Finanssektorns roll för hållbar utveckling

Erik Thedéen: Panel Discussion on the report from HLEG – High Level Expert Group on Sustainable Finance, at Alecta, 30 August 2017

What have we done so far?

We have been working actively with these issues since the end of 2015 when we received the special remit from the Government. So far, we have focused primarily on climate issues. We conducted surveys to gain an understanding for the concrete issues facing financial firms, and we also developed a policy framework that outlines how to deal with these issues from a supervisory point of view. We also communicated our findings in several reports that were published last year. They are all available on our home page.

This year, we are in the process of integrating climate issues into our supervisory processes and investigations. For example, in our consumer protection report that was published in May, we described an investigation we conducted into the way fund managers are marketing funds as "sustainable" , "green", etc., and informing their customers about the meaning of these labels in order to limit the risks of so called "greenwash". We have also initiated discussions with firms about, for example, the use of scenario analysis to gain an understanding for the challenges facing the industry. We have also highlighted the work of the G-20 Bloomberg Group. We will hold a seminar on this initiative together with the SNS in the next few weeks.

So what we are working on at FI can be summarised into three points:
- the promotion of industry initiatives
- the promotion of increased transparency surrounding climate risks at financial firms,
- the integration of climate-related risks in our regular supervisory work, to be gradually extended to other aspects of sustainability

The supervisory perspective

The "HLEG"- report discusses the so called "double compression", i.e. the issue of "short-termism", and issues related to a risk perspective that is too limited in scope to capture all relevant risks. These are, in fact, typical problems for financial markets and firms and the fundamental reason for the existence of financial regulation and supervision. In this respect, the issues of sustainability and financial stability are quite similar – in both cases, it is important to promote a longer-term perspective and a broader concept of risk to align financial business with societal aims. Or, to use textbook vocabulary: it is important to internalize externalities. So, the sustainability issues represents a natural extension of our thinking and our work. We don't have to change our role or fundamental concepts.

Increasing the requirements on disclosure can improve the functioning of the markets. Appropriate disclosure is fundamental for observing, pricing and reducing the risks - and also for capturing the possibilities - related to sustainability. I think the G-20/Bloomberg report on climate-related financial disclosure represents an important achievement in this respect, which is also reflected and acknowledged in the "HLEG"- report we're discussing here today. And, as I mentioned, we will arrange a seminar on the Bloomberg report in a few weeks' time.

In our view, there is no meaningful "trade off" between financial stability and the promotion of sustainability. If anything, financial stability becomes even more important if the financial system is to play a constructive role in channelling the financial resources needed to adapt to a low-carbon economy. Financial stability requires that financial firms take into account all relevant risks, which includes the risks stemming from factors such as climate change.

Monitoring the way financial firms work with sustainability risks and the way they inform consumers and investors about this work, is also a natural part of our work as supervisors. In my view, it's important to counteract the risks of "greenwash", which means using sustainability simply as a marketing device with no real substance. Here again, transparency and comparability are key. As I mentioned, we have conducted several investigations into a number of retail funds, and we are maintaining discussions with the industry about this topic. We have noted a growing awareness within the industry, with initiatives on disclosure and information, which is very promising, but we will also be able to issue regulations in this area, if necessary.

Financial regulation as a complement

We must realise that, even if financial regulation and supervision play important roles, they can't be the main vehicle for tackling climate change or sustainability at large. When it comes to climate issues, there must be a general climate policy in place, for example an appropriate tax on carbon emissions, that encourages appropriate incentives throughout the economic system. Financial regulation is an excellent complement, but it cannot be used as an alternative to or substitute for carbon taxation.

If an analysis of the lending from a bank shows considerable risk exposures related to e.g. climate change, this should naturally have implications on our risk assessments and requirements on capital. However, I think that prudential regulation as such should not be adjusted to target non-prudential goals, e.g. in terms of lowering the risk-weight on "green" lending, which has been proposed in some quarters. Neither is it efficient to raise capital requirements on carbon-intensive sectors. In addition to introducing problems related to definitions and measurement, this would create ambiguity and a lack of transparency in the supervisory process. More importantly, it also risks undermining the ability of the capital requirements to meet their main objective - ensuring that firms are robust and reliable. The general rule that a single instrument should not be used to achieve more than one objective applies here as well.

Such a policy will not be efficient in terms of sustainability, either. To take an example: if your ambition is to reduce the consumption of sugar, you could tax candy, soft drinks, etc. This will probably be effective. However, if you instead choose to raise the requirement on the capital banks lend to industries producing candy, the effect, if any, is likely to be very small.

In the "HLEG"-report, the question is raised if the Solvency 2 -regulation discourages sustainable investments. I doubt that it will; it will require more ambitious risk assessments, but this doesn't necessarily mean that sustainable investments will be discouraged. Instead, the opposite effect may very well be realised, provided, of course, that the risk assessments include long-term aspects. Moreover, there are no quantitative limitations on specific assets like there were before. After all, it should be in the interest of the policyholders – to whom the regulation is targeted – to invest in truly sustainable assets.

Managing long-term risks requires flexibility

Finally, sustainability risks and, in particular, risks related to climate change, are typically long-term and linked to structural changes in the economy. This means that new information and new insights will evolve over time and new technologies to handle them will be developed. We will probably be faced with many surprises along the way, both good and bad. Therefore, we must be flexible and prepared to change our policies, measures and actions when necessary. We must embrace an open and humble attitude to make real – and sustainable! – progress.