 More and more of us want to make informed decisions about where our money goes when it comes to climate change. We want to do things like avoiding buying from companies that harm the environment. But to do that, we need the right information. This is where climate disclosures come in. It's all about transparency and making sure companies and institutions are clear about what climate change means for them. Disclosures help us take climate-related issues into account in the decisions we make every day. Here at the ECB, we recently published a couple of important documents. First, as banking supervisor we published our third report on the progress that banks have been making in becoming more transparent when it comes to climate. And second, for the first time, we published details of the carbon footprint of our monetary policy operations. You're listening to the ECB podcast, bringing you insights into the world of economics and central banking. My name is Katie Ranger. I'm very happy to welcome Frank Eldison back to the podcast. Frank, you're here again wearing your two hats. So as an executive board member and supervisory board vice chair, and that's because we'll be covering both monetary policy and banking supervision aspects of the topic. It's great to have you back. Thank you, Katie. I'm very glad to be back. Now in our conversation today, Frank, I want to talk about quite a few different things about climate disclosures. I want us to talk about what they are and why we need them at all, why they're helpful. But I also want to talk about why they matter for us as a central bank and what we're doing to help ensure transparency around climate impact and exposure. Let's start then with the basics. What are climate disclosures? Sure. Well, climate disclosures, I would say our data, our details, is information that organizations such as companies, institutions, banks publish. Publish about mainly two things. The effect that these organizations have on climate change and also the other way around. So the effect that climate change has on them. And you know, disclosures, it's a fancy word, but it can take many forms. So you can think of a report or a simple webpage or any kind of public communication. Okay. The important thing is that it's disclosed to the public, essentially. Exactly. Okay. And what do we need them for? Why are they helpful? Well, basically to get better informed decisions and for risk management. So let me elaborate a little bit on that. So better climate information helps all of us. So when I say all of us, I mean you as a consumer, me as a central banker, an investor, a business owner, non-governmental organizations, anyone practically to make more informed decisions. So I was thinking of an example to make that a little bit more, you know, down to earth. Think for example, and I think most of our listeners will recognize this. Think of nutrition labels on food. So people use this to make a choice between healthy and less healthy food. Now climate disclosures are actually much the same. So they help us understand which are the greener options and which are the non-green options. And if we all take notice of that information that we get, then, and that is of course the whole thinking behind it, then more money will flow into activities and technologies that are better for the environment. That's one thing. The other thing is that disclosures also help us to spot risks and risks of doing business with certain companies or of course, you know, in our purview banks. So for example, again, an example, a company with high green greenhouse gas emissions might run into trouble if new climate policies force that company to change its business practices. This is what we call a transition risk. Exactly. So one day the last coal mine will close. One day, you know, and you and I will see that there will no be no more diesel cars on the streets of Frankfurt or fossil cars, you know, more generally, to just give you two examples. So if you own shares in a company or if you lend to a company as a bank that is affected by these transition risks, as we indeed call them, then you might lose a lot of money. And disclosures, and this is the key point here, disclosures help you spot that risk before so that you can take your message before it's too late. Okay, so disclosures are important for a lot of different people in that sense. It's quite interesting what you were saying about the nutrition labels because in the UK now they have to put calories on menus and there's a new discussion about putting the climate impact of certain foods and some restaurants have actually started doing it and there are studies that say it's really helpful for people to choose the less carbon, the option on the menu that has a lesser carbon impact. I would certainly be guided by that. I can tell you if I saw that in a restaurant. Now, when it comes to disclosing climate information, we hear a lot about something called greenwashing and what this basically means is that companies also including banks disclose misleading information that makes their activities look greener than they really are. And by doing that, they also make their products seem more environmentally friendly to customers, so more attractive and they are often accused of this in the media. So given the risk of this and also given the reality that we hear in the media that this does happen, what exactly can we do to make sure that disclosures actually work, that we can trust them essentially? Right. Well, greenwashing is indeed a concern and I would say specifically because of the impact that it has. So if information that is disclosed claims that practices or activities are more environmentally friendly or sustainable than they actually are, or if they misrepresent how firms are managing their climate-related risks, then this will mislead customers and the wider market. And it's not just by the way just representing also, and all of us have heard those, you know, daring and visionary statements like, we will be pairs aligned by a certain day. They are often made without the proper plans in place to make sure that this will actually then be delivered upon, that this will actually happen. So they just say it, they put this nice big statement out there, but there's nothing or not enough behind it. Exactly. So the ambition is excellent. And I would say, you know, but it's crucial that organizations just don't just make green sounds, but that they act green, that they deliver, that they are as green as they pretend to be. Now, disclosures about climate risks influence the decisions of millions of people in the economy. So this is a real issue as investors become increasingly interested as they do in green finance and place more importance on climate and environmental concerns. And as climate change becomes more intense and widespread, we just, you know, we cannot afford to delay that green transition any longer, can we? Okay. So it's really time is of the essence, but what can we do then to help tackle this problem of greenwashing? Sure. Well, I think there's a number of key things that could help combat this or to put it more positively that can contribute greatly to sound and relevant disclosures. So I think earlier I said that disclosures can take many forms, but in terms of the actual content, they should actually not be different. So consistency and a mandatory global reporting standard for climate related disclosures is actually key. And let me just give you some examples here. So the financial stability board task force on climate related financial disclosures, it's a mouthful. TCFD for those who have, you know, looked into this a little bit more, but it's the task force of the financial stability board and has issued recommendations about a consistent approach for companies and banks. And having this global baseline, if you like, for disclosures will ensure that information on the impact of climate change is comparable and is consistent and can therefore be reliably taken into account for investment landing and insurance decisions. That's the point, isn't it? If it's not consistent, then, you know, you might have investors in Europe and investors in the U.S. with different levels of information and, you know, an investor who's working in both jurisdictions will not be able to have a clear picture of all of the options open to them. Exactly. So this is why these recommendations by the TCFD are so important. But also on the European level, we see very important developments here. So we have this, what we call the Corporate Sustainability Reporting Directive which actually requires companies to issue annual sustainability reports. And the European Sustainability Reporting Standards outline how and what information companies, but also banks and insurance companies, then need to report. So this is more of a requirement part here. Right, so you have this directive, you have reporting standards, and then the European Banking Authority, so sorry for throwing all these different fora at you, but it shows how much is going on right now and why this is such a topical issue. So the European Banking Authority has recently published Binding Climate Risk Disclosure Standards for Banks. And this will make it easier to compare banks across Europe. And then I talked a little bit about Europe, and I mentioned the TCFD, but further on the global level, there is the International Sustainability Standards Board. And that board is working on similar standards that would then apply beyond Europe and help make disclosures more comparable across different countries. So standards determining which economic activities are sustainable, which are green, are crucial for reliable, meaningful, and comparable disclosures. And actually there's another concept that I want to throw at you. The EU taxonomy is also a very good example of it, as is the future European Green Bond Standard, which will determine when such a label, when a bond can be called a green bond according to this European Green Bond Standard. But to be as impactful as possible, these standards shouldn't be ideally, of course, in the end, global and mandatory. And they will help to improve the quality and the availability of data on climate-related risks, which will also be useful for other companies and banks to use in their disclosures. So banks build on the disclosures by the real economy firms that are their clients, so they need to disclose, and then the banks need to disclose, and then this whole system ideally should be global and mandatory. So in a nutshell, everyone needs to do it, but they all need to do it in the same way as well? Yes, and we can't just stand by and wait for all these standards being developed. In the meantime, we all need to work with the tools and the information that we have to improve and expand on our disclosures and to keep pushing forward the green transition. And in this sense, patchy data is a good start. So saying it's not ideal yet is not an excuse for inaction. Okay, Frank, I want to zoom in on one of the groups that you've just been mentioning a bit there in your answer, and that's banks. Now, we supervise Europe's banks to make sure that they are safe and sound, and that's exactly why we want them to be aware of the climate-related risks that they are exposed to, like giving out a lot of loans to companies in carbon-intensive sectors or located in areas at risk from the effects of climate change. But we also want them to be transparent about them to their customers and investors, and this will help them avoid financial, operational, and even reputational risks. So it goes back to that risk management that you were talking about earlier. Now, Frank, as I mentioned in the introduction, we've just published our third report on the progress that banks have made in becoming more transparent when it comes to climate. Now, this report looked at disclosures for a total of 131 banks, and it looked at some key areas, including their business model, their strategy, governance, and how they manage that risk. So, Frank, what did we find? How are banks doing on this front? Okay, well, this is indeed the third consecutive year that we do this, and I think, you know, by now, I would say it's both a good news and a bad news story. The good news, and let me start there, is that banks are disclosing much more. So to make that very, very specific, in just one year, so compared to last year, the percentage of major banks disclosing their exposures to climate and environmental risks went from 36% to 86%. That's huge. That's a huge jump. That's a very significant jump. So that's the good news. But the quality of these disclosures is still lacking and not in line with what we expect from them as their supervisor. So, for example, whilst half of the banks provide information on the amount of emissions they finance through their business, in many cases, this information is still incomplete. It's unspecific, or it's not properly substantiated. And this needs to change. And there are new EU rules on climate disclosures. I just gave you some examples. And they will come into force this year. And right now, the information that banks are providing is not enough to comply with these new rules. And this is just one of the examples of the minimum standards I gave when we talked about the greenwashing. So, if needed, we will take the appropriate action as supervisor to ensure that banks comply. And the consequences of not complying with minimum transparency standards are only going to increase for banks. Because you already mentioned it a little bit. There are legal and reputational risks that start to emerge for banks as more and more clients, investors and other stakeholders and market participants want meaningful, comprehensive information on climate-related risks. And also, and this is key, corresponding, matching action by the banks. Okay, so you've published these results, but what about the banks themselves? What have you asked them to do about it? Right. You know, when we do such a review, what we then do is we go back to the banks individually, we inform them of our findings and we ask them, we told them to address these shortcomings. And we have also, and that is because we also feel we need to help. So as a supervisor, we look at all these banks and we look in the kitchen if you like of each of the banks and we are able to seek good practices. So in order to help, because in the end what we want is to move the whole banking system in the right direction, don't we? And so we seek good practices, we publish those. This is kind of like a living document, so we also look into future when we see better practices emerging, we will also publish those to help banks on the other hand. Okay, Frank, I want to turn the spotlight onto the other side of the ECB's work, which is your second hat that you have, I mentioned. In addition to supervising banks, it's also our job to ensure price stability. Now when we design the policies for carrying out that task, we need to take into account the effect that climate change has on the economy, but also the effects that our own operations might have on the climate transition and the risks that we are exposed to as a central bank. Now that's why in October of last year, 2022, we started shifting or in the jargon tilting our asset purchases towards issuers with a better climate performance. And here we've been looking at companies with lower greenhouse gas emissions, more ambitious carbon reduction targets and also better disclosures, which just goes to show how important that is. Now, Frank, to what extent are we ourselves actually disclosing the kind of information that we've been discussing and that's actually useful to us? Very good question, Katie. So we are making various contributions to support our efforts to align with the Paris-compatible transition path. So one of these actually began very recently in March of this year, 2023, when for the first time we published information about the carbon footprint and the exposures to climate risks of some of the assets that we hold. And when I say assets, I mean things like the corporate bonds that your system central banks bought in recent years as part of our monetary policy. So these disclosures give us a first picture of where we stand in the decarbonization of our portfolios. And they are really, I would say, an important piece of the puzzle in getting a clear view on our efforts to contribute to the fight against climate change and a key commitment of the climate change action plan that we agreed on and published in 2021. We'll certainly link to that in the show notes of the podcast. Now, this decarbonization that you talked about basically means making the portfolios less carbon intensive in terms of the emissions that they're linked to. So what have the disclosures actually shown? Well, this first set of disclosures shows, I would say, encouraging signs of progress. So for example, we see that what we call the carbon intensity of the companies that we buy bonds from has gradually declined over time. So this means that the emissions of these investments relative to their size have decreased. In other words, companies have become more carbon efficient with their activities. And together with our efforts to buy more bonds from better climate performance, so this is this tilting or shifting that you refer to in your question, Katie, this has had a clear impact on the carbon footprint of the investments by the central banks across the euro area. And the disclosures also show that since 2019, we have more than half the emissions from the large part of the investments that we make using our staff pension fund and increase the share of green bonds from what was actually only just 1% in 2019 to 13% in 2022. So we will be publishing these disclosures every year and over time include also some of the other assets that we hold. And, you know, they are very useful as they will help us steer the reduction of emissions of our assets holdings. To be very honest, now that we have announced that as of July we will no longer be reinvesting any maturing bonds, we will have to reassess what action we need to undertake to ensure alignment with the Paris compatible transition path, as President Le Gard also mentioned in the most recent press conference. By becoming more transparent about the climate impact of our investments and our holdings, we can and will contribute to paving a clearer pathway towards the cause of the Paris Agreement. Well, Frank, we've covered a lot of ground today, thank you once again for another fascinating conversation. It's always a pleasure to have you here on the podcast. Pleasure's mine. As you always know, before we wrap up, we ask our guests a question before they leave, and that's for a hot tip linked to the topic that we've been discussing today. So broadly speaking, transparency and climate change. Frank, have you thought of something? Yes, well, I had to think a little bit, because first I was hoping that I could find a song that I like that deals with transparency. But then I thought, you know, actually what we are talking about is not just transparency, but there's also honesty, isn't it? So then Billy Joel's honesty came to my mind. So that's one thing. But then I was also thinking, you know, I gave the speech last Friday, also climate related. And there there was one sentence I mentioned, which was that everyone within their mandate should do all he or she can to contribute to combating the between climate and environmental crises. So of course, us within our mandate as a central bank and a supervisor, but actually everyone. And then I was thinking, you know, you told me just before we started this conversation that, you know, the average age of the listeners is about 30. So I was thinking, there must be among the listeners, those who are now thinking about, you know, what is the children's books that I want to read to my children. And so actually my whole tip is the following, that whenever you buy children's books or ask them, you know, for the grandparents to give for your children's birthday, whatever, you can also think about, do they deal with these issues? Do they instill love for the climate and for the environment in children? Just a little bit like the nutritional things that we talked about or the, you know, the disclosure. So here you go. It's maybe a little bit of a long thought process, but it brought me back by, you know, the next generation and how we teach them how crucially and finally important the environment and the climate is. Well, you say it's a long thought process, but it's a very tangible and concrete thing that we can all do. So I think it's a perfect hot tip. Thank you so much, Frank. Thank you, Katie. Well, that brings us to the end of this episode. I want to thank Frank Eldersen, who sits on the ECB's executive board and is the vice chair of our supervisory board for joining the conversation today and sharing his thoughts. Listeners, be sure to check out the show notes for further reading on this topic. You've been listening to the ECB podcast with Katie Ranger. If you like what you've heard, please subscribe and leave us a review. Until next time, thanks for listening.