital in the real economy.

For Sabine Mauderer, though, the key player is the real economy, particularly the production sector. “This is where important steps will be taken,” she stressed, pointing to the fact that many enterprises have noticed that new products and services that make sparing use of natural resources are good for business. “All we need to do now is act with determination,” she concluded.

A great deal of scepticism over greenwashing

The afternoon panel, consisting of experts from banks, asset management firms and insurance corporations, revealed that sustainable investments are in high demand among customers. In the past, it was the patriarch who decided how money would be invested, said Axel Weber (UBS). But now, he explained, the next generation – or the millennials – have a seat at the table and are calling for sustainability. According to Philipp Hildebrand (BlackRock), business models that do not take these needs into account are no longer viable. Pressure from customers in Europe is particularly intense, he noted. Mr Weber warned against “greenwashing”, or PR methods used to cast an enterprise in an environmentally friendly and responsible light when this isn’t actually the case. “This is creating a great deal of scepticism within the industry,” he said.