Speech by Benoît Cœuré, Head of the Innovation Hub, Bank for International Settlements, at the Salzburg Global Finance Forum - Financial services in the post-pandemic era: an opportunity for a green and digitally enabled recovery, 22 June 2021.
Distinguished guests, ladies and gentlemen：It is a pleasure to join you virtually today at the Salzburg Global Finance Forum. The topic you have chosen for this year's Forum could not be timelier.In my remarks today, I will show that the two dimensions, green and digital, are not only interconnected but interdependent – the fate of one depends on the other. Rather than try to cover all aspects of greentech – how technology can help us fight the climate crisis – I will focus on how digitalisation can support the green and sustainable finance agenda. In doing so, I will also highlight how we at the BIS Innovation Hub plan to contribute.While national governments are taking the lead in the global response to the climate crisis, as evidenced by this month's G7 commitments, there is an increasing and shared awareness of the urgent need for action by all economic players. With more than 130 countries having announced their intention to cut emissions to net zero,commitments are now being translated into legislation and concrete action plans.This requires a significant amount of coordination across and within jurisdictions and sectors.
Central banks and the sustainable and green finance agenda
Standard-setting bodies and international organisations, alongside several important public and private-led initiatives, have made significant progress in their climate-related work in recent years.The IMF has included climate-related financial stability risks in its financial sector surveillance through a standardised approach to the disclosure of these risks, enhanced stress tests, and assessments of supervisory frameworks.The central banking and supervisory community is no exception, as the discussions at the Green Swan Conference hosted by the BIS earlier this month showed. Through the Network of Central Banks and Supervisors on Greening the Financial System (NGFS), with its more than 100 representatives, and other initiatives, central banks are contributing to national and international work on disclosure policies and accounting standards. They are also helping to develop a more consistent taxonomy for green investment products.It is now widely accepted that financial risks arising from climate change through physical and transition risks should be considered alongside the more traditional risk categories or as part of them. Individual supervisors have started to publish their expectations for risk management and disclosure and have initiated stress and scenario analysis.Central banks also see scope within their mandates for adjusting their operational frameworks to reflect climate-related risks. Several are seeking ways to green their own assets and are discussing the potential scope and the role of macroprudential tools and monetary policies in response to the climate crisis.The role of central banks doesn't stop at monetary policy, bank supervision and financial stability. Central banks need to give careful thought to the kind of capital market structures needed to channel savings into more sustainable uses. We will not solve the climate crisis without the private sector. The amount of investment required is too large, and we need the private sector's insights and innovation.In a recent speech, ECB President Christine Lagarde reminded us how railroad bonds helped to unify the US capital markets in the late 19th century and called for a European "green capital markets union" backed by the growth of sustainable finance.Today, I would like to argue that the rails of tomorrow's green transformation will be digital. I will give concrete examples of how digital innovation can support the green and sustainable finance agenda and I will discuss how central banks can help.
Digital rails for green transformation
The United Nations Environment Programme has been an early advocate of how fintech innovations can help the financial system align financing with sustainable development. The green fintech ecosystem is rapidly growing. Central banks and supervisors are also starting to explore how technology can assist their data-related sustainability efforts and connect sustainability-related work with their ambitions to become more tech-savvy – in other words, they are exploring how greentech meets suptech.This is where the BIS Innovation Hub comes into play. Established in 2019, the Hub's mission is to lead and coordinate central bank responses to digital innovation and foster international collaboration. Partnerships with other stakeholders are critical for this task.The Hub's work is directed towards practical solutions rather than conceptual research. We are building a portfolio of projects – typically as proofs of concept or prototypes for central banks. In doing so, we are helping our partners to harness the benefits of technology while understanding its limits. Our work programme is built around six key themes of critical importance to the central banking community: suptech and regtech; next-generation financial market infrastructures; central bank digital currencies; open finance; cyber security and finally, green finance.Complementarity with other key themes (such as suptech and regtech, and open finance) and proximity to standard-setting bodies and the Financial Stability Board (FSB) have led us to identify data and information availability and analysis as initial priorities for our green finance agenda.Data and information availability have been highlighted by both public and private participants as a major impediment to delivering on the ambitious agenda outlined earlier in my remarks.The last few years have witnessed the emergence of over 200 green and sustainable finance reporting frameworks, standards and principles catering to the needs of different stakeholders. These have been put forward by private and public entities at the global, regional and national level.Although the Task Force on Climate-related Financial Disclosures (TCFD) framework, established by the FSB, is emerging as the leading global framework for climate-related disclosures, the wide variety of standards and disclosure frameworks make it difficult to compare the climate-related, green and sustainability information available to market participants. When firms make information public, they often do so in an array of different reports and based on different measurements, making such information difficult to locate, collate and analyse.Moreover, actual disclosure of the potential financial impact of climate and sustainability risks on firms' activities remains low and of varying quality. The quantity and quality of public information often depends on the size of firms, making it difficult to compare smaller businesses with large ones. Differences in accounting principles and/or reporting schemes across jurisdictions accentuate this problem.For instance, according to calculations by Bundesbank staff, only 15% of all listed companies disclosed their greenhouse gas emissions in 2019, with researchers concluding that firms cherry-picked to report primarily non-material climate risk information.Moreover, market participants often lack the tools they need to properly inform decision-making through a sustainability risk lens – current practices may not support effective markets and may distort them if information is used to incorrectly price risks, allocate capital inefficiently, or misrepresent sustainable financial products to consumers.A recent NGFS report revealed that persistent gaps in climate-related data hinder regulators from assessing financial stability. It noted there was a need for more forward-looking data in the form of targets or emissions pathways, and granular data in the form of geographical data at entity and asset level.Disclosure has the characteristics of a public good. Useful disclosures enable central banks, supervisors, and financial market participants to understand the environmental footprint and trajectory of firms, sovereigns and assets. In this context, the BIS Innovation Hub seeks to develop projects on:
The collection of non-traditional, non-financial data, including climate-related data describing physical and transition risk drivers. Technological solutions could be developed to enable financial institutions to collect the necessary information and report it to supervisors and the market, using satellites or remote sensing devices on the Internet of Things (IoT) to expand and automate the collection and reporting of a wider range of data.
Improvements in the quality and comparability of sustainability disclosures. Which technological solutions could aid in capturing and structuring relevant climate-related (meta)data, in a consistent, high-quality, comparable and standardised way, to enhance environmental risk analysis? Could technology solutions be interoperable so that they could be used across the varying standards, policies and taxonomies of different jurisdictions? Could "green rulebooks" be developed to showcase how rules and data requirements might be delivered as code in a consistent, high-quality, transparent, comparable and standardised way?
Improvements in the transparency and consistency of impact reporting, where current practices are inadequate.The limited verifiability of self-reported returns undermines trust in the reliability of the data. Can artificial intelligence (AI), machine learning (ML) and natural language processing be used to scrape data to improve impact projections? How best to use blockchain to transparently store, authenticate and manage (issuer) impact data? Can payoffs related to impact investments be linked to automatic performance triggers?
Measurement of greenhouse gas emissions and other sustainable and responsible investment-related metrics for climate-related financial disclosures. Could technological solutions, such as blockchain, IoT, smart sensors and GPS data, among others, help determine the carbon footprint of investments and portfolios and help align financial portfolios with a net-zero objective?
Central banks, supervisors and financial market participants also need tools to visualise, predict and assess financial vulnerabilities associated with transition and physical risks to support informed lending. Hub projects might help in the following ways:
Interpret massive amounts of often unstructured data. Could we use alternative data processed with the use of AI and ML algorithms to help determine which risks are financially material to industries and companies (recognising that attention is needed to ensure that algorithms are fit-for-purpose and data are of sufficient quality)?
Navigate ESG data/ratings providers. As interest in climate-related or ESG disclosures has increased in recent years, so has the supply of products, including climate data, analytics, advisory services, corporate and country ESG research and scores and ratings. ESG data providers and sustainability ratings face transparency issues and methodological challenges amid a lack of consistent, comparable and reliable coverage among providers. The integrity and reliability of methodologies will require regular due diligence by the banks and supervisors making use of such indicators. Could dashboard analysis looking through methodologies and data sources and making use of AI and ML algorithms to identify patterns help in scaling up green finance?
Scenario analysis and stress testing. Could big data ingestion, predictive analytics and visualisation tools be developed to aid both regulators and financial institutions in better assessing and analysing the financial impact associated with the transition to a carbon-neutral economy and with physical risks across different regions, sectors and asset classes in different scenarios and in stress testing?
At the Hub, we have started work on these themes through Project Genesis, launched by our Hong Kong Centre. Genesis aims to develop a prototype for the introduction of tokenised green bonds in small denominations, thereby giving retail investors greater access to these products. The project will also integrate real-time tracking and disclosure of green output for investors via mobile apps, incorporating technologies that can be used to track carbon credits generated through the investment of bond proceeds in renewables, and to provide a foundation for carbon trading.With the Bank of Italy, the Hub is also co-hosting the second edition of the G20 TechSprint, addressing issues in the field of green and sustainable finance. The 2021 initiative focuses on how technological innovation helps financial institutions and investors better collect, verify and analysedata to understand whether their loan decisions and investments improve (or worsen) environmental outcomes; as well as how better to connect projects and investors.This year's G20 TechSprint will be instrumental in scanning the technological universe, thus helping us refine the Hub's contribution to the green finance agenda. We look forward to developing further projects that strengthen the collection, verification, sharing and analysis of environmental data using state-of-the-art digital technologies to enable central banks, supervisors and financial institutions to conduct environmental risk analysis.Beyond the finance industry and immediate Hub projects, other initiatives are needed. Individuals have to make decisions that cannot always be based on perfect information and rational choice. Cultural aspects and social norms may come into play, drawing on routines and habits that do not involve deliberative, cognitive processes.Across markets, all too many of our fellow citizens lack an awareness of how climate change will affect them and how they should respond. According to a recent survey, most are unable to identify which lifestyle decisions would be the most effective at reducing their carbon footprint.As I had the opportunity to discuss at the Green Swan Conference, overcoming behavioural bias can be achieved through innovations that provide incentives for change by:
Informing consumers of the carbon footprint of their transactions. Could innovations such as blockchain, IoT, smart sensors and GPS data, among others, help increase consumer awareness of the environmental impact of their purchases at POS/time of payment by adding a carbon footprint? As an example, Ant Financial Services Group, in association with UN Environment, initiated the world's first large-scale pilot in greening citizens' consumption behaviours using mobile payment platforms, big data and social media.
Increasing awareness of polluting sectors of the economy. Although growing attention is being paid to polluting companies, and more recently on the carbon intensity of cryptoassets, mechanisms are also needed to help sectors such as agriculture and fashion lighten their environmental footprint. Research shows that the fashion industry was responsible for some 2.1 billion metric tons of greenhouse gas emissions in 2018, about 4% of the global total. To set that in context, the fashion industry emits about the same quantity of greenhouse gases per year as the entire economies of France, Germany and the United Kingdom combined. In this light, how might technological innovations be deployed at different stages of the supply chain to allow customers to take informed decisions when purchasing goods?
Let me conclude, the climate crisis is a global problem that requires coordinated action by central banks and other players, both public and private. Technology can help us deploy solutions faster and more efficiently to finance the transition. The BIS Innovation Hub has made green finance one of its priorities and we look forward to playing our part.