27 March 2024

SSM's Elderson in Brasil: Taking into account climate and nature in monetary policy and banking supervision around the world

In my remarks today, I will explain why central banks and supervisors have no option but to take the ongoing climate and nature crises into account to deliver on their monetary policy and banking supervision mandates.

Many thanks to the Banco Central do Brasil for inviting me here today. I am honoured to be speaking in Rio de Janeiro’s botanical garden. It is home to more than 6,500 different species – just a fraction of the more than 130,000 species that are estimated to be found in Brazil, the most biodiverse country in the world. But even this little glimpse into Brazil’s biodiversity is more than sufficient to appreciate the concept of natural capital and the tremendous value it represents.

At the same time, global heating and nature degradation are putting this natural capital at risk. And central banks and supervisors around the world recognise that this poses a serious threat to the stability of our economies and the robustness of our financial system.

Let me be clear from the outset: central banks and supervisors are not, and do not intend to be, policymakers in the area of climate and nature. It is governments that are responsible for climate and nature policies. In my remarks today, I will explain why central banks and supervisors have no option but to take the ongoing climate and nature crises into account to deliver on their monetary policy and banking supervision mandates. And that is exactly what central banks and supervisors around the world are doing. We at the European Central Bank (ECB) are not alone in this work, as can be seen from the work being done by the Banco Central do Brasil and most other central banks and supervisors around the world.

The relevance of climate and nature for central banks and supervisors

Human-induced global heating and nature degradation are scientifically established facts. Their devastating consequences are becoming all the more apparent in the increasing number of hazards we are seeing around the world. We don’t yet know exactly how the climate and nature crises will continue to unfold, partly because governments are taking mitigation and adaptation measures. This uncertainty also means that we don’t know exactly how the economy and the financial system will be affected.

At the same time, analysis consistently shows the vital importance of climate and nature for central banks and supervisors.

First, whatever happens, the economic impact will be profound. If left unchecked, global heating and nature degradation will contribute to increased macroeconomic volatility as climate and nature events become more frequent and have a greater impact on the economy. A successful transition to a green and sustainable economy, meanwhile, will require vast investment flows that will alter the way our economies function.

Second, the economic benefits of a timely transition far outweigh the costs, especially when considered against the alternative scenarios of doing nothing or doing too little too late.^[1]

Third, climate-related risks translate into financial risks. Early work by the Basel Committee on Banking Supervision (BCBS) shows that climate events are a driver of each traditional type of risk considered in the regulatory framework, from credit risk, liquidity risk and market risk to reputational and operational risk, including legal risk.^[2] Floods, for example, could damage a company’s production facility, which could affect its ability to repay a loan, in turn leading to higher credit risk for the bank that provided the loan. Or consider what might happen if your house is built in an area vulnerable to wildfires. Your home could fall in value, leaving the bank that granted you the mortgage with higher risk on its balance sheet...

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