Claudia Buch: The transition towards a low-carbon economy - what supervision can contribute

Speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the European Stability Mechanism (ESM)/Central Bank Research Association (CEBRA) conference "The Role of Central Banks and International Financial Institutions in the Transition Towards a Low-Carbon Economy", Luxembourg, 21 November 2024. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Thank you very much for the invitation to speak at this conference on the role of central banks and international financial institutions in the transition to a low-carbon economy.

Climate change affects banks' balance sheets despite operating on different time scales. The effects of climate change are very long-lasting but can be very disruptive once tipping points are reached. Climate change is driven by the accumulation of greenhouse gases in the atmosphere where carbon dioxide has been building up since the onset of the industrial revolution. Bank balance sheets turn over much faster. The average maturity of a bank loan is roughly nine years, the average maturity of banks' liabilities less than three years. Yet, banks' balance sheets are like a chain that links the past to the future: Banks' assets reflect economic structures of the past, and are thus affected by climate-related risks, banks' new lending provides opportunities to support investments into a sustainable future.

Climate-related risks are thus highly relevant for banks already today. Transition risks such as those related to decisions on climate policies or increases in carbon prices can affect the valuation of banks' assets. Climate-related natural catastrophes, such as wildfires and flooding, directly affect the operations and financial conditions of banks and their customers. If banks do not account for these risks, their business models and their ability to lend may be disrupted.

So what role do supervisors have in the transition to a low-carbon economy? Let me make three points today.

First, climate and nature-related risks affect the economy and thereby banks' balance sheets. Up until several years ago, banks hardly had systems in place to manage these risks. Information on the climate-related footprint of their customers has been sparse. In line with its mandate, supervision must ensure banks address these risks in a sound manner. Better reporting on climate- and nature-related risks complements the efforts of banks and supervisors. Meanwhile, significant progress has been made in terms of risk management and availability of data.