SMART UNCONVENTIONAL MONETARY
(SUMO) POLICIES: GIVING IMPETUS TO
GREEN INVESTMENT
Romain Morel
Project manager, Investment and Climate CDC Climat Research
Our Common Future under Climate Change
The real paradigm shift
Today We need the private
sector/financial markets to
move on climate to address
the 2°C
What could
really work
Climate change and
subsequent policies will
substantially modify our
business model/ability to
address our mandate
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Our proposal: looking at institutions’ mandates, finding the impact
of climate change and climate policies on them and looking for how
they can address climate financing issues within their mandate.
Based on a report written with IDDRI “Mainstreaming climate change in the financial sector and its governance”
http://bit.ly/1SykWcA
3 dimensions make climate fighters’ and the
financial sector’s agendas mutually reinforcing
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1. Expected impacts of climate change will substantially harm global
GDP growth in the short and long term
Besides the expected loss in global wealth, sovereign debt and the
whole financial sector may suffer from repeated crises.
2. Financial risks induced by climate policies will harm individual
institutions but may become systemic according to amounts at stake
As expected value loss are high in an “optimized” world, the financial
sector should advocate for a better anticipation of climate policies.
3. A 2°C-compatible financial sector is full of new opportunities and an
improved way to make business
More productive investment, better intermediation and better risk
assessment will be the result of a successful low-carbon transition.
Based on a report written with IDDRI “Mainstreaming climate change in the financial sector and its governance”
http://bit.ly/1SykWcA
Mainstreaming climate change at
each stage of the value chain
Supply of capital
• Incentive structure faced by capital providers, intermediaries and asset holders to allocate their assets
Matching instrument and tools
• Translating low-carbon and resilient project into financial assets that match investors’ needs
Demand of green capital
• Creating the environment to make emerge enough low-carbon and resilient, economically viable, projects.
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The financial governance and regulatory
institutions can act at every stages
E.g.: IMF and
OECD works on
international
cooperation on
fiscal policies and
policy alignment
E.g.: IOSCO and central banks
could work on how developing
green securitization
Based on a report written with IDDRI “Mainstreaming climate change in the financial sector and its governance”
http://bit.ly/1SykWcA
Opportunity windows to improve the
integration of climate issues in the supply side.
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Prerequisite: “promoting low-carbon finance to promote stability” must
be largely endorsed
Classical central banks monetary
intervention
CBs’ ability to give signal could be
used through collaterals eligibility
Unconventional central banks monetary
intervention
Recent unconventional interventions opened
the way to implement thematic preference
Long term perspective Short term giving impetus
Better risk assessment and prudential policies (supervision mandate)
A better assessment of risk implies taking into account climate change and climate
policies. There is a broader need to address long-term infrastructure financing and the
impact of prudential rules.
Addressing existing risk management failures
Based on a report written with IDDRI “Mainstreaming climate change in the financial sector and its governance”
http://bit.ly/1SykWcA
Shifting trillions with low-recourse to
public budgets
• Unconventional Monetary Policies can be seen as a way
to “print money” to help finance the low-carbon transition
• They also can be perceived as a “coherence” test of the
alignment of monetary policies and climate change
objectives
• They usually appear in a context of low-inflation/deflation
and can inflate the risk of financial bubbles
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Three mechanisms based on
unconventional monetary policies
SDRs
Green Quantitative
Easing
Carbon Certificates
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Two mechanisms based on
existing elements and one
original mechanism
Different scales of
implementation
Possible co-benefits
Used to capitalize an international Green
Fund
Restricting the access to QE for specific
assets
Creation of a new asset setting a price on
emission reductions. Set a carbon price for
new infrastructure.
Some limits that can be tackled thanks
to an efficient MRV procedure
• Limits linked with the economic optimality • Windfall profit and rent-seeking
• Moral hazard
• Crowding-out of private investment
• Transaction costs
• Hence a need for an efficient Monitoring, Reviewing and Verification (MRV) procedure with limited costs of implementation
Tradeoff between a precise selection of projects and low transaction costs
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• Need for multilateral agreements
• To issue new SDRs
• To implement a CC or a Green QE mechanism in Europe or
internationally
• Potential need for the modification of existing treaties
• Need for agreements on methodological issues
• In some countries, need for changing the mandate of
central banks
Institutional and political agreements that
seem difficult to reach in the short term
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• A need for further research • financial volume
• environmental consequences
• economic consequences
• Major challenges • Bringing private finance on board
• Implementing a robust selection and MRV procedure
• Associated jointly with appropriate “demand-side” policies, monetary policies could give a kick-start to a green recovery
Conclusion: part of a larger story
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