Author: Constantin Mugur Isărescu

Chairman of the Board, Governor of the National Bank of Romania, Member of the Romanian Academy

Sustainability & climate change – a more delicate balancing act

The economy and financial system worldwide saw major transformations in the past decades, boosted by globalization and digitalization or reshaped by key inflexion points such as the 2008 financial crisis, the COVID-19 pandemics and geopolitical shifts.
Sustainability & climate change – a more delicate balancing act

Fot. National Bank of Romania

Moreover, the climate change advent – flagged by the Club of Rome’s “Limits to Growth” report in 1973 at the Davos World Economic Forum, the gathering which, four decades later, was calling for action to “advert a climate apocalypse” – is getting closer to a tipping point, complicating a reasonable and fair resolve of these complex developments.

Visionary and sustainable development becomes a challenge given the current overlapping crises, with economic resilience under scrutiny and our ability to stand in solidarity and to capitalize the new technologies tested for the bid to strengthen the society in the long-run.

The compounded impact of the pandemic and the war in Ukraine – both exceptional phenomena – calls for a substantial, in some cases, unprecedented response from authorities across the Globe to alleviate their economic and social consequences as well as an enhanced strategic cooperation. Weathering these difficult times needs to take account of the nature and climate.

The environmental change is a harsh reality, is not a temporary phenomenon, it affects future generations. For the financial market, climate change risks mean most probably losses, while the much-desired transition towards a green economy brings in additional costs. Moreover, in the broader sustainability picture, issues such as diversity, inclusion or ethics are often overlooked or minimized in the quest for economic recovery. Given these paradigm shifts, the standards and rules are changing, instruments renewed and policies adapted. Thus, responsible finance plays a key role in reconciling sound development with environmental, ethical and social values.

Incorporating the ESG (environment, social, governance) principles into the decision-making processes is both a challenge and an opportunity for the financial system as a whole. It ensures its use for the benefit of the collective well-being, with a highlight on its role in addressing climate-related risks, more prominent due to the emergence of irreversible damage to the environment in the past decades (on biodiversity & temperature levels). On the other side of the coin lies a highly uncertain context given the ongoing deep structural changes in the economy and global supply-chains, rising inflation and geopolitical tensions. Moreover, as the digitalization process makes room for efficiency gains, competitiveness and financial inclusion, it brings along risks related to cybersecurity or data-privacy.

At the European level, sustainability, and particularly the greening of the economies, enjoy a strategic focus (i.e. Green Deal), while the EU institutions are leading the way globally in terms of regulating sustainable finance (i.e. the current review of the Non-Financial Reporting Directive could bring progress by expanding the range of firms subject to sustainability reporting requirements, establishing common assessment criteria and ensuring an appropriate degree of data granularity). Next Generation EU funds – designed to help the recovery from the adverse effects of the pandemic and face challenges of a future driven by innovation, technology and green transformation – would clearly underpin the push ahead on the convergence path, addressing regional disparities and inequality. For Romania, it is a unique chance to press ahead with structural changes that ensure a sustainable development of its economy and society.

For central bankers, the ESG narrative occurs in a variety of specialised and localised ways: as market players they invest in assets carrying ESG ratings; as supervisors and financial stability authorities they pursue assessments and try to address the financial risks from climate change as part of the drive to preserve financial stability; and lastly as institutions they strive to reduce their carbon footprint or lead by example in developing financial education projects or promoting diversity and ethics principles.

Without prejudice to their primary objective – achieving price stability – and unwilling to take the centerstage, central banks are contributing to the green transition by supporting the governmental policies within their mandates, while underpinning the worldwide efforts to coordinate public policies aimed at alleviating climate change impact as well as to pursue standards which provides for sustainable development. Debates are ongoing over whether and how to incorporate these issues into their mandates, monetary policies and strategic plans.

Nevertheless, either in their own jurisdictions or gathered in the Network for Greening the Financial Sector (NGFS) – with over 100 monetary or supervision authorities – central banks are engaged in tackling the climate change via their solid research, modelling, innovation or by adoption of sustainable investment principles as well as when assessing their own activities. According to a recent IFC (Irving Fisher Committee) report, sustainable finance statistics are of growing interest to central banks in pursuing core mandates, i.e. micro- and macro-prudential supervision, asset and reserve management activities, and the conduct of monetary policy.

At the National Bank of Romania (NBR), member of the European System of Central Banks since 2007, the ESG-related topics, as probably in many other central banks, are a relatively new avenue. Some areas, such as the analysis of the digital and Fintech advent or incorporating climate-related issues in various financial stability assessments or development of various HR –driven diversity, ethics and governance initiatives, are a bit more upfront running.

Ever since 2019, the NBR has launched several research papers and analysis on how climate change, green transition and digitalization is affecting Romania’s economy, outlining the potential threats to the financial stability, while the Bank’s first Climate Risk Dash Board for the banking sector was launched last year. All these studies reveal that an orderly green transition is key for Romania, where carbon-intensive industries hold 50 percent of overall companies’ assets and generate 40 percent of the value added in the economy. They show that nearly half of the corporate loans granted by the Romanian banks go to firms that may be affected by climate change, while green assets account for only some 3 percent of the Romanian banks’ portfolio. These assessments underline the considerable room for boosting green transition financing, especially as green investment projects (estimated at 60 billion EUR) are set to exert a significant impact the country’s economic growth and development. However, the transition should take into account possible future external dependencies in strategically important areas, by developing alternatives either internally or regionally, in order to reduce the length of global supply chains.

On the digital front, it’s worth noting that the NBR was among pioneers in Europe by launching a Fintech Innovation Hub to encourage and support innovation in payments and financial services, in a controlled manner and for the benefit of consumers, while seeking to identify the potential risks involved and measures to manage them. The Hub is very relevant for Romania which exhibits a mixed picture: good soundness indicators of the banking sector and strong ITC advance (which drives 6 percent of our GDP), but low financial intermediation of only 27 percent and modest financial education rating of 22 percent.

In terms of the institutional cooperation, over the past two years the NBR has coordinated joint teams (gathering experts from the Romanian Presidency, the Government, professional associations or NGOs) which drafted two key reports on climate change and sustainable finance in Romania, endorsed by the National Macro-Pru Body. Moreover, our supervision and regulatory departments are closely following European Supervisory Authorities in the matter, while as an NGFS member (September 2020), the NBR has been actively participating in the work or events organized by this fora.

As regards the NBR’s ESG approach for (reserve) portfolio management I would say it is aligned to our legal mandate and constrained to the main pillars of safety, liquidity and profitability of our investment strategy – typical asset class used by central banks: sovereign bonds, agencies and supranational bonds (the BIS green bonds in our portfolio) and so on. We are considering a gradual approach in integrating ESG metrics at monitoring our portfolio risks and thus we welcome the global standard for sustainability reporting that is now taking shape under the auspices of the International Financial Reporting Standards Foundation.

Moreover, in a bid to streamline various internal initiatives as well as gather multi-disciplinary expertise, starting last May two units – sustainability & green economy and digital money – had been set up within the Bank, with a special task on raising awareness over the ESG and digital aspects in general and related to our own activities. The digital unit is currently exploring the CDBC via in-depth analysis and tests of the technical requirements.

To conclude I would say that central banks around the world, entrusted by the public with the task of achieving price stability and preserving financial stability, are closely following the new trends, including the ESG. However, given the rapid resurgence of inflation towards record levels and high uncertainties amid the recent geopolitical reset, central bankers are set to navigate carefully to restore price stability and consolidate a resilient financial system in a bid to support economic recovery and a sustainable development of the society. Achieving medium-term price stability while acting as a guardian of the financial stability is already delicate balancing act for many central banks across the Globe. Tackling the fresh challenges associated to the sustainability path makes that mission an even more delicate balancing act.

Constantin Mugur Isărescu – Chairman of the Board, Governor of the National Bank of Romania, Member of the Romanian Academy.


The article is published in a series of articles in Obserwator Finansowy written by governors of central banks and distinguished economists. The series is under the special patronage of the Governor of Narodowy Bank Polski, Professor Adam Glapiński. The authors of the articles have agreed to waive their fees for writing the texts, and in exchange NBP shall donate the amount equivalent to the fees onto the account of the National Bank of Ukraine in order to support the NBU during the war. Below is a foreword by the Governor of NBP to the whole series: 

On 24 February a huge tragedy occurred, in the face of which it is impossible to simply move on as if nothing had happened.

Nobody can remain indifferent to the misfortune that has befallen the Ukrainian nation.

All of us are shocked by the press reports, and particularly by what we see in the mass media.

Fighting Ukraine is not only its brave soldiers, but also an army of thousands of civilians trying to preserve normality in a country stricken by Russian aggression.

This army includes the staff of the National Bank of Ukraine, with whom NBP is in constant contact.

Aware of our Ukrainian colleagues’ needs, we have invited several central bank governors and eminent economists to share their knowledge on the economic processes taking place around the world.

It is rare for such a distinguished group of authors to feature in Obserwator Finansowy, which is published by NBP. It is also worth underlining that all the authors have waived the fees for their articles in order to donate them to meet the needs of our colleagues working in the National Bank of Ukraine.

I believe that you will find the series of these articles interesting, especially since they not only share the knowledge and experience of their authors, but also express goodwill towards the war-afflicted NBU.

                                                                                Prof. Adam Glapiński, Governor of NBP


Fot. National Bank of Romania

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