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Intervenção do Administrador Luís Laginha de Sousa no "ESCB: Towards a Green and Digital Future? - 2nd Webinar organized for SCECBU’s Trade Union Members": "Central Banks and Environmental Sustainability" (apenas em inglês)

I would like to start by sending a very special thank you note to Mr Desanois and to Elizabeth Barreiros for organising this Webinar and for inviting me to be here with you all. 

It is a great pleasure to address such a distinct audience of ESCB staff representatives.

I was asked to focus my intervention on the topic of environmental sustainability, particularly on the challenges it raises for central banks; how it affects their mission; what policies and actions may be undertaken; and last but not least, what all this means for the ESCB staff. 

So this is what I will try to do in the next 35 minutes or so, hoping that at the end we will still have enough time for some questions. 

Before jumping into today’s agenda, I would like to share, for very brief moments, these two statements, one from UN Secretary General, António Guterres, the other, from the ECB President, Christine Lagarde. These two statements set the stage for what is lying ahead of us.

“… If we combine forces now, we can avert a climate catastrophe. (…) there is no time for delay and no room for excuses.” , A. Guterres, UN Secretary General, Statement on the IPCC Report, 9 August 2021 
It is governments, not central banks, who are primarily responsible for facilitating an orderly transition, and who control the main required tools. Nonetheless there are several areas where central banks can and will contribute.”, C. Lagarde, ECB President, 11 July 2021

Moving onto today’s agenda, I’ve assumed that the audience has a diversity of backgrounds and knowledge about the topic and so I’ve tried to favour the breadth and not the depth of the topic. To do so, I have organised my presentation into two parts. 

In the first part, I will focus more on the economics of environmental sustainability. 

I am sure that most of you have come across the expression “everything is economics”. This does not mean that “economics” is all that matters, nor that it matters more than other concerns of society and individuals; it simply mirrors the fact that there tends to be an economic rationale behind every decision made by both individuals and organisations. 

Be it a more simple decision or a more complex one, there is always an economic rationale behind it, even if doesn’t look that way. I will try to show that this matters a lot for today’s subject.

In the second part of the presentation, I will discuss how environmental concerns affect the mandate of central banks and what role our institutions should play in the transition to a greener economy.

Throughout the presentation, you will mostly hear me talk about climate change, which has become a serious concern for central banks in the past few years. However, other phenomena – such as biodiversity loss in particular - are also increasingly on our radar. And this means that what I will say about climate change largely applies to biodiversity loss or, even more generally, to environmental degradation.



Let me start by commenting briefly on the economics of environmental sustainability.

As with humans, when they have a health problem and visit a doctor, a fundamental aspect for the doctor to prescribe the right medicine is to understand the cause of the disease.

We could say that the same rule applies when we refer to environmental sustainability.

It is now beyond dispute that environmental sustainability is under severe threat due to the fact that global warming and biodiversity loss are evolving at an alarming pace. Another element that is also beyond dispute and considered an established scientific fact is that climate change is caused by human activity and is a major cause of biodiversity degradation.

A significant part of the energy the world still uses today comes from fossil fuels - such as oil, coal or natural gas – which release the so-called greenhouse gases (GHG), mostly CO2. These GHG have nowhere to go other than to accumulate in the atmosphere. As the accumulation increases, the Earth’s surface and the oceans warm up, in turn affecting temperature, rain patterns, sea levels and the frequency and severity of storms, wildfires and other natural phenomena. 

The IPCC, the UN Intergovernmental Panel on Climate Change, published a report in early August. which included very important and alarming calculations. Just to indicate a few examples:

  • The average temperature this century has been 1ºC higher than in the period 1850-1900; 
  • Each of the last four decades has been successively warmer than any decade that preceded it since 1850; 
  • If we keep emissions at the current level, we will reach an estimated increase of 1.5º C by 2040, and an estimated increase of 2.7º C by the end of the century. 

Higher temperatures bring more frequent and more severe natural disasters. Such disasters cause fatalities, destroy wealth and also affect the health and livelihoods of entire populations. Floods, heatwaves and wildfires in Europe this summer were only the latest and closest reminder of where we are heading. 

The World Health Organization estimates that 24% of deaths around the world can be traced to avoidable environmental factors. The WHO also claims that, between 2030 and 2050, climate change is expected to cause approximately 250 thousand additional deaths per year, from malnutrition, malaria, diarrhoea and heat stress. These estimates show that we cannot neglect climate change.

Moving now onto the economics of the problem, in other words, how can we apply economic theory to such a huge problem in order not only to better understand it, but also to try to correct it?

In fact, from an economic perspective, the problem is very straightforward. What happens, put in a very simple way, has two major components.

One component is that those who are responsible for GHG emissions – the individual producers and consumers of carbon-intensive goods and services - are not paying enough or aren’t paying at all, for the “right” to produce those emissions. 

The other component is that those that are “hurt” by the emissions - local populations or society as a whole - are not being compensated for the negative effects they have to face without contributing to them. 

What we have is therefore a situation where the private cost of producing a vast number of goods and services is substantially lower than the social cost of producing those goods and services. This means that the economy produces far more carbon-intensive goods and services than what would be socially desirable. 

This is what economists call “an externality” and, in the words of Professor Nicholas Stern, it is considered “the greatest market failure the world has seen”. There are few things economists are certain about, but one such things that when we are in the presence of “externalities”, then free markets do not yield efficient outcomes and corrective policies become necessary. 

So now that we have identified the root cause of the problem, we are better prepared to apply the right medicine, which in this case, has to come in the form of public intervention.

We know that we need a very wide and deep economic transformation in order to achieve carbon neutrality. This transformation cannot be implemented without affecting all economic sectors from power generation to transport, manufacturing, construction and food production.

For this transformation to occur, we need to ensure that there is an alignment between the private and the social cost of production of goods and services. This alignment can be achieved through policies such as environmental regulation, carbon taxes, emission permits or even subsidies for cleaner energy.

Such policies, if correctly defined, will lead to increases in the costs faced by the producers of carbon-intensive goods and services, and can reduce the cost of producing more environmentally friendly goods. As the relative price of carbon-intensive goods increases, the demand for such goods declines and production shrinks, leading to falling emissions. At the same time, firms have an incentive to adopt environmentally friendly technologies and production processes, and investors also have an incentive to finance green projects. 

There are many macroeconomic and financial policy instruments that can and should be put in place as part of the policy effort towards mitigation and adaptation to climate change. By mitigation I mean GHG emission reduction and by adaptation I mean increased resilience to climate change. 

Among the instruments, carbon pricing (either carbon taxes or emission permits) is considered to be the most effective tool. Other fiscal policy instruments such as public investment in green infrastructure, subsidies to R&D and green energy and environmental regulations can also play an important role in the transition. Financial policies also have a key complementary role, but I will address those in more detail in the second part of the presentation.

The political economy dimension is also an unavoidable component to take into consideration. Different countries, regions and social groups will be hit very differently by the policies implemented to address climate change challenges. Those who are likely to lose will resist change and fight for fair burden sharing.

The outcome of this tension, which is already taking place and is likely to intensify, depends on how well we deal with two major types of friction:

  • The first type is an “information asymmetry” – we should not forget that once policies are adopted, they are universally applied; however, when such policies are being defined, they are not designed by abstract entities, but rather by concrete self-interested individuals and institutions; 
  • The second type of friction is a “time asymmetry” between those who benefitted from the “climate externality” and those who will no longer be able to, and therefore claim they should be entitled to compensation.

Thus, if policies are not carefully balanced, they might look perfect, but they will fail to deliver what they are meant to achieve, which overall, will be negative for society as a whole.

The combination of the overwhelming evidence on the perils of climate change and the need for public intervention has translated into very important commitments.

The signing of the Paris Agreement in 2015 is clearly one milestone in this process. The 196 signatories of the Agreement pledged to keep the rise in average global temperatures well below 2ºC above pre-industrial levels, and preferably limit the increase to no more than 1.5ºC. In order to get there, they committed to reaching net zero-emissions before the end of this century – meaning gross emissions minus the so-called carbon capture being zero. They also committed to making financial flows consistent with low GHG emissions.

Meanwhile, the European Union has adopted the European Green Deal, and made climate goals a legal obligation. The European Climate Law, approved this summer, establishes that net emissions should be cut by at least 55% by 2030, and that net-zero is to be achieved in 2050. To achieve the EU climate goals, the European Commission has pledged to mobilize at least €1 trillion in sustainable investments over the next decade.

However, in spite of ambitious commitments by most countries around the globe since 2015, not enough has been done to curb emissions of GHG and to reverse the increase in temperature.

It is clear from what I have said before that climate change must be tackled, first and foremost, by the political authorities

They have the control of the most cost-effective instruments to pursue the mitigation and adaptation policies that we need to fight climate change; and only political authorities have the legitimacy to deal with the redistributive effects that inevitably result from the transition from a carbon intensive economy to a more sustainable one.

Christine Lagarde made this point very clearly in a recent speech, when she stressed, “It is governments, not central banks, who are primarily responsible for facilitating an orderly transition, and who control the main required tools.”  

But Madame Lagarde also said “Nonetheless, there are several areas where central banks can and will contribute.” 

I would add that central banks not only “can contribute”, but they also have an obligation to do so in pursuit of their mandate. 

This obligation is very much recognised by the central banking community around the world. One example of such recognition was seen in the creation of the NGFS – the Central Banks and Supervisors’ Network for Greening the Financial System. The NGFS – and its more than 90 members - have been doing amazing work, particularly in terms of sharing best practices and contributing to enhancing climate risk management in the financial sector and also to mobilising finance to support the transition towards a sustainable economy.

This leads me to the second part of my presentation on the implications of environmental degradation, and most notably climate change, for central banks and supervisors.



We can say that climate change has entered central banks neither by the window nor the back door discretely. In fact, it entered central banks by the front door and in a way that was anything but unnoticed.

The reason for such a conspicuous appearance has to do with the fact that the (direct) link between climate change and two of the most common mandates attributed to Central Banks, which are financial stability and price stability, became uncontested.

In terms of financial stability, it became very clear that climate change is an important source of systemic risk for the financial sector. That link in particular is related to two types of risks: 

  • The so-called “physical risks”, which are risks from more frequent and intense natural disasters or the destruction of natural capital; 
  • And “transition risks” that emerge from changes in regulation, taxes, technology or consumer preferences as we move towards a decarbonised economy. 

These physical and transition risks can have a significant impact on the valuation of a wide range of assets. Since assets are funded, insured or accepted as collateral by financial institutions, they can significantly affect the balance sheets of those financial institutions. 

Also, as I pointed out before, greening the economy implies a huge structural transformation. This transformation will require massive financing, with a significant impact on macroeconomic conditions.

So, it goes without saying, that our core missions of price stability and financial stability are significantly impacted by climate change.

Bearing all this background in mind, it is now clear to Central Banks that there is no real option other to than integrate climate change into their respective “modi operandi”.

We are the guardians of financial stability in the euro area.

This means that we share a common responsibility to promote the resilience of the euro area financial sector throughout the transition process, which has already been set in motion by climate policies.

So the question is what must we, central banks, do? 

In terms of financial stability, one imperative is that we develop methodologies and supervisory approaches to measure and mitigate climate related risks to the financial system. 

To do so, 

  • We first need to deepen our understanding of how climate-related risks may threaten financial stability, what are the links, what are the interconnections, what are the triggers that might lead the risk to materialise? 
  • We also need to adapt our risk-based prudential framework in a way that encourages financial institutions to adequately manage and price environmental risks.

Let me now turn to monetary policy, which is the other core function of the Eurosystem. 

Here too, we have actions to undertake. 

A key action or group of actions is to deepen our understanding of how climate change is likely to affect our ability to deliver our primary objective of price stability in the euro area. In particular:

  • We need to adapt our models and methodologies and, if necessary, create new instruments. Current models and instruments that used to support decisions taken to preserve price stability might not be adequate since climate change and the transition to a sustainable economy affect the outlook for price stability through its impact on macroeconomic indicators (such as inflation, output, employment, interest rates, investment and productivity);
  • We also have to assess and manage the climate-related financial risks that affect our counterparty and collateral frameworks and our monetary policy portfolios (i.e. the portfolios from our asset purchase programmes that we keep in our balance sheet. We have to keep in mind that in some countries, central banks’ balance sheets can be almost the size of their respective annual GDPs). 
  • We then have to make any necessary adaptations to our monetary policy framework. An action plan to include climate change considerations in monetary policy strategy was announced in early July. This action plan is a comprehensive one, covering research and macroeconomic modelling, statistics, disclosures and climate risk assessment. 

Despite affecting the two core central bank mandates being already more than plenty to deal with, the truth is, climate change impact is not confined to those two components.

Climate change affects the full spectrum of central banks’ responsibilities and operations: from reserve management to statistics; from banknotes to payment systems; from internal services to ICT; from HR to communications; there is hardly a single central bank function that is not impacted.

Although I do not have time to address how each operational function may be affected, I will just briefly mention two of them: 1) reserve management and 2) banknote production and circulation.

Let me start with reserve management

As you well know, the Eurosystem central banks manage large non-monetary policy portfolios, which makes them relevant market players.

This has two important implications:

  • First, is what we can define as “leading by example” – If the central banks in the Eurosystem start for instance targeting an increase in the share of green securities in their own funds’ portfolios and pension funds, this will be a very powerful example. And it will be even more powerful if they do it in a coordinated manner.
  • The second is the contribution that the Eurosystem can provide to ensuring progress is made in common standards, in data availability and also in harmonised climate-related reporting.

This last aspect I’ve mentioned is crucial for the markets to adequately assess, manage and price climate risk as well as to prevent so-called greenwashing (i.e., to prevent companies or asset managers from providing misleading information on their product’s environmental credentials). 

Another operational area where environmental considerations play a key role in central banks is that of banknote production and circulation. And this is an example which is especially relevant for the Banco de Portugal as we also have a factory to produce banknotes, not only for Portugal but for other European central banks as well.

Keeping euro banknotes safe and sustainable is one of the pillars of the Euro Cash Strategy 2030. The Eurosystem follows international standards and best practice to ensure that euro banknotes have as little impact on the environment as possible and to protect the people who use banknotes as well as workers involved in their production. 

In short, our aim must be and is to incorporate climate considerations into our routine across all business and support areas

This is precisely the purpose of the recently set-up ECB Climate Change Centre. This unit reports directly to ECB President, Christine Lagarde, and was set up to oversee the ECB’s work on climate change and sustainable finance, and building on the expertise of different teams across the bank. The Centre will also act as a hub for fostering ESCB collaboration and coordination on environmental issues. Several NCBs have created similar structures, which can also be seen as a recognition that climate change poses a crosscutting challenge for central banks.

All I have said supports the view that even if central banks cannot – and should not – replace governments, they can – and should - complement, catalyse and amplify governments’ decarbonisation policies. We have to act within our mandate, and doing so, exploit its limits and flexibility, while avoiding mission creep.

Climate change, and environmental concerns more broadly, need to become a permanent feature of our organisational mindset; they need to be embedded in our central banking culture. And all this can only be achieved if central bank staff incorporate these environmental concerns into the social dialogue when discussing internal policies. 

It is also critical that, as an institution pursuing an important public mission, we all lead by example in our day-to-day activities. This is a major challenge, as the impact of climate change is felt beyond the traditional horizons of monetary or financial stability policies. Our decision-making process is simply not well equipped to deal with this mismatch that the former Bank of England Governor, Mark Carney, described as “the Tragedy of the Horizon”.

Time is running fast, and since we should leave enough time for the discussion, let me conclude with some brief final points.


Final remarks

For these final remarks, I would like to recall again the words of the UN Secretary General, António Guterres, where he says that we are facing “an existential threat” and we have reached “a code red for humanity”. 

As the COVID-19 pandemic subsides and we move from “damage control mode” to “recovery and resilience mode”, we are lucky that a virtuous circle of investment-growth-environmental sustainability can be set in motion. 

Society seems to be aware that inaction or procrastination are no longer options, and that no institution or individual – none of us – can escape from the moral imperative to fight climate change and biodiversity loss.  

The big question, however, is whether, when confronted with the need to pay more for carbon-intensive goods and to change our consumption habits radically, we will be willing to bear the cost of the transition?

And let me stop here, with this open question, which combines hope and concern (hope because we know what needs to be done and concern, because we don’t whether it will be done). 

Thank you for your attention. 


ECB website

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