DNB: We will only succeed if we join forces

DNB: We will only succeed if we join forces

Duurzaam beleggen
Olaf Sleijpen (photo archive DNB)

Dutch central bank says the financial sector needs to join forces and act urgently to speed up the transition to become climate neutral by 2050.

‘Impact investing and lending creates a significant opportunity to mobilise capital into investments that target measurable positive social, economic or environmental impact alongside financial returns,’ said Olaf Sleijpen, Executive Director of De Nederlandsche Bank yesterday at a symposium on sustainable investing. ‘At De Nederlandsche Bank, we may not be in the driving seat, but we are definitely part of the team. A part of the team in three different ways, in three different roles. As a supervisor and regulator, as a central bank and as a leader by example.’ ‘This is why we are committed to integrating sustainability considerations in all our core tasks by the end of next year.

Two things stand out. First of all, no matter how you look at climate change, it will have an impact, one way or the other. Ignoring mitigation of climate change, will increase the costs of adaptation and will pose serious risks for the economy as we know it. But effective climate risk mitigation also comes at a cost in the short term, that may impact the economy, financial institutions and financial stability. However, the cost of dealing with the consequences of climate change far outweighs the cost of a timely transition. Whatever the route will be, central banks and financial supervisors will, given their mandate, always prefer a predictable and orderly transition path.

Secondly, green policies need to be coordinated at an international level to make them more effective and to create a level playing field for economic actors. But that doesn't mean waiting for the others. If we don’t take the lead as the developed world, with our technological and financial might, countries like India and China will be even less inclined to speed up their energy transitions.’

Role of financial institutions

First of all, tailoring the operational processes towards impact investments. Here I think of investment processes and customer acceptance, credit judgement and revision. That means impact needs to be part of the parameters for decisions about investments, alongside risk and return. That means daring to move away from the broad market benchmark and choosing a smaller portfolio of impact-oriented companies. And you have to make it clear to your stakeholders what the implications may be for the diversification of your portfolios.

Secondly, finding the right people and creating the right processes to make this work. That means recruiting the appropriate capacity and competences and reorganising organisations. That means defining new or additional KPIs that reward decisions that contribute to impact goals and place less emphasis on classical views, like beating the benchmark.

And the third element is being more transparent about what you do and the results you are aiming for. That means: moving away from the short-term focus towards a sustainable, long-term future.’

DNB and sustainable investing

‘As a guardian of financial stability, we encourage you to embrace impact investing as a means to accelerate the green transition and thereby reduce systemic risks. In my view, this also means that we as a regulator need to ensure that we are not a barrier to your transition to impact investing. That means that we have to change too.

For instance, when we assess financial risks for investments, we have to consider whether or not they are future-proof. Or when applying the prudent person principle, one could argue that we should be concerned not only with the financial returns that participants will receive from fund investments in the short run, but also whether these returns are sustainable in a longer term perspective.

It is important to note that impact investing is often associated with illiquid and more complex products, such as venture capital and private equity. We have to take account of that in our supervision. Of course, such investments require a sufficient level of knowledge and expertise to manage these products responsibly.

To further tailor the way we supervise, we have developed a good practice guide for sustainable risk management. We will update the guide this year and we also intend to include Frequently Asked Questions to provide clear explanations and expectations. I hope these tools will encourage the financial sector to use forward-looking indicators. To apply scenario analyses rather than focus on historical track records. And motivate the sector to implement a concrete transition plan and more long-term, sustainability-focused KPIs.

Crucial role of finance

‘Financial institutions play a crucial role in our societies. They play an important role in creating sustainable prosperity. So we need the financial sector to act urgently. We need to speed up the transition to become climate neutral by 2050, in line with international goals.’

‘There is no time to lose. The world needs the financial sector’s help in financing the transition to a carbon-neutral society that is in harmony with nature. And we need the sector to manage its climate- and nature-related financial risks. They are often two sides of the same coin. We will only succeed if we join forces – supervisors, governments, financial institutions and other private parties. So let’s check in today, and take up the task that lies before us – together.’