Digital rails for green transformation

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 gentlemen¹

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,² 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,³ 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.⁴

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.⁵

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.⁶ Through the Network of Central Banks and Supervisors on Greening the Financial System (NGFS), with its more than 100 representatives,⁷ 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.⁸ Individual supervisors have started to publish their expectations for risk management and disclosure⁹ and have initiated stress¹⁰ and scenario analysis.¹¹

Central banks also see scope within their mandates for adjusting their operational frameworks to reflect climate-related risks.¹² 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.¹³

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.¹⁴

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.¹⁵ The green fintech ecosystem is rapidly growing.¹⁶ 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.¹⁷

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.¹⁸

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.¹⁹ These have been put forward by private and public entities at the global, regional and national level.²⁰

Although the Task Force on Climate-related Financial Disclosures (TCFD) framework,²¹ 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.²²

Moreover, actual disclosure of the potential financial impact of climate and sustainability risks on firms' activities remains low²³ 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.²⁴

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.²⁵

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.²⁶

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.²⁷

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.²⁸ 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.²⁹ 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.³⁰ 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.³¹ The integrity and reliability of methodologies will require regular due diligence by the banks and supervisors making use of such indicators.³² Could dashboard analysis³³ 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?³⁴

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 analyse data to understand whether their loan decisions and investments improve (or worsen) environmental outcomes; as well as how better to connect projects and investors.³⁵

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.³⁶

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.³⁷

As I had the opportunity to discuss at the Green Swan Conference, overcoming behavioural bias can be achieved through innovations³⁸ 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.³⁹
• 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.⁴⁰ 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.

Thank you for your attention. I look forward to our panel discussion and to visiting Schloss Leopoldskron for the Forum's next edition.

¹ As prepared for delivery. All views expressed are mine and do not necessarily represent those of the Bank for International Settlements (BIS).
² G7, Carbis Bay G7 Summit Communiqué: Our shared agenda for global action to build back better, 13 June 2021.
³ See S Breeden and F Elderson, Sizing the benefits and risks of our climate ambition, 7 June 2021, and Climate Action Tracker, Projected warming from Paris pledges drops to 2.4 degrees after US Summit – analysis, May 2021.
⁴ The Financial Stability Board (FSB) is developing a coordinated roadmap to address climate-related financial risks. The aim is to provide a strategic vision for the work of standard-setting bodies and international organisations (see FSB, FSB Chair's letter to G20 Finance Ministers and Central Bank Governors, 6 April 2021). The Basel Committee on Banking Supervision (BCBS) is investigating how far climate-related financial risks can be addressed within the existing Basel Framework, identifying potential gaps in the current framework, and considering possible measures to address them (see BCBS, Basel Committee publishes analytical reports on climate-related financial risks, 14 April 2021).
⁵ IMF, The IMF is placing climate change at heart of its work, remarks by the IMF Managing Director at the Climate Adaptation Summit, 25 January 2021; and IMF, IMF Managing Director's remarks to the Green Swan Conference, 2 June 2021.
⁶ The Green Swan Conference – Coordinating finance on climate, 2–4 June 2021, co-sponsored by the BIS, Bank of France, IMF and NGFS.
⁷ As of June 2021, the NGFS consisted of 92 members and 14 observers. Together, these jurisdictions cover five continents, representing around 85% of global emissions, 88% of the global economy and all global systemically important banks.
⁸ P Bolton, M Despres, L A Pereira da Silva, F Samama and R Svartzman, The green swan – Central banking and financial stability in the age of climate change, BIS and Bank of France, January 2020; FSB, The implications of climate change for financial stability, 23 November 2020; NGFS, Survey on monetary policy operations and climate change: key lessons for further analyses, 15 December 2020; and BCBS, Climate-related risk drivers and their transmission channels, 14 April 2021.
⁹ Australian Prudential Regulation Authority, Consultation on draft Prudential Practice Guide on Climate Change Financial Risks, 22 April 2021; Bank of England, Enhancing banks' and insurers' approaches to managing the financial risks from climate change, Supervisory Statement, no SS3/19, 15 April 2019; and ECB, Guide on climate-related and environmental risks – Supervisory expectations relating to risk management and disclosure, November 2020.
¹⁰ Autorité de Contrôle Prudentiel et de Résolution, A first assessment of financial risks stemming from climate change – The main results of the 2020 climate pilot exercise, 4 May 2021; Bank of England, Bank of England publishes the key elements of the 2021 Biennial Exploratory Scenario: Financial risks from climate change, 8 June 2021; ECB, ECB publishes final guide on climate-related and environmental risks for banks, 27 November 2020; and R Menon, Being the change we want to see: a sustainable future, speech at the launch of the inaugural MAS Sustainability Report, 9 June 2020. The ECB is also carrying out an economy-wide climate stress test. The People's Bank of China is considering the possibility of including climate factors in financial stress tests, and it is gradually incorporating climate risks into its macroprudential policy framework (Y Gang, Green finance and climate policy, opening remarks at a High-Level Seminar on "Green finance and climate policy", co-hosted by the People's Bank of China and the IMF, 15 April 2021).
¹¹ NGFS, NGFS Climate scenarios for central banks and supervisors, 7 June 2021, and L Brainard, Financial stability implications of climate change, speech delivered at the "Transform tomorrow today", Ceres 2021 Conference, Boston, Massachusetts (via webcast), 23 March 2021.
¹² NGFS, Survey on monetary policy operations and climate change: key lessons for further analyses, 15 December 2020.
¹³ NGFS, Progress report on the implementation of sustainable and responsible investment practices in central banks' portfolio management, 15 December 2020; and NGFS, Adapting central bank operations to a hotter world – Reviewing some options, 24 March 2021.
¹⁴ C Lagarde, Towards a green capital markets union for Europe, speech at the European Commission's high-level conference on the proposal for a Corporate Sustainability Reporting Directive, 6 May 2021.
¹⁵ United Nations Environment Programme (UNEP), Fintech and sustainable development – assessing the implications, December 2016.
¹⁶ For examples of possible applications of fintech to green finance see D Nassiry, The role of fintech in unlocking green finance – Policy insights for developing countries, ADBI Working Papers, no 883, Asian Development Bank Institute, Tokyo, November 2018; B Caldecott, Fintechs and the ESG data challenge – a study of emerging technologies, BNP Paribas, 2019; and European Commission, Commission Staff Working Document – Digital solutions for zero pollution, accompanying the document "Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Pathway to a Healthy Planet for All, EU Action Plan: Towards Zero Pollution for Air, Water and Soil", 12 May 2021.
¹⁷ A Moreno and T Caminero, Application of text mining to the analysis of climate-related disclosures, Bank of Spain Working Papers, no 2035, 27 November 2020, and R Menon, Fintech for an inclusive society and a sustainable planet, remarks at the Singapore FinTech Festival, 8 December 2020.
¹⁸ Reflecting the global nature of innovation and technology, the Hub is headquartered in Basel and already has five Centres: in London (with the Bank of England), Hong Kong SAR (with the Hong Kong Monetary Authority), Singapore (with the Monetary Authority of Singapore), Stockholm (with Sveriges Riksbank and the central banks of Denmark, Iceland and Norway), and Switzerland (with the Swiss National Bank), leveraging the strength of the host central banks and of the local fintech ecosystems. A strategic partnership with the Federal Reserve System in New York has been formed, and in the next months two new centres will open in Toronto (with the Bank of Canada), and Frankfurt/Paris (with the Eurosystem).
¹⁹ IMF, IMF Managing Director's remarks to the Green Swan Conference, 2 June 2021. For examples of policies, regulations and guidance on disclosure and reporting, see NGFS, Report on sustainable finance market dynamics, 31 March, 2021, pp 8–9; and Association for Financial Markets in Europe (AFME), ESG disclosure landscape for banks and capital markets in Europe, 14 April 2021.
²⁰ Leading global voluntary reporting frameworks and standard setters are increasingly collaborating with the goal of establishing a single, coherent and global ESG disclosure and reporting standard, aligned with the TCFD recommendations. Relevant reporting frameworks and standard setters include CDP (formerly the Carbon Disclosure Project), the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB). The IFRS has concluded that there is a growing and urgent demand to improve global consistency and comparability in sustainability reporting, and also that it is necessary for the IFRS Foundation to play a role in this – the International Federation of Accountants (IFAC) and the International Organization of Securities Commissions (IOSCO) are backing this initiative. As there are no standards for sovereigns to report on climate and environmental considerations, investors have developed their own bespoke frameworks for engaging with sovereigns on these issues; the World Bank is currently developing a "TCFD for sovereigns" framework and associated guidance. See NGFS, Adapting central bank operations to a hotter world – reviewing some options, 24 March 2021.
²¹ Task Force on Climate-related Financial Disclosures (TCFD), Recommendations of the Task Force on Climate-related Financial Disclosures, June 2017; NGFS, Report on sustainable finance market dynamics, 31 March 2021; and G7, G7 finance ministers and central bank governors communiqué, 5 June 2021.
²² BCBS, Climate-related risk drivers and their transmission channels, 14 April 2021.
²³ A recent report by the CDP showed that 49% of financial institutions indicate they conduct no analysis of how their portfolio impacts the climate. See CPD, The time to green finance – CDP Financial Services Disclosure Report 2020, April 2021.
²⁴ TCFD, 2020 Status Report, October 2020; J Bingler, M Kraus and M Leippold, Cheap talk and cherry-picking – what ClimateBert has to say on corporate climate risk disclosures, 2 March 2021; and BCBS, Climate-related financial risks – measurement methodologies, 14 April 2021.
²⁵ J Weidmann, Climate risks, financial markets and central banks' risk management, speech at The Green Swan Conference – Coordinating finance on climate, Frankfurt, 2 June 2021.
²⁶ OECD, OECD Business and Finance Outlook 2020 – Sustainable and Resilient Finance, OECD Publishing, Paris, 2020.
²⁷ NGFS, Progress report on bridging data gaps, 26 May 2021.
²⁸ Banks and institutional investors have started evaluating physical and transition risks using climate scenario analyses with support from multilateral and international organisations helping to make more ESG data publicly available. For instance, the World Bank has launched its Sovereign ESG Framework and Sovereign ESG Data Portal, and the IMF has launched a Climate Change Indicators Dashboard – an international statistical initiative to address the growing need for data in macroeconomic and financial policy analysis to facilitate climate change mitigation and adaptation.
²⁹ Environmental Finance, Green bond funds – impact reporting practices, December 2020.
³⁰ See climate-related financial disclosures of Bank of England, The Bank of England's climate-related financial disclosure 2021, 17 June 2021; and Bank of France, Responsible Investment Report 2020, March 2021.
³¹ T Ehlers, B Mojon and F Packer, Green bonds and carbon emissions: exploring the case for a rating system at the firm level, BIS Quarterly Review, 14 September 2020; NGFS, Report on sustainable finance market dynamics, 31 March 2021; and A Carstens, Transparency and market integrity in green finance, remarks at The Green Swan Conference – Coordinating finance on climate, Basel, 2 June 2021.
³² BCBS, Climate-related financial risks – measurement methodologies, 14 April 2021.
³³ NGFS, Dashboard on scaling up green finance, 31 March 2021.
³⁴ In assessing transition risk, banks and supervisors have resorted to macroeconometric models calibrated on historical data and statistical relationships that may not adequately capture climate scenario dynamics. Connecting a climate scenario consistent with physical risk drivers to an economic framework remains an area of ongoing research (see BCBS, Climate-related financial risks – measurement methodologies, 14 April 2021).
³⁵ For further details, see B Cœuré, Leveraging technology to support central bank's green finance objectives, remarks at the Delphi Economic Forum, 12 May 2021; and I Visco, The G20 TechSprint 2021 on sustainable finance, address at the G20 TechSprint presentation event, 7 May 2021.
³⁶ NGFS, Overview of environmental risk analysis by financial institutions, 10 September 2020.
³⁷ Ipsos, Perils of perception – climate change, 17 April 2021.
³⁸ See panel discussion: "How can innovations in market-based approaches using consumer carbon tracing influence consumers' lifestyle choices?", at the Green Swan Conference – Coordinating finance on climate, Basel, 4 June 2021.
³⁹ The "Ant Forest" encouraged Ant's users to cut their carbon footprint via a three-part approach: (a) providing individualised carbon savings data to individuals' smartphones; (b) connecting their virtual identity and status to their earnings of green energy for reduced carbon missions; and (c) providing carbon offset rewards through a physical tree planting programme (see L Chen, T Sun and S Zadek, Scaling citizen action on climate: ANT Financial's efforts towards a digital finance solution, United Nations Environment Programme, May 2017).
⁴⁰ McKinsey & Company, Fashion on climate, 26 August 2020.