Climate change can affect financial stability

Publication 16 joulukuuta 2021

Director General of the Debt Office Hans Lindblad answers questions on how climate issues affect the tasks of the Debt Office.

How do climate issues affect the Debt Office?

“The Debt Office’s remit is to run central government finances and attend to central government borrowings and central government debt management.

However, the Debt Office’s basic remit also includes contributing to financial stability and laying down conditions for sustainable finance. In this context, climate change is a cause for concern.”  

What are the implications of climate change for the financial system? 

“The value of assets such as real estate, forests and industry is directly affected by natural disasters such as flooding, extreme temperatures and fires, landslides and subsidence. These assets are often collateralised and, if they plummet in value, this can cause financial difficulties. 

Also, there is a risk that companies operating in sectors featuring major climate-impacting emissions will decline in value. One reason for this is tightened laws and rules that put companies under a clearer obligation to carry the costs of their climate impact according to the “polluter pays” principle. That is, those who cause harm to the environment also have to pay the economic costs this causes to society. Another reason is that the companies might face falling demand as consumers snub goods and services with a high carbon footprint. Waning profits, credit losses and so on can, combined, cause stability problems.

If central governments, companies and society at large can’t cope with the challenges that arise and make the necessary transition, this causes increased costs and considerable stability problems – not only of a financial nature, but also that affect society on a broader front.”

What role can the financial market play in the transition towards a more sustainable society?

“Today, there is great consensus in the view that the financial market has a crucial role to play in pointing society in a more sustainable direction. Money is key to bringing about change. 

We can also see that capital is shifting from unsustainable operations to more sustainable activities, and that this is driving developments in green technology. For example, we see that renewable types of energy are, in some cases, outcompeting fossil alternatives.”

What are the tasks of the Debt Office in the climate transition?

“In September last year, the Debt Office issued the first ever Swedish sovereign green bond. The bond was given a 10-year maturity, the issuance amounted to SEK 20 billion and there was tremendous interest from the market. The interest rate was slightly lower than for a regular bond. The proceeds of the green bond were allocated in advance to a selection of green expenditures in the central government budget.

The Swedish government’s issuance of a green bond sends an important signal and stimulates further expansion of the green bond market. In turn, this can bring about better terms for companies wishing to make green investments.

We are also tasked with issuing central government credit guarantees for major green industrial investments.”

Why is the central government engaging in green credit guarantees?

“The central government, through the Debt Office, used to finance roads, bridges and canals. Now, investments in green infrastructure and green production are needed. Industry accounts for around one third of Sweden’s greenhouse gas emissions. Major investments will therefore be needed in the transition to a fossil-free society. In this respect, the central government can lend a hand and bolster the commitment that already exists in the industrial sector in order to help reduce climate impact and boost competitiveness together.

There is great interest in the green guarantees. The government therefore proposed, in the 2022 Budget Bill, an increased guarantee framework of SEK 50 billion for 2022, SEK 65 billion for 2023 and SEK 80 billion for 2024. The central government guarantees up to 80 per cent of the loan, meaning that companies can borrow up to SEK 100 billion.” 

So, what is the role of the Debt Office in the green transition?

“Since 1789, the Debt Office has played a part in financing important investments that have laid the foundation for the progression of Sweden’s welfare. We continue to play a key role in Sweden’s development and today it’s a case of helping to fund a necessary transition towards a sustainable society.

The Debt Office can contribute through our green tasks, while at the same time, through the demands we place on banks and other institutions, we ensure financial stability and secure future economic growth.”