Policy Shift Weekly News: our selection of recent analysis on sustainable finance and climate change


Every week, Policy Shift will share a selection of recent articles and publications focused on public policy and innovation. This week's theme deals with proposals and evolutions in the sustainable finance field and in climate change economic policy - notably in light of the Covid-19 crisis.


On Sustainable Finance


An article (in English) about climate-related risks, the Covid-19 pandemic and risk pricing


By Luiz Awazu Pereira da Silva, Deputy General Manager of the Bank for International Settlements, this article builds on the discrepancy between how the scientific community worries about climate-related risks – including the Covid-19 pandemic – and how risk managers in the financial community and economists currently integrate them into costs and prices. The author insists on the rise of “green swans” (i.e. or “climate black swans”, that present many features of typical black swans, a concept developed by N.N Taleb in 2007) These “green swans” are characterized by deep uncertainty and nonlinearity, with chances of occurrence not reflected in past data, and the impossibility to rule out extreme values. In addition, they can cause significant damage to societies and their economies - both on the real and financial sectors, with risks of spillovers and spillbacks across countries. As such, they entail large negative externalities at global level. Because of this, Pereira da Silva insists on the need for coordinated global action that takes into account the need to increase the resilience of our global commons :


(i) In order to foster change in methodologies and mindsets to cope with this type of global risk (i.e. more effort into researching and better understanding of climate risks, given that these are non-linear phenomena, exponential and complex transmission mechanisms, and into finding the most appropriate way to internalize these risks in prices and additional costs);

(ii) Coordinating between and within governments (e.g. adapting their policy mix, integrating sustainability investment criteria into their portfolios); with multilateral development banks, with regulators and the financial sector, with standard setters (e.g. to set up ecological accounting frameworks, for instance).


The article also further discusses the need for coordination between global agencies that survey macro-financial stability and agencies that monitor other public health vulnerabilities, while specifying to what extent the destruction of our natural habitat is a factor in pandemics.


It concludes that understand the current Covid-19 pandemic as a “green swan,” requires us to rethink the trade-offs between the efficiency and the resilience of our socio-economic systems – due to the significant negative redistributive impacts of climate-related risks and pandemics – by revisiting ideas such as the “geography of globalization”.


Typologie of "swans" (by the Author)


A policy brief (in English) about the consideration of environmental objectives by Eurozone monetary policy


By the University of Glasgow’s School of Law, this policy brief takes part in the debate opposing the German constitutional court and the European Central Bank (ECB) since the beginning of May – as German judges have given the ECB three months to justify bond purchases under its flagship stimulus program or risk losing the Bundesbank as a participant. The brief underlines that Article 11 of the Treaty on the Functioning of the European Union (“Environmental protection requirements must be integrated into the definition and implementation of the Union's policies and activities, in particular with a view to promoting sustainable development”), as a cross-sectional clause applying to all EU policies, requires that environmental protection objectives be integrated into all EU policies (Solana, 2019), including the Eurosystem when designing and implementing monetary policy. According to the authors, Article 11 should therefore make evident the integration of environmental protection objectives in the ECB’s decision-making process - beyond its current purchases of green bonds held in its CSPP portfolio (i.e. Corporate Sector Purchase Program) and even though, in the end, it has to prioritize price stability. Taking climate change into consideration, especially given the CSPP’s climate impact (i.e. Matikainen and al. 2017, Jourdan & Kalinowki, 2019 – explained here), would be a twofold process: first, integrating an environmental impact assessment into the design of future monetary policy programs (especially given climate-related financial risks); and second, integrating an environmental “watch group” established within the ECB to advice the Governing Council in order to demonstrate an active engagement under Article 11.


A supervisory guide (in English) about risk management and disclosure with regard to climate-related and environmental risks by significant EU banks


By the European Central Bank (ECB), this guide aims to outline the ECB’s understanding of the prudent management of climate-related and environmental risks under the current EU’s prudential framework (i.e. for instance, Article 73 of the Capital Requirements Directive (CRD) requiring institutions to have in place sound and effective strategies and processes to maintain the distribution of internal capital considered as adequate to cover their risk exposure; and Article 74 CRD requiring robust governance arrangements). In addition, physical and transition risks affecting the EU’s economy are already identified as a key risk driver for the Single Supervisory Mechanism (SSM Risk Map for 2020 available here). This supervisory guide applies to significant banking institutions supervised at the EU level. Although it does not supersede national law, it is supposed to be applied by the end of 2020.

The aim of the guide is to detail all of the ECB's expectations of banking institutions and competent national authorities with regards to the management of climate and environmental risks. These expectations cover banking institutions, in particular, due to the strong understanding of the impact of such risks on the business environment in order to make informed strategic and business decisions. This would allow them to integrate all material risks into the business strategy and risk management framework, while assigning responsibility for the management of such risks within the organizational structure. In their credit risk management, institutions should consider these risks at all stages of the credit-granting process and to monitor them in their portfolios. In their day-to-day monitoring, institutions should take into account the effect of such risks on their current market risk positions and future investments and to develop stress-testing scenarios that incorporate these risks.


A decryption report (in French and in English) about the European Action Plan on Sustainable Finance and associated regulatory advances


By Finance for Tomorrow, this report aims to illustrate to what extent sustainable finance has reached a central status in European policy agenda by presenting a detailed overview of the regulatory advances of the European Commission’s Action Plan for Sustainable Finance. With the momentum now carried by the Green Deal, the Paris financial center underlines that the transition toward a more sustainable and resilient economy must be a cornerstone of Europe’s economic recovery post-Covid 19. This objective should be based on the work undertaken by the most mobilized institutions, in France and in Europe, as it is fundamental to provide political and regulatory tools to financial actors.


A policy paper (in English) about climate change adaptation and efforts designed to cope with natural disasters while protecting worldwide supply chains and building investor confidence


By Janine White (Wharton School of the University of Pennsylvania), this article starts out by reminding the reader about the “stranded assets” risks (i.e. assets that are now generally accepted as no longer able to earn an economic return at some point prior to the end of their economic life due to changes associated with the transition to a low-carbon economy or directly as a result of the physical consequences of climate change) and to what extent recent business and financial actors have shown growing awareness to climate change. Since two biases – myopia and optimism – are likely to alter business decisions in favor of climate change mitigation, the article points out the role of time horizons in considering non-linear risks such as climate change (i.e. thinking medium and long term) and scenario planning and analysis (in line with the Task Force on Climate-Related Financial Disclosures recommendations). Such change in thinking toward business strategy will help companies prepare for broader climate change adaptation. Passing mandatory corporate and financial disclosure is also seen as an effective step, given that “if one business voluntarily [nb: at international level, such disclosures are deemed voluntary but they are mandatory in France and will soon be in the EU] gives a full accounting of stranded assets while its main competitor remains mum, there’s no way to make a fair comparison of balance sheets”. That is why the Wharton University’s Risk Management and Decision Processes Center produced a set of 30 ideas to cope with climate change risk, available here.


On Climate Economic Policy and the Covid-19 Crisis


A scientific article (in English) about the temporary reduction in daily global CO2 emissions during the Covid-19 forced confinement


By Corrine Le Quéré and al., this article has compiled government policies taken during the confinement period (showing a decrease in energy (coal, oil, gas) demand) and activity data in order to estimate the decrease in CO2 during forced confinements around the world. Daily global CO2 emissions have therefore decreased by -17% as of early April 2020 compared with the mean 2019 levels, with about half resulting from changes in surface transport. While the impact on 2020 annual emissions depends on the duration of the confinement, it is estimated to be around -4% (-2 to -7%) if prepandemic conditions return by June 2020 – and more if some restrictions remain worldwide until the end of 2020. It underlines that government actions and economic incentives post-crisis will likely influence the global CO2 emissions path for decades. This article echoes the IEA report (available here), which shows that such declines in global emissions would be the largest ever, six times larger than the previous record reduction in 2009 caused by the global financial crisis.

Policy Shift has read three dazzling articles by IPBES (Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services), Dennis Meadows and Johan Rockström, on the urgent need to fully take into consideration planetary boundaries and climate change-related imperatives into the post-Covid 19 crisis recovery framework


An opinion article (in English) about limits to growth and the Covid-19 epidemic


By Dennis Meadows, author of the 1972 report “Limits to Growth”, this article aims to draw the link between the current epidemic and climate change – though it points out that a model of long-term continuous change cannot predict, nor be corroborated by a short-term discrete event. Dennis Meadows underlines that while the current economic system and growth in population has stressed natural ecosystems and lowered their capacity to self-regulate, the rise of efficiency in resource use (i.e. production of ever greater output from ever diminishing inputs forcing humans to become more efficient) has lowered humanity’s resilience. Dennis Meadows’ conclusion is the following: “Slowing growth in population and in consumption of materials and energy will not eliminate the problem. But it would reduce the pressure to increase efficiency and leave more possibility for increasing resilience”.


An opinion article (in English) about Covid-19 stimulus measures and the necessity to safeguard nature to reduce the risk of future pandemics


By IPBES members, this article underlines the role of human activity in the emergence of the Covid-19 pandemic (“Pandemics, are caused by activities that bring increasing numbers of people into direct contact and often conflict with the animals that carry these pathogens”). These activities are linked to deforestation, uncontrolled expansion of agriculture, infrastructure development and the exploitation of wild species.


Because future pandemics are likely to happen more frequently and spread more rapidly, and in line with its Global Assessment Report published in 2019, the IPBES underlines that three important considerations should be central to the economic stimulus plans already being implemented:


(i) Ensuring the strengthening and enforcement of environmental regulations;

(ii) Adopting a “One Health” approach at all levels of decision-making (i.e. recognition of the interconnections between the health of people, animals, plants and their shared environment);

(iii) A properly funded health system.


An opinion article (in English) about the need to respect planetary boundaries and the resilience imperative


By Johan Rockström and Ottmar Edenhofer, this article underlines that the 21st century will likely be characterized by “speed, scale, connectivity and surprise” with climate change, mass extinctions and global pandemics. This is why today’s stimulus plans must, according to these ecological economists (who developed the “planetary boundaries” framework explained here by Policy Shift), promote long term economic resilience through effective governance of the global commons. According to the article, three reforms are essential :


(i) A green recovery plan - with an increase in carbon prices so as not to lock in a high-carbon economy; long term maturity bonds; and design of supply chains based on geographical diversification;

(ii) Generating human prosperity within planetary boundaries, by adopting science-based targets (beyond avoiding global warming);

(iii) Strengthen the governance of humanity’s global commons, by increasing the capacity of institutions such as the World Health Organization and the UN Environment Program.

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