Weidmann bei seiner Rede an der Humboldt Universität Berlin ©Nils Thies

Weidmann: Enhance transparency of climate-related financial risks

Bundesbank President Jens Weidmann says that climate-related financial disclosures should be mandatory, and also sees central banks as having a role to play in helping to boost market transparency. “The Eurosystem has a legitimate interest in making climate-related risks more transparent,” he said in a speech at the Green Swan 2021 Global Virtual Conference, an event hosted by the Bank for International Settlements, the Banque de France, the International Monetary Fund and the Network for Greening the Financial System. Mr Weidmann explained that, in order to shield the central bank’s balance sheet from climate-related financial risks, the Eurosystem should, in future, only purchase securities or accept them as collateral if their issuers meet certain climate-related reporting obligations. Moreover, the Eurosystem should only use ratings that adequately and transparently reflect climate-related financial risks.

Take climate-related financial risks into account in the monetary policy portfolio

According to Mr Weidmann, if no adequate solution can be found here, the Eurosystem would have to adopt alternative measures to properly incorporate climate-related financial risks into its risk management. One possible approach would be to limit the maturities or the amount of corporate bonds of certain sectors and issuers in the Eurosystem’s monetary policy portfolio. The Bundesbank President warned that such risk-oriented tilting should not be confused with suggestions to steer the behaviour of companies and financial institutions for political reasons. “Even such a tilting of our portfolio would require a proper and transparent yardstick for climate-related financial risks,” he said. That, Mr Weidmann noted, is why it is all the more important to improve the information base. “In this way, the Eurosystem would not only protect its balance sheets. We would also help to enhance the market transparency of climate-related risks, thereby acting as a catalyst for other initiatives and the greening of the financial system.” This would contribute to the fight against climate change without overstretching the Eurosystem’s mandate, Mr Weidmann told his audience.

Call for mandatory reporting of emissions

Mr Weidmann noted that many financial corporations around the world clearly still know little about the greenhouse gas emissions they finance. This could suggest that climate risks are being underestimated. According to Mr Weidmann, investors still have an unclear picture of the climate risks that many enterprises are exposed to and how they deal with these risks. He considers the disclosure of consistent, comparable and reliable climate-related information to be necessary, and welcomes governments’ current initiatives to introduce mandatory disclosure as a step in the right direction. Given the urgency of the matter, filling in information gaps on basic metrics should be prioritised. “An important step would be to establish mandatory reporting of greenhouse gas emissions along a common, ideally global standard”, Mr Weidmann said, adding that “more granular and precise information will help all organisations to incorporate climate-related financial risks into their risk management and, more broadly, to improve their decision-making”. He maintained that this would be a necessary requirement in the transition to a “greener” economy that leverages the power of the financial markets. 

Harnessing central banks’ analytical capabilities for policy consultation

In a panel discussion at the Green Swan Virtual Conference, Bundesbank Executive Board member Sabine Mauderer highlighted the key role of central banks in shaping the economy’s transformation. Ms Mauderer pointed out that, thanks to their outstanding analytical expertise, central banks can support and assist policy makers in determining the measures needed to tackle climate change. By providing quantitative data, central banks can enable policy makers to clearly understand the impact of their actions – as well as the impact of their inaction. Ms Mauderer emphasised that the analytical advice given by central banks could help to raise awareness of the urgency in tackling climate change: “Central banks should harness their analytical capabilities to provide guidance in decision-making.”