Remarks by Director Luís Laginha de Sousa at the Euromed Webinar "What role for central banks in the crisis, from emergency decisions to green recovery?"
Session 1: Central banks and supervisory authorities support policies and exit strategies 1
Good afternoon to all and greetings from Portugal.
I know I only have a 5 minutes time budget, but I would like to start by using part of it to congratulate the Banque de France and the World Bank Group for reconvening these important gatherings. I would also like to salute all the speakers and those that have been attending this event from afar.
I am a strong believer in the benefits of sharing experiences and best practices among peers, and this belief is even stronger in the case of our countries and institutions, given how interconnected we are – by history, by geography and by this common challenge of having to face the fiercest pandemic wave in more than a century.
We all heard countless times how the “Pandemic Wave“ took us by surprise in early 2020, and how we were called upon to face the storm in largely unprecedented circumstances. Nevertheless, please allow me to stress one more time that public authorities had to be at the forefront of this challenge.
Promoting coordinated responses and ensuring that basic needs were attended to, that essential structures and services were kept operational, that the damage caused was mitigated, as much as possible.
Central banks, inevitably, had to stand among those public authorities, acting in line with their mandates and civic responsibilities. The challenge for central banks was not directly to save lives, care for the sick or preserve operational healthcare systems, as was the case of health authorities.
Nor was it to provide direct temporary assistance to the unemployed or those on furlough, and to viable firms caught in the limbo of social restrictions, as was the case of governments, in general.
The key task we have been facing, talking on behalf of the Banco de Portugal, was clear-cut from the start. I believe that has also been the case for central banks, in general, and for those that are part of the Eurosystem, in particular, like Banco de Portugal.
We had to promote conditions that would preserve an appropriate flow of credit to the economy, across all sectors. And we had to do so while simultaneously avoiding the fragmentation of financial markets.
This required supporting liquidity, investment, and the ability to promote an economic recovery when circumstances became more enabling.
Moreover, as always, it was up to central banks to do their bid in preserving financial stability, in order to avoid second and third round effects that would inevitably magnify economic and social damage.
And to help preserve financial stability, reforms to the regulatory and supervisory framework, and buffers that were built before the pandemic, proved to be critical.
It was within this setting that, as the pandemic struck, Banco de Portugal moved to act on several grounds.
In a very condensed way, among the actions we took, I will mention a few:
- Participating in the definition and implementation of euro area monetary policy measures;
- Contributing to both new and revised legal texts, which were adopted to protect loans to corporates and households, and were combined with the issuance of supplementary regulations;
- Relaxing regulatory, supervisory and macroprudential policy measures;
- Ensuring that our payment systems and means of payment remained operational, which included relevant adjustments to facilitate the substantial increase of online and contactless payments;
- Developing new methodologies for monitoring the Portuguese economy and the Portuguese financial system, either on our own or in close cooperation with other national statistical authorities;
- On a more inward-looking note, we also had to adjust how the Bank operates, in order to protect its staff and stakeholders, while ensuring the continuity of its key functions. For instance, we managed to keep our printer facility fully operational throughout the pandemic, and that was far from being easy.
I know the clock has not stopped. So, in order to conclude, let me just add that international and multilateral cooperation, even if not enough, have nevertheless been crucial in reacting to the health emergency and the challenges of the vaccination process.
The same international and multilateral cooperation has also been crucial in preserving global financial stability and in addressing the most acute needs of the most affected countries, which are very often those with less room to implement countercyclical policies.
The multipronged policy response to the pandemic we have been experiencing – involving domestic, regional and global layers – has been unique and distinct, but it must also be a lesson and a key takeaway for the future.
Not just for future pandemics, but also for other key challenges, such as reacting to climate change.
We have come a long way, and the woods may be getting thinner, but we are still inside them.
Apart from the needed improvements in both the health and economic fronts, the challenge for central banks, as for other entities, will be to sustain supportive policies as long as they remain required, while testing and refining our exit strategies.
That is becoming more and more of the essence.
Session 2: Policy mix and mobilizing capital for a greener economy 1
I would like to start by saluting my colleagues from the Panel
I would also like to extend special greetings to Sylvie Goulard.
I believe we would all have enjoyed to attend this event in person, not just because of being in Marseille, but also because that would have allowed Sylvie Goulard to be twice our host today, given the fact that Sylvie is a native Marseillaise.
It is a great pleasure to participate in this panel, which will focus on certain parts of the climate and environmental agenda, while also taking place at a moment when we are less than a couple of weeks away from COP-26, from which we all expect great outcomes.
One of the topics to focus today is necessarily on what central banks and financial supervisors, in their role as public authorities acting according to their mandates, can do about the climate and environmental agenda I´ve just mentioned.
Another topic is the key role that the financial system is bound to play in raising the trillions of private capital that will be required over the next decades, certainly alongside with public funding, from Governments and from multilateral development banks. And certainly also against the background of an enabling framework that includes climate policy measures of various kinds and shapes.
We must all bear in mind that without a forceful mainstreaming of sustainable finance into the global financial system, it will not be possible to aim for success in tackling what UN Secretary-General António Guterres labelled as “a code red for humanity”.
I’ve chosen not to prepare slides and to share some telegraphic views around three points.
Let me start by the first point which I would like to call “greening the recovery".
I believe we all agree that we would have rather lived without the pandemic than having had to face it. But since we haven’t succeeded in avoiding it, the second worst thing we could do, would be not to extract all the potential the pandemic has revealed, particularly on how we can reinvent the way we operate as individuals, as companies, as public organizations, or as a society.
This means we must indeed seize the opportunity that the recovery from the pandemic surely represents, something we all hope will be on the horizon, as the previous session reminded us.
And the calls to make this recovery a green recovery became increasingly louder since mid-last year.
Which is something in itself remarkable, as it signals the relevance which is attributed to green issues – and most of all to climate change – even when those issues face an overwhelming attention-grabber such as Covid-19.
Very few global challenges were able to remain under the spotlight during pandemic times, as the climate emergency did.
To ensure the recovery is green, not just on the surface, but also deep inside, it is never too much to say that it will be critical, for public authorities -- including central banks – to engage with the financial sector, raising its awareness to the criticality of climate change.
This is something we have been trying to do at Banco de Portugal, both through participating in joint, wider platforms at the national level as well as through our own outreach initiatives to disseminate information and knowledge.
In order to promote the “greening of the recovery” and in addition to what I’ve said, it will also be critical to provide the financial sector with an enabling environment that will create further incentives to channel resources into green finance – or, on a broader note, into sustainable finance, which includes blue finance, transition finance and social finance.
In Europe, this is happening largely through the gradual reshaping of the European landscape for sustainable finance, with ongoing stepping-stones such as the EU Taxonomy, the European Green Bond Standard or the proposal for a Corporate Sustainability Reporting Directive. Not forgetting the critical allocation to green and sustainable goals of rising shares in financial packages such as the Next Generation EU or the EIB budget.
My second point, is inevitable for someone who is at a central bank, and it is basically to recall how central banks can do their bid in the climate crisis. This might look a little bit redundant at this point, particularly for the audience that is with us today, but we should keep in mind that there is still a long road ahead, until topics such as climate change are fully integrated into a central bank’s DNA.
I will address this second point by briefly focusing on a couple of takeaways, based on the experience we’ve had so far at Banco de Portugal, in dealing with sustainability and climate change issues.
This experience has intensified during the past three and a half years and certainly cannot be fully summarised in those two takeaways.
But these two are the ones I thought to be potentially more interesting to single out for today’s audience.
I believe central banks in General (and it was also the case of Banco de Portugal) are impacted by climate change across the full spectrum of our responsibilities and activities. This means that the impact can be felt not only in the core areas of monetary policy and financial stability – including in the context of our participation in the euro area – but it can also be felt in our own funds management, risk management, statistics and many more.
So, my first takeaway is that it is useful for an institution, such as a central bank, to approach those different dimensions in an integrated way. This can be achieved by setting up platforms for internal coordination, in order to promote a consistent and articulated action, but without compromising the autonomy of each internal area.
Banco de Portugal adopted this approach at a very early stage, and it proved to be a very important decision. It sharpened our strategic vision and allowed us to move faster, and in a more effective way, along the learning curve.
My second takeaway is to emphasise what can be an important lever for a central bank to contribute towards the debate and subsequent action on climate issues.
Our remit at Banco de Portugal includes providing advice to the Government on economic and financial issues, which includes also sustainable finance.
In that capacity, we have had the opportunity to provide multiple inputs, which not only shaped domestic initiatives, but also translated into relevant contributions to Portuguese positions on European and other international Fora.
Moving on to my third and final point, I will turn to one thing we should try to avoid, as it runs the risk of becoming the lost child of the green debate.
Climate change is indeed an inescapable priority.
However, it is not the only game in town – or, to be less provocative, other environmental emergencies are also increasingly looming.
Some of them have ties to climate change, but they can also be critical on their own.
One of such cases is biodiversity loss.
It was considered the fourth biggest global risk in the 2020 Survey of the World Economic Forum and its rising profile results from the intensification of several damaging factors.
Biodiversity loss not only contributes to climate change, but it also affects the ecosystem’s ability to provide a number of key services – and they are key also from a narrowly economic perspective.
If we take pollination as an example (and I am aware it is very unusual for central banks to talk about pollination) it is one of those key services that are increasingly compromised and for which there is no appropriate artificial proxy.
The estimated economic value of pollination is between 5% and 8% of global agricultural crops’ market value.
It is not difficult to figure out the damage that could be caused if this service were to be discontinued.
If we multiply this example, by many other examples, we can easily conclude that the economic and financial analysis applied to assess the impact of biodiversity degradation has many similarities with the economic and financial analysis applied to assess the impact of climate change. And the link to financial stability is consequently also very clear, unless we pretend not to see it.
To conclude, let me just mention briefly the upcoming event that will possibly shape the climate debate for a long time.
I’m referring to COP-26, which has set high ambitions and will probably be the most significant milestone on climate and green issues since the Paris Agreement of 2015
At Banco de Portugal, we are strongly committed to do our share in this global effort, and as part of that, we will be issuing a pledge on the COP’s Finance Day – the 3rd of November. With that pledge we reiterate our commitment to climate action and to take it to the next level.
The “Yes we can” motto might have fallen out of fashion but it sounds very adequate when applied to the climate challenge.
Nevertheless, and to finish, I can’t resist saying that we should be very careful if we try to verbally translate this moto in French, because it makes a big difference if instead of saying “Oui on peut” we say “Oui, un peu”.