Policy panel discussion: Sustainable finance
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Transcript: English(auto-generated)
00:00
That's a bad start. Let me start off and thank the SRB for the invitation. Thank you, Francesco, for organizing this great conference, including me in it, and for setting up a remarkable panel. And I'll get to the introduction straight away.
00:21
The topic is sustainable finance. And there are a number of facets of sustainable finance, which my colleagues will cover. They don't need introduction, but let me just hammer home a few points. Stefan Ingves, both as governor of the Reichsbank and chair of the Basel Committee,
00:42
and also long service as chair of the SRB's Advisory Technical Committee, and as you'll appreciate in those various guises, bringing forth some of the frontier thinking around these issues. Francois-Vilois de Galo, governor of the Bank de France,
01:04
and the founder, like with every success, there are many fathers, but the founder of the network for greening the financial system. And I hope, I trust Francois will expand on that, the work of the central banks and supervisors
01:22
who've come together under his leadership, under the leadership of the Dutch Central Bank, participation of the Bank of England, but really bringing together central banks and supervisors, which cover over 40% of global output and emissions. Speak further on that. Christian Thiemann, bringing extensive
01:42
private sector experience, experience in the insurance industry, currently CEO and chair of ATHORA Germany, a participant in leading the EU's high-level expert group on sustainable finance. I first met Christian, though it wasn't the first time,
02:02
but first worked more closely with him when he was vice-chair of the private sector's task force for climate financial disclosures. I'm gonna say a few words on that once I finish introducing the panel, but again, perspective on how mainstream finance can bring us sustainability.
02:23
And Professor Dirk Schonmacher, widely accomplished, is currently professor of banking and finance at Rotterdam Erasmus, I guess, Erasmus University, really, senior fellow at Bruegel, member of the advisory scientific committee here at the SRB, written extensively on sustainable finance.
02:43
New book out, is it out yet? In December, you might, he's a very modest man, but I'm gonna ask you to speak to what's in the new book, I've had a chance to see a sneak preview. I don't wanna say too much because we have this panel, so I'll just make a couple of quick points.
03:02
One is that these issues span macroprudential, stability, of course the primary focus of the SRB, microprudential issues, and in my view, mainstream finance, and it's on that last point
03:21
that I'll end my introductory comments, which is that yesterday, at the honor, I was at the One Planet Summit in New York, President Macron, Secretary General of the UN as the co-chairs of that, and what was striking about it was just how quickly, over the last several years, issues that were on,
03:45
shall we say, the periphery of mainstream finance, have come into the mainstream. That's partly as a consequence of, and quite rightly, a consequence of the actions that have been taken by governments, because after all, governments make climate policy,
04:01
certainly central banks and financial regulators don't make climate policy. We deal with the consequences of those, and we want a system that is resilient to the change in the policy, but just to give you a couple of numbers in terms of the change on the disclosure side, this task force, which Christian was vice-chair of,
04:21
as of today, there are $100 trillion of assets backing the task force. That's three-quarters of the world's systemically important banks, virtually all the European banks, including the UK. Eight of 10 of the largest asset managers,
04:40
including the major passive asset managers who actually are now using their votes as passive asset managers in favor of disclosure, largest sovereign wealth funds, major insurance companies, the proxy firms that give recommendations on shareholder votes, the ones that control 90% of those proxy recommendations
05:00
are both supporting this now, and the consequence of that demand is we're just starting to see the supply of this disclosure, so the leading companies are disclosing against those recommendations, and there'll be a big focus in the run-up to the Japanese G20 summit around actually fulfilling the demand
05:21
for this information-providing supply. So all of this has implications for the financial system. Without further ado, I want to turn to the panel and really ask, what I'm going to ask, and I'm going to go just for guidance,
05:41
starting with Stefan and work across the stage, just ask them each outline how they think the financial sector can best adapt and be resilient to climate-related risks. And relatedly, how it helps mobilize finance to fund the transition to a low-carbon economy.
06:03
We'll start with Stefan. We'll have a bit of a discussion here, and then in the spirit of this conference, open it up for questions from all of you. So without further ado, Stefan. Thank you. Well, first, I'm gonna start thinking about climate change and financial sector risks, and financial stability generally speaking.
06:24
It struck me that climate change and financial stability have at least one thing in common, and that's something about the timeframe, because basically timeframe is somebody's supposed to say no today in order to avoid
06:40
a lot of problems at a future date. And that's what climate change is about when it comes to getting a better handle on climate change or trying to avoid it. And many financial sector stability issues are quite similar in the sense that you say, you try to do something today in order to avoid an unknown,
07:01
but with a high likelihood disaster at some time, at some point in the future. And then the time horizon is something that really, really matters, and we human beings have a pretty hard time dealing with a long time horizon, because it's just hard to engineer those types of decisions.
07:24
So, second point is that what we're talking about is various types of externalities that are not incorporated in decisions by companies and investors, either because we don't know about them or they are ill-defined. And that needs to change because with better information
07:43
or with the right information, then essentially it becomes easier to internalize externalities. And then we need various ways and methods to make that happen. That's what partly this conversation is all about.
08:01
Third issue is that, which may be obvious, that climate change is global, and most decision-making is local or national. And that's a problem in itself when it comes to coming to conclusions on what to do and what not to do. And my pollution might affect my neighbor,
08:22
and that's why it's difficult to deal with these issues. What are the risks then? Well, this can be defined and talked about in many different ways. One is to talk about physical risks. We're talking about droughts, floods, hurricanes, heat waves, rising sea, changing ecosystems.
08:41
These are things that, at least in the early days, affect the insurance sector. And either these events have been insured and there is enough money and it sort of works, or maybe many times the other way around, there is not enough insurance, and then the insurance companies end up in trouble, and then eventually that could also spread
09:01
to banks and to others. Let me pick a couple of examples that have happened in the very, very near time during the summer. The first example is from July in Sweden, where an insurance company in the southern parts of Sweden started to refrain from insuring housing
09:22
in a seaside location in the southern parts of the country because they say that if the sea level rises, this is not gonna be sustainable. The other example is another insurance company that in the middle of the summer, when we had the serious forest fires, decided to stop all new insurance of forests.
09:43
That came back eventually when the fires were put out, but that's sort of, it's pretty serious in the middle of the summer when everything is, when you have some serious forest fires going on. So we have physical risks, and then we have transitional risks in terms of this affects the corporate sector
10:02
and it affects households. You are gonna have winners and losers in all of this, and that means that the distribution of risks will look different in the future compared to in the past. Let me give you a third example, and we can argue to what extent this is about climate change or not,
10:22
but I think that most of you in this room have read about the NASDAQ clearing event that took place about two weeks ago. And what happened on Monday the 10th of September was that the markets in Nordic and German power went in completely different direction.
10:42
German power prices soared along with a rally in carbon emission allowances, while on the other hand, contracts on the Nordic market went the other way because more rain was expected compared to the rain that wasn't there during the summer. And that meant that all of a sudden out of the blue,
11:02
the spread increased by 17 times compared to a normal day's change. And that of course led to a bankruptcy and all sorts of technical issues with how to deal with that bankruptcy, which is a different topic, how to deal with clearing corporations when things go really, really go wrong.
11:21
But it's a remarkable event in the sense that sort of all of a sudden nature changes and things happen. Wearing my Basel committee hat, I have sort of sensed that from time to time, people come and kind of hint that the regulatory regime
11:40
should be tweaked to incentivize the move to a low carbon economy. That makes me a bit hesitant because to tweak prudential rules for all sorts of special purposes is probably not the best way to go about dealing with this
12:00
because prudential rules are there for very special prudential reasons. And that is to deal with the risks. So I think that with this as a starting point, one should make a difference between the need to increase resilience due to climate change.
12:20
And that's what prudential rules are all about. And the other one is to argue and discuss how to allocate the flow of capital towards sustainable investments. And when it comes to the lateral, then it's probably issues on the fiscal side and other rules, not really prudential rules
12:40
that are supposed to be dealt with, to be used to deal with that. And it's of course hard on the public sector side, I think, to exactly prescribe what to do and what not to do. Some of this will have to be dealt with by the private sector itself. But that is provided that there is good, sensible, reasonable information out there
13:02
so that informed decisions can be made. And with that way of thinking, I think that the international TCFD initiative that Mark referred to already is actually quite important because without information, clearly it's difficult to fully know what you're doing.
13:22
With information, it might still be hard because it's not absolutely clear at this juncture what that information is supposed to look like. But it can't be wrong. Can't be wrong to have it, and it can't be wrong to work on it over time in order to standardize this type of information
13:42
in such a way that risks can be identified, quantified, and taken into account when people make decisions in the financial sector about risks and how to invest in this and that. Then being a central banker, the other aspect, of course, is what should central banks do?
14:01
And this is where it gets a bit difficult because as a central banker, it's also up to us to be aware of these issues. But it's not that, let's say, monetary policy is your first choice when it comes to dealing with environmental issues. So it's another set of topics there.
14:24
And I think that a little bit of the same actually holds when it comes to the management of foreign exchange reserves. And maybe it's possible in the future to invest in these types of instruments, but as long as they're not all that liquid, and as long as the time horizon is very, very long,
14:42
it's debatable what central banks should do when it comes to managing their reserves in this particular field. So let me sum up. Climate-related financial risks are important for financial stability. They're likely to be more important in the future because nature will do things to us
15:00
that we did not expect in the past. I don't think that prudential rules are designed to deal with these issues, except from a risk perspective, but not so much from a credit or capital allocation perspective. And finally, better access to information
15:20
and better access or the production of standardized information is going to be a key issue in this field because without standardized information, it's very hard to decide what is right, what is wrong in this field. And there is a need to assess these risks. There is a need to price them, and there is a need to manage these risks. And if that is done properly,
15:41
then the various externalities that we're talking about can be better internalized in various markets. And that should also mean that we eventually, by internalizing these risks, can allocate capital in a better way than in the past. Excellent. Thank you. So, excellent.
16:01
So just to, as I hand over to Christian, to re-emphasize a couple points you made, which is first, this element of the horizon and the time horizon and related to that transition risk. And one of the elements of the financial stability risk is, is this going to be a smooth transition occasion
16:22
by far-reaching climate policy and timely climate policy, or are there going to be jumps in the level of riskiness? And we've seen some of those jumps in policy in the past, whether it's been in certain electric utility markets, so you had an example of a market risk there.
16:43
Secondly, re-emphasizing, as I would hope and have expected, not to use prudential policy as a substitute for climate policy, but ensuring that there's resilience. Christian, you have a unique perspective on this panel, but I would say more broadly,
17:02
given your private sector vantage point, but participation both around these issues of getting the right information, but also in the EU's Sustainable Action Plan. So I'll give you your five minutes to take it wherever you want. Thanks very much, Mark. I would say that for me,
17:20
the way to think about where we stand on sustainable finance, the useful framework is to think about two arms of sustainable finance. I would say the first arm is about understanding the risks, the transition risks, analyzing them, disclosing them, reporting on them, taking account of them in governance, both in private sector institutions and public institutions.
17:41
And I think there we are on a very, very good way. There's a lot of progress. I think the FSB's task force will go down in history as a unique experience where the public sector instilled a private sector process that led not to regulation, but voluntary measures that are equivalent and do the right thing.
18:00
And that's very unique. So I see the whole insurance sector mobilized on the climate risks. That's evident. We are on the year after the biggest natural catastrophes on record. I see the whole banking sector very deeply engaged in thinking about the credit process and thinking about disclosures. I see the whole corporate sector, utilities, energy sector,
18:23
also thinking, how are we part of this game, the whole discussion about coal, about diversification, electrification, the transport sector. So there's enormous corporate engagement. And of course now the public sector, the ESRB, the central banks are engaged in this. So on this way, I would say we are making great progress. And I think the TCFD, we are still in touch.
18:43
We have now 500 companies, large sector companies. We are still talking to them, encouraging them. What we are telling them is four questions you have to answer in your report on climate risk. What's your governance around risks? Second, how does it affect your strategy? Third, what's your risk management of this?
19:02
And fourth, what are the metrics you have given yourself? And that's a very, very simple frameworks. And we see many companies taking account of that in the financial reporting. There is, however, the second arm, which is the mobilizing arm. So how do we mobilize the financial sector to invest more? How do we get funds into climate mitigation?
19:20
How do you improve the energy system? How do we improve the transportation system? How do we improve even the food system, which is also a huge emitter of CO2? And here is, I think, where the difficulties are. We still see that our economy suffers from a lack of long-term investment in infrastructure, but also in sustainability, if you think of jobs, if you think of regional development,
19:40
if you think of education, all the long-term issues. And the question is, what is needed to foster that? And regulation is the first thing that comes to mind, but I would agree that's not the instrument of choice. There has been a discussion about the green supportive factor, but even the high-level expert group was very cautious on this, because the capital framework's there to cover risks,
20:02
and so it would only be justified to the extent that one could really be sure that the risks of a certain investment are lower. Otherwise, it would not be the right instrument. The question is what one can do. And here in the European high-level group, we looked at three areas which we thought were relevant. The first, there is a total lack of infrastructure investment across Europe.
20:22
And the dramatic development, of course, the Italian bridge has just been a very powerful reminder of that situation. But this is also the whole energy infrastructure, transportation infrastructure. And this is a paradox because there's not a lack of funds. Every insurance company would love to invest long in infrastructure. So the money is there, the need is there,
20:42
but somehow it doesn't happen. When we looked at this, we thought that there's something missing at the European level. There's somebody missing who can help develop infrastructure, because it's a very difficult, technologically, legally difficult area. So this is where we need more development capacity in Europe.
21:00
The second element that discourages investors is not the capital charge. This has been lowered by Europa and many others, so that's appropriate. What discourages them is that there's no policy stability. You don't know what the feed-in tariffs will be over the next 10 or 20 years, and you invest in an ill-equipped asset and you have policyholders to pay. So we have had many, many bad experiences
21:22
with government changes and feed-in tariffs that have destroyed cash flow projections of projects. And the third area that we would say holds back long-term investment is still short-termism in finance. We have, and this is, Mark, I would see your fantastic role
21:40
of the tragedy of the horizons. I would say there's also the tragedy at the shorthand. We do have still a financial sector where large pockets are focusing on short-term value attraction using long-term instruments. Let's take equities, the stock market. Equity is an instrument which is for the long-term. If any of you goes to your financial advisor,
22:00
he or she will tell you you have to hold this instrument for a couple of years because this is when the returns will materialize. And yet we know that there's a whole pocket of market that uses it for value extraction over days, over weeks, and so on. The average holding of equity in the European Union is eight months.
22:20
Portfolio investors turn the entire portfolio in 20 months. So we see that something which is a long-term instrument is used for short-term value extraction and not even speaking about high-frequency trading, which is saying provision of liquidity to the market, but actually it's a profit-making mechanism on very, very, very short-term horizons. So now you may ask, what's the relationship?
22:41
How does that impact long-term investment? And I would say it does impact it through some rules in the system. And these are the rules that force many players now to move more to market to market. So it's the accounting rules that transpose the volatility we see in the short-term market, the short-term trading fluctuations on long-term balance sheet.
23:01
And an interesting example is if you look at the equity investment of European insurers that has fallen very, very consistently is now much lower than the US. And if you dig deeper, it has to do with the capital framework and it has to do with the accounting framework because these are mark to market. So you can have a lot of volatility
23:21
and nobody likes volatility on the balance sheet. So I would say today, this is a big issue how to see how we can insulate and protect people who want to invest into the long-term, how we can protect them against undue, I would say undue short-term volatility. In the US, for example, they have the short swing profit rules.
23:41
If you're a director, you cannot trade the stock of your company on a rise in shorter than six months. So there is many times discussed the idea you need to have a longer-term dedication for sustainable finance because all the areas that we ask for is illiquid long-term investment. And I believe we have to make sure that this is not disrupted by marking to market practices
24:03
on the whole balance sheet and so on that puts undue volatility and actually discourages people from going long-term where we need the investment most. Okay, very good. We'll come back to some of those issues. That's excellent. So Dirk, you've thought a lot about these issues about mobilizing finance and a change in perspective
24:22
and I'll ask you to expand. Thank you, Mark. It's nice to see that the topic is really high on the policy agenda and it has already been longer high on the agenda of the markets. And I was asked to, from my book, to reflect on markets and products
24:40
which will become green and writing a book and my academic colleagues know that that's a journey. And what I really found out that it's not about certain niches and which are good as front runners like green bonds, but it's really about mainstream finance which gets changed.
25:01
And then that's also a solution to the short-term problem. So we should attack the issue as a big issue rather than making a few products. And saying that, a silent revolution is already happening because if I would ask you which percentage
25:20
of assets in the management in Europe is already managed with one form of this called ESG, environmental social covenants, some kind of ESG factors in mind, that's already more than 50%. So 50% of these assets already take into account these issues.
25:41
The same is happening on the banking side. They're really major banks. If they're making credit assessment, there is a sustainability section on it, on the issues of sustainability, but also on is the business model of this company sustainable.
26:01
And so that is happening. It is not yet in the models. And also if you ask chief risk officers, they are a bit, the more quantitative you are, the more you are away from this issue. So these are not all looking at it.
26:21
And this is the risk perspective. And I think I really like Christian's thing of two arms. So the risk side, and I'm now at the business school, so you get really different perspective. So I would call it the opportunity side. And what you find academically, you have these studies, finest people like these empirical studies.
26:43
So if you run on general ESG factors and see whether you outperform the market or not, you don't find much evidence, not plus, not minus. But what is really happening is that what matters are material ESG issues. And that means relevant to the company.
27:01
So for example, your work at central bank supervise, I work at university. So for us, do we have access to intellectual capital, young credit, that's a material issue. If you're a manufacturing company, at this health and safety of the workforce in the down on the ground. So the issues are very different for each industry.
27:20
If you run your empirical studies on these issues, so you take for each sector, the material issues, then the first studies already show a superior financial performance. And then I go to my friends at the business school. I've been there now for three years, I learn a lot.
27:41
They would say, yes, it's about strategy of the company. It's about the business model. And then are you future proof? So the sustainable development goals, I'm happy that Christian also broadened it from climate to raw materials, land use, water use, social costs. It is really the big companies, not only utilities.
28:03
So the Unilevers and Philips on healthcare. So it's broadening. And basic issue is, is your business model the future? Working on the future, it's an opportunity or not. So are you Kodak still making the printed photographs
28:22
or are you doing the digital photo making? So that is at stake. So are you moving to this new sustainable economy or are you sticking with your technologies? And that's what business is doing, not all of them. So you have lacquered, you have the early runners
28:42
and then the middle crowds. So what's happening in business and exactly the same happens in financial institutions. I talked about this 50% of investors who now look at these issues. So is the company I'm investing is, see ahead of the game already in a transition
29:03
or is he using the old technology still? It's not only fossil fuel companies. If you are a car company and you still have traditional motors and a carbon tax will kick in. So you move to electric, but you don't have electric motors,
29:20
your company will be worthless, stranded assets. But this more than only the big oil companies. So it is really all carbon intensive assets, including real estate, which has not an efficient energy label. So there's really hitting the economy in a big way if carbon taxes are going to come.
29:42
And then the interesting thing is, because otherwise you get gloomy, that it is exciting as bank or as investor to invest in this future proof companies, to identify them. And what are the mechanisms? And I think there is already consensus.
30:01
Let's not wait for the regulator. So things are coming. And I think also taxation, some countries have it like Sweden, have a really substantial carbon tax. If we get more pictures on the television of permafrost in Canada and Russia,
30:21
the melting ice caps, then politicians will start at some point to come with serious carbon taxes. And you are all economists. So you would argue, let's do it smoothly. We announce it and we do it in a five-year frame. That's economists. I'm also trained as an economist. Politics is different. As soon as the politicians, they wait a bit too long,
30:42
but as soon as they smell, they have to do it. They do it overnight. So it will be not an economist scenario, but a political scenario. So you get an overnight and high carbon tax. And then what I always tell my students is losers will not be compensated
31:02
because the politicians owe a promise to the electorate, not to business. So if the green left is introducing a carbon tax, it is not going to compensate the losers. Look at the energy here in Germany, 80%, 90% of equity value is lost on the utilities
31:21
and is borne by the market, these losses. And we were almost there in the Netherlands. Last year, when we had the negotiation on the government, the first round was the green left in, and then we would have had the carbon tax. In the end, we got a coalition without green left, so no carbon tax yet. So that's how it can happen.
31:41
And that's what I want to do as a wake-up call here of politics is brutal, and we know which way things are going. So early or late, we will get these issues on the table. Finance is about anticipating things happening. So it makes a lot of sense
32:00
to anticipate these things happening. So you are ahead of the queue. Now you can sell your fossil fuel assets. When everybody's running for the exit, you get zero for it. And then moving to supervisors, exactly the same. If you find a bank or a pension fund with a lot of brown assets, I would get worried
32:22
if they have a lot of high carbon assets. So I would start to explain large exposure rules to these exposures. So supervisors can do the same. And then the final thing is the climate stress test that you take on a longer horizon than the normal stress test, that you look what is in the portfolios of banks
32:42
and asset managers really across the financial system, because Mario Draghi also said we have to look beyond banking with macro potential really sector-wide. And then we can do the climate stress test on the whole financial system. And the Dutch Central Bank did already last year a survey on all financial institutions
33:01
on their carbon intensity of all assets, including real estate. So these things are happening, speeding up the progress on this topic. And what I like is to look at that as an opportunity to move to the new era, rather than only to look from the risk side, because otherwise you become a bit gloomy
33:21
if you do that too often. Okay, very good. So underscoring strategic resilience, these ideas, and I think we'll try and pull it out a bit in the discussion around scenario analysis, this climate stress test, and where is that technology and how can it be developed. Francois, I referenced your parentage
33:41
of the Network for Greening the Financial System, which yesterday was described by, I'm trying to remember, described by some head of state described it as the most exciting name in climate finance. And there was probably some irony in this description. No, no, no, no, it was a sincere point,
34:03
because it was about green, anyways. But we are excited about it. Exactly, and rightly so, go ahead. So before saying some words about our network for greening the financial system, or we are successful enough to have an acronym now, a common acronym, NGFS, let me share two preliminary thoughts.
34:21
First, why do we care? It's not because we want to be fashionable, and there could be a suspicion. Because we share in this room a conviction that climate stability is, in the long run, one of the determinants of financial stability. So it's not a cherry on the cake, it's at the core of our mandate.
34:42
And second preliminary thought, we are all familiar with the distinction between physical and transition risks. But let me spend one minute on that. There could be a tendency, or even a temptation, to focus on physical risks, and to think that they are more or less covered by insurance.
35:00
And that is the business of insurance. This would be mistaken, first, because part of it is not covered by insurance, and then clearly it's a risk for banks and the rest of the financial system. And second, that what might scare people most is not necessary what we should focus on the most.
35:23
Transition risks have not yet materialized, but they will probably come earlier, and we have to deal with them. They are of different nature, but they affect banks. There are business risks, there are market risks, about the volatility of the prices
35:41
of brown and green assets. There are obviously credit risks, and there are also legal risks with all the liabilities. We, at the ACPR, so the French supervisor, made a third estimate about the share of the total credit exposure of banks
36:03
to such transition risk, and we had a magnitude of around 13%. It's interesting because the Dutch supervisor had more or less the same magnitude with the same study. So this is what NGFS is about. It's our role, as supervisors and central banks,
36:22
to deal with these two kinds of risk, including transition risk. Some words about the NGFS, where we are. We created it a bit less than one year ago. It was in the first One Summit Planet in Paris last December, and Marc was there. Marc is always an attendee of the Planet Summit
36:42
because you were yesterday in New York, so you can tell us. We created it as a coalition of the Willings, and this is extremely interesting. So we were eight founding members at the start, including the Dutch National Bank, who chairs the NGFS at present, Frank Elderson. The Banque de France has a secretariat,
37:02
and the Bank of England is a very important member. We are now 18. This is interesting. And we are even 23, if I add, five observers, including OECD, World Bank, or BIS. Among the 18 members, they come from five different continents,
37:22
and there are some more unexpected members, perhaps, but very important one, like the People Bank of China, or the Reserve Bank of Australia, and Australia is not famous as the most enthusiast country behind climate mobilization. To be fair, we don't have yet the US Fed in the NGFS,
37:43
but perhaps they will join the coalition of the Willing, if I can express this. They came up with the expression. No, but it's of the record. The Fed San Francisco will join. No, the Central Bank of Canada can join as a first step. But it has been expanding, and there is a great mobilization.
38:01
So how do we work? And we try to be very operational. We have three work streams. I don't want to bother you with a practical organization of the work stream, but let me say some words to conclude about the content. So first work stream is about, sorry, I take the exact title,
38:22
Supervisory and Microprudential Issues, and it's shared by the PBOC. And here, let me make a distinction about the analysis of risk between what I call the snapshot and the video of risk. The snapshot is about the disclosure of existing risks, their measurement and their disclosure.
38:40
Here, obviously, we have the fantastic help of the TTFD under the sponsorship of the FSB, and as we know, it's voluntary disclosure. It already raises many questions, and we try to take stock of the various efforts of various jurisdictions, the comparability of data,
39:00
and this is a very technical issue, obviously. In some countries, including mine, we have some mandatory disclosure. It raises the same technical question, but if I can express here a wish, that sooner or later, we should come collectively from a voluntary to a mandatory disclosure, having made progress on a common taxonomy,
39:22
which is obviously a prerequisite. This is a snapshot, and then we have the video of risk in a forward-looking perspective. This is a still more difficult issue, and as it is more difficult, we have trusted the Bank of England to deal with the issue because this is our workstream number two
39:42
about macro financial questions. We are only at the start of this reflection, but it's a very important one. And to give you two examples, if we want to have forward-looking stress test, which is probably the most powerful tool we have,
40:01
we have to deal at least with two questions. How can we translate climate change scenarios, which we know, into economic scenarios that can be used in adapted stress testing frameworks? And we know how to deal with economic stress test, so we need some kind of translation.
40:22
And second issue, how can we assess the impact of shocks on the probability of default, PD, over a much longer horizon than the usual one for PD of one year? These are tricky issues, but we are taking stock, and we are trying to make progress.
40:44
I believe that such tools, video, forward, what I call the video of forward-looking stress test, are probably much more powerful than some regulatory tricks. If I may use this expression to qualify the green factor,
41:00
I am very cautious about the green factor for the reason already mentioned by Stefan and Christian. Just to conclude, we have a third workstream about the role of central banks themselves, shared by the Bundesbank. What are the next steps? We will have an interim report in Bali, where we will use this gathering
41:22
of the international community, and we will publish the first comprehensive report next year in April, and having a conference in Paris. So again, it's a coalition of the willing. It's a new way of working together. We are very enthusiastic, but we want to deliver on operational tools, thank you.
41:42
Excellent, okay, fantastic. As I expected, a very rich set of comments, and I think as you will appreciate if you're new to the topic, a lot of substance underneath. So this is not an aspirational topic, it's not conceptual, it's moving into a lot of substance. I thought I would, if we could,
42:01
I'd ask three or four questions just to draw a few things out, and then open it to the floor. And just to sort of nail it down on this question of green supporting factor, and both Christian and Francois commented directly on it. I wonder, and this is partly influenced
42:21
by some of the discussions we've had at the NGFS about, if not a green supporting factor, what about a brown penalizing factor? I'm gonna throw it open to anyone who wants to comment in the sense of it satisfies both the prudential caution and some differentiation.
42:42
I welcome any thoughts. To the, from the, this is not, no, this will not be official Basel committee. Just to be clear. Tomorrow. In a personal capacity. Well, it wouldn't surprise me if over time that's the heading, the direction we would be heading in
43:01
because that's basically being aware of future risks and trying to calculate them in one way or the other. Let me just give you one example, which is maybe well known in this country, and I think that Vattenfall is kind of a household name in this country. Basically, they, as far as I know,
43:21
they had to get rid of, eventually got rid of all their brown coal investments at an enormous loss, and that's the way these things go, because all of a sudden you sort of bought something yesterday that looked good yesterday, but then you realize that this is no good for tomorrow, and then you just have to cut your losses and get out.
43:42
Now, Vattenfall is a government owned company, so in that sense, and they had a ton of money so that they could do it, but for a privately owned company, it would be harder to know whether actually you could sustain that. Yeah, Christian and then Francois. My sense would be, I understand, of course, it's much easier because it goes in the way of regulatory prudence,
44:01
but on the other hand, it suffers from the same shortcomings. I mean, I think it would be only justified if indeed it was riskier. So, and if that's the case, maybe it's just coal. I was still at AXA when in 2005, AXA decided to disinvest. That was without any penalizing factor. We just realized this is a risky investment going forward. You had the horizon in order to do that.
44:21
Yes. Francois? I would say that on this question, the jury is still out. Not very strangely, the banking industry tends to favor a green factor, diminishing the prudential requirements, and the supervisory sides tend to favor a brown factor penalizing. So this is not very surprising,
44:41
but we should have one very simple principle. It should remain risk-based and not intention-based. And on this field, as said, the jury is still out, but there are probably more reasons for a brown penalizing factor, which are more risky in the long run, than for adventuring green factor.
45:01
Excellent, Dirk? And I can give also an extra argument for that because I talked about opportunities. On the sustainability side, but nobody knows whether wind or solar will win. We don't know. There's a business risk. So both are renewable energy sources, and they will be scaled up,
45:21
but which one will be really profitable? And on both sides, there's a lot of investment going on. So one will relatively came to the other. So the normal business risk is around on the green side, like in any business. There's no reason to lower. And I argued about maybe a large exposure rule
45:41
for high carbon concentrations in your asset side. The alternative will be a brown capital factor, but I think we on the panel are more or less agreed. If you have too much high carbon assets in your portfolio, then you need to do something about it whether it is large exposure and brown capital charts or other guidance,
46:02
but the supervisors will then act on it. Yeah, excellent. I'll just, I've mentioned just because I brought it up, the PRA, the supervisory arm of the Bank of England came out with a report, well, actually came out with a supervisory consultative document yesterday and referenced some analysis in it around this issue.
46:23
And I think going in the prior would have been once you control for other factors, you wouldn't find a performance on the green side. But in the case of UK mortgages, they found that controlling for income, controlling for location, there was actually some of performance,
46:41
which is interesting. And that's, well, it's a bigger discussion, but it goes to the core point that you've all made in Francois most forcefully, that it has to be risk-based. And then the question is what's your horizon for the risk and where do you see it? And that's to give a sense. And that again gives a sense of the analytic basis
47:01
for all of this and depth to it. Let me shift to, if I could, to scenario analysis and stress testing because this has come up. And I think it'd be helpful for me, but for others to get a bit of perspective of how early days are we in scenario analysis
47:22
and stress testing and where do you see the direction of travel? And I'll start with you, Dirk, if I may, given your perspective, as you remind us rightly, on both opportunities and risk. And of course, strategic resilience goes very much to the opportunities.
47:42
What I did is I'm now teaching for a third year sustainable finance. And sometimes you do experiments and you don't know what comes out of it. And I did a lecture together with somebody who used to work at Shell. Shell is more or less the inventor of scenario analysis given the long horizons of their investments.
48:03
So he, I did explain sustainability. He explained how scenarios work and all the students were mid-year, so they knew how to do a valuation of a company. So we gave them a cash flow analysis by an analyst, so like 10, 15 year outs of JP Morgan,
48:21
of Shell, of Axel and Mittal, and then told them, okay, you got this, you know how the cash flow system work of this company. Now you search yourself one or two material factors and you make your own scenarios. And then we had two teams on each stock. And it was really amazing, like on steel, on Axel and Mittal.
48:43
Both teams came to about one third of the stock and they had not only carbon, but they had fine dust and water use it. So they were really, without any guidance from us, they were really deep going. So my main message is, the main thing is to really look properly at this ESG,
49:05
so really look very carefully at what you want to test and go very deep there. So if you want to take a climate issue or something else, go very deep. And then it is less important where you put a 30 or a 25% percentage on scenario because that's anyway subjective,
49:21
but go very deep on the factor itself, do it serious. And then what all people already said here and coming from your markets, you need a longer horizon than one year clearly, you need a longer horizon. So don't mix it up with the standard stresses you're already doing banking,
49:41
make a separate one across the financial system would be my advice. Kirsten? In the corporate sector, I would say we are at year two. So people are experimenting this, it's gaining traction. The great thing is that it forces forward thinking. By definition, it's exactly what Francois said. It's the film, not the picture. So it obliges you to think forward.
50:00
So corporations are interested in that. The two hesitations they have is, one, which scenario to take? That's always very difficult. There are several scenarios out there technically. And then is it my country scenario? Is it the European scenario, the global scenario? So that's one of the difficulties. And the other difficulty is that they say how much time do I have to experiment on this?
50:23
Because this is new, and how quickly am I obliged to disclose it publicly? How quickly will the supervisors come? How quickly will the investors come? So that's a bit, they would love to have a phase of experimentation before this gets real, because as much as it's useful, it is very, very strong.
50:41
Because if you extrapolate trends going forward, you see the delta is really growing. So you really, really, really see valuation. So that's a bit the tension where they are. And then of course for them always is the question, will the investors share the long-term perspective? Because we have many investors in the stock of a company that are looking at the next year return still. And then to say, we discount really very much
51:02
what happens five or 10 years down the road. So I would say that's where we currently are. Can I, if other colleagues have comments on that, I'll give you the floor in a second. But I wanna come back on this issue of long-term perspective. Again, investor perspective. And I think one of you mentioned that when,
51:26
I think it was you actually, that there wasn't necessarily, once you control for a climate, there's not necessarily outperformance. Because there is a school of thought on ESG,
51:43
ESG related issues that people are willing, depends of course, to pay for ESG, SDG performance, sustainable development goal performance. So how much alpha am I giving up? But what some are finding,
52:02
and you can tell I'm very tentative about it because I don't think it's conclusive, certainly not in front of this audience. Some are finding that it's at least consistent with the market and in some cases somehow performance because there is certainly a correlation between companies that are looking at these types of risk,
52:22
climate related risk, SDG risk, and who think about other long-term structural challenges, opportunities to their business. They tend to be more long-term thinking. Is that, I just welcome your- Yes, yes, that's absolutely, I think what you described as sort of consensus. The aspect, the conflict, however, is a little different.
52:40
And let me tell you a story because I talked to many CEOs obviously on this and I thought one CEO described the paradox most visually. And he said, the problem is, when I think about long-term investment utilities country, new technologies, new energy, is that I always have to have two speeches in my suit. Here on the left-hand side, I have a speech for the analysts.
53:02
The speech for the analysts that come and if you ever run a company, you get frequent visits from the analysts that come, they're these professional investors and they want to know how's the current year going and next year, that's the horizon. And they ask you all technical questions about the return on equity, the dividend payout ratio, the degree of leverage and so on.
53:21
It's this year and the next. And if you tell them all we have a longer model, they say, that we discount too much, we really want to know this year and the next. He says, then in my right-hand pocket of my suit, I have a speech about my economic role, my role in society, my role for the planet, for the youth and the climate. And that's the speech I use when I speak
53:40
in front of employees, politicians or when I go to Davos. And he says, what drives me crazy is that these two speeches are not connected. And I think it's a very powerful algorithm because he says, the moment I deviate from the short-term results, short-term optimization and say, I switch technology,
54:03
I go more to more renewables in my energy provision, I invest in electric cars and whatever, the moment I leave this path of short-term optimization, I get punished by the first group. So maybe I will be a hero in a few years down the road, but I will go through hell in the meantime. So this is a bit the tension that they feel
54:22
between the long and the short-term because, and many investors have the same, and I think it's a really, really paradox because when you talk to the asset managers, they tell you the same story. They tell you, I'd love to be sticky and long-term, but I'm always measured against competitors by indicators, tracking and so on. If I deviate from the benchmark for one quarter,
54:42
my boss calls it a tracking error and I have to justify. So that's what you often hear the story that we are very much focusing still on short-term, tracking, uniformity, meeting the benchmark and so on, and that that environment to go out and do the big technological changes, that's the challenge, I would say.
55:01
Can I pick on this? Yeah, you and then Francois, and then I'll come to the floor. On this empirical evidence, what we redid one of the US studies and they were very strong on outperformance and then we found that quality was really important as factor, and quality stands mainly for quality of management.
55:21
I think it is in the end, the CEO who dares only to use his right-hand side speech and stops with the left-hand speech. I think management quality because it is about the future and do you have your future of your company on your eyes? Do you have a good strategy? And I think that's the key issue. Do you dare to be long-term,
55:42
ignoring the short-term, which is difficult? And the question, can you afford it? Sometimes you can't really afford it and that's where you get into trouble. Francois and then Stefan. Two quick remarks. The first one about this schizophrenia you just described, Christian, and this is a key issue. There is a paradox here.
56:00
I don't know if the paradox is a solution, but investors are often rather short-term as you said. But savers, and investors manage savers money, are individual citizens and these individual citizens are more and more sensitive to sustainable development and it's a great movement in our society.
56:23
So will we see some translation of this savers expectation to the investors expectation? It's an open question. My second remark is about forward-looking stress test and Mark, you raised the issue. One technical word about that. We are convinced in the NGFS
56:41
that this is probably one of the most powerful tools, but let us be honest, none of us has a technical solution at present. It's why our work stream is really a start-taking exercise and we try to elaborate on hypothesis. If I could put it in a nutshell, I would say that we have two solid foundations
57:03
for our reflections. We have the climate scenarios and more or less we all agree about them and we have the stress test, financial stress test methodology and we learned much about it in the last 10 years. How can we converge the two?
57:21
We have to bring the climate scenarios to economic scenarios. As I said, none of us thinks now that we can apply directly climate scenarios to stress test. So to translate them into economic scenarios. And if I look at the other end of the spectrum about the financial stress test, we have also to take them in a longer term perspective.
57:44
It's not only a challenge for investors. Let us be honest, even for us regulators, which are always longer term, it's not obvious to have the horizon of the present stress test. I mentioned the example of the one year for the PD in the much longer term perspective
58:01
we need for climate change. But this is a work we are trying to deliver in the coming years. Stefan. Well, for the past 30 years when I've been in this business, I've always listened to people who complain about marketing to market and same thing today. So in that sense, it is not new
58:21
and there are many contradictions and difficulties in all of this because essentially stress testing is marketing to market when it comes to looking at what happens in the future. And that's why it's not so easy to find the right balance in all of this because stress testing essentially is about telling stories about the future,
58:42
actually being honest about what stuff is worth in the future. And that's what it is. And at the same time, people seem to hate marketing to market and that's not so easy then to deal with. If I just may add a notion of granularity in this debate. I think it's not for or against marketing to markets.
59:03
The question is, should it be applied to each and every instrument of each and every investor type? So I think for the banking sector, for example, you have the banking book and the trading book for the insurance sector paradoxically which is a longer term sector, you don't have that. So in theory, you market to market everything except real estate.
59:20
So this causes then a lot of shortened volatility and fluctuations and that for assets of which you know that will all likelihood you're not selling them the next eight years because that's the average maturity and you have other assets to sell in case of liquidity stress. The question is, are we not shooting ourselves in the foot to apply market to market to these very asset group?
59:42
Yeah, okay, excellent. So I wanted to open, promise to open it up. If you just raise your hand, I'm sure microphone will mysteriously appear or you can shout loudly and I'll repeat your question. My professor Pagano and if just for the benefit, I think many are known to each other.
01:00:00
But even if you're world famous, if you can tell us right there. Let us know who you are. As Francois Villeroy was talking about this translation, this translation of the climate
01:00:21
scenarios into a stress test requires a very complex type of operation, I imagine. Because different climate scenarios would be presumably associated with all kinds of socioeconomic phenomena, such as, say,
01:00:40
mass migration deriving from climate change or very complicated general equilibrium effects, including also political reactions to climate change. So essentially, the mapping may be extremely complex because it's not like something that we have to model,
01:01:03
essentially, the whole social and economic system, how it would react to the climate change to translate it into economic consequences that then we can map in terms of stress for the companies or the banks.
01:01:22
So I was wondering, as he was talking about what we really need in terms of analytics, very complex general equilibrium, and not just economic equilibrium, also socioeconomic equilibrium models to do that. Should we take? Why don't we take a few?
01:01:42
So governor, behind you. I'd like to go along the same line. I'm the Romanian central bank, Daniel Dejan. Yeah, thank you, Daniel. So what strikes me here is that finance is willing to be more forward looking,
01:02:04
to be strategizing, when we acknowledge that markets are myopic. More or less, we have economics of insanity if we think about climate change and what can happen with our planet instead of having economics of sanity. So how can we internalize in economics?
01:02:23
It's the externalities and the self-destruction we have embarked on. This is one thing. So we have a combination of new technologies, which are displacing labor. We have climate change, which is splitting up, and we are not responsive enough. And we have a cluster of financiers,
01:02:43
I mean, people who are trying to strategize and to think, look, it's dramatic. But then what are the analytical underpinnings which should help us when it comes to economics? I think economics is a huge problem, or models. And then how can finance, how can we
01:03:02
have finance in the driving seat? How can we have the sort of due diligence which should convince economists, politicians? Look, we have a huge problem. And we have to change the way we behave, the way we calculate, so that we should not, not sustainable finance, not finance should be sustainable.
01:03:22
Our economy should be sustainable. So, okay, two excellent questions I'm gonna turn in. I'm gonna supplement the last bit, if I may, Daniel, which is to just make the point that some of the more simple stress tests, and this is all complex, is to say, assume a two degree scenario,
01:03:40
take an IEA scenario, two degree scenario, and what is the implicit price of carbon and other policies that are consistent with that? And then one maps to what does that mean for my asset portfolio and my business? Now, that already starts to get pretty complicated, but it steps out from whether or not that will happen,
01:04:01
it just assumes that action is taken so that it does happen, and what would that mean? And maybe some of the market cynicism, cynicism isn't the right word, myopia, in this sense, is that it just doesn't think that will happen, the first stages of that, the two degree. But these are complex mapping questions
01:04:23
from Professor Pagano and from the governor. So Francois, can I start with you, please? I will try to be short on these two questions. On your third question, the fair answer, it's a journey. But we are making progress on this journey. If you start with physical scenario, it's exactly what Mark just said.
01:04:40
There is now an agreement, unfortunately, about the physical scenario. It was not the case 10 or 20 years ago, and probably there is only one important American citizen who is not convinced about this scenario. Then we have to translate it in economic consequences,
01:05:02
and all your questions are perfectly accurate. But it's not completely a blank sheet. If you look at IMF or OECD studies, we have already economic simulations. We have probably less consensus on them, and it's still macro. But we could elaborate, and then we have to translate these macro consequences
01:05:21
in micro for each company or each financial institution. But we are on the journey. So I cannot say when we will be at the end, but I'm confident we will come to a credible economic scenario and stress test. About markets, Daniel, only a slight dose of optimism, a slight one.
01:05:46
If you look at the development of green finance, it's an impressive market phenomenon. We have already one trillion outstanding. We know we have huge needs ahead of us, up to $100 trillion probably till 2030.
01:06:02
But here, we have market developments which are completely spontaneous. And driven by supply and demand. And you mentioned the opportunities. Green finance is probably not at the core of our panel, but it's a financial opportunity. And we need to develop it quantitatively with perhaps,
01:06:23
and this is one of our challenge, some qualitative improvement because to be fair, at present, green finance is a very diversified content. Here again, it's a question of label, charters, taxonomy, but we can make progress on that. But we have one field where markets developed
01:06:43
in the right direction. Excellent. Chris. I also would say we should rather be encouraged because we are quite fast on this journey. If you think the Paris Agreement was 2015, 2016 was ratification, 2017 was TCFD
01:07:00
and high level expert group, 2018, we have the implementation. So I mean, that's a very, very fast. I think there are few cases where the implementation will be as fast. I think if we fail to take these two arms, we will not fail because of a lack of awareness. I think we will fail because of underinvestment. I think today, the problem the financial sector has,
01:07:22
it cannot invest in assets that don't exist. We still have a shortage of green infrastructure, energy transition product, transport transition. And I think that's also a role for economic policy. It's easy on China. They say we do a gigantic battery plant and they do that very simply. In a market economy, this is very, very difficult.
01:07:42
And the question is for economic policy because I think they also should start to invest big times and redirect financial flows. I think that's the message to them to tell them the financial sector is ready to go long term. Please do create these assets, do create these technologies, give us the opportunity to finance them.
01:08:00
Okay, Dirk? On these scenarios, exactly as you said, Mark, what is a sensible price? And we have this data out, we have to stick let's turn that I think that's the latest report, which says 40 to $50 midterm, but in the longer term, $100 carbon price.
01:08:23
We did that with the Dutch data. So these are initial results. So we have this data of the financial system and then we apply this $100 carbon tax overnight. And then 50%, about 50% of the equity capital
01:08:41
of the financial system will be wiped out. And that's our first round losses. So no second round. And first result, so don't quote me on that. We will work further on it. But it shows that it's massive. It's a bit late. A bit late. Exactly. I can see it going across the stage.
01:09:00
It's S-C-H-O-E-N. Yeah. And finally, to pick on the savers, Francois, you said, I think there it starts, our pension funds, they're doing surveys among the beneficiaries. And they say, of course, we care about our pension in a livable environment.
01:09:22
And that's what we see. So the push behind ESG is also financially driven, but also ESG driven because, and even US academics, although they are European born, Oliver Hart and Luigi Zingales, they have this paper.
01:09:40
Okay, they say, if we don't want that Walmart is selling machine guns, we can wait for regulation, but we know what happens in Washington, nothing here. But there are shareholders. If you are a shareholder of Walmart, you can go to the annual meeting and vote against it. So this idea of pro-social shareholders.
01:10:02
So in that sense, things can move. And I think that's why, like most of Christian's report, is the strengthening of the fiduciary duty. I think that's so important that we write down, and that is happening now in the legislation, that investors have, asset managers have a duty to check on sustainability when they make an investment.
01:10:24
They are not allowed to ignore it anymore. And that can be quite helpful. Great. I might just see if we have a couple more questions and then we'll close. For Governor Lane, yes, at the back, please, yeah.
01:10:43
Giuseppe Salaco, ESRB. I couldn't help noticing that your angle is very much metropredential. So I'll give you an example of what I mean. I was sitting at dinner once with a chief compliance officer of an airline,
01:11:01
and she was laughing her head off because she was saying, my job is to prevent planes from crashing. Your job seemed to be to calculate exactly how much insurance we have to put aside to pay for the cost of the passengers dying. So I heard a lot about capital, a lot about valuation,
01:11:21
but isn't the whole thing about trying to avoid the externalities that are implicit in the mechanism and try to avoid the plane crashing rather than putting aside capital so when it crashes we have enough to cover for the pensions or to cover for the cash flows.
01:11:42
Question goes to the heart, and then last question, Governor Costas, Carlos here. Just up, third row back, yeah. Thank you. I want to go back to the question that was raised by Christian.
01:12:01
10 years ago I was at EIB, and we launched the first green bond. It was new. And one problem that we had at that time was to be sure that we were able to show to the investors that we are using the money for green projects.
01:12:22
And this means that one of the points that we have to care about is about certification of the projects. Why? Because there is a reputation risk. That is, we take the funds from the market. The investors are very keen to lend to projects.
01:12:43
But after we need to show that we were able to deliver what we were promising. And there it's linked with the Christian point. We need to be sure that we are able, at the end of the year, to show at the end that every euro
01:13:02
have been used for that. And on that point I want to say one point is that Europe was the first mover on the green bond side before even before World Bank. But certification is a critical point
01:13:20
because reputation after will be at stake if we are not able to show that you use money in the right way. Okay, excellent. So I'm gonna go to Christian for observations on, if I may, green bond. The green bond market is now over 300 billion euros, I believe. Outstanding, but that.
01:13:40
And then obviously you can come in on the other. But I would phrase the question from our colleague about, are we trying to stop the plane from crashing? Are we putting foam on the runway or are we helping a broader process of a smooth landing? But Christian first. On the green, Carlos, indeed it's a very, very important segment. I think we can be proud,
01:14:00
the EAB too, to have championed that. The challenge will be to develop new projects. So not just to identify existing ones that are green, but really to do new. The European Commission believes that we are lacking 180 billion investment every year. Investment in energy efficiency, in renewable energy, and so on. And if you dig deep and talk to people on the ground,
01:14:22
to mayors, to local politicians, you always come back to the issue, it's the development capacity that they're lacking. To do offshore wind is a very complex issue, technologically, legally, financially. To leave this to local politicians, they need capacity. Our plea was whether the EAB or somebody could grow around and help
01:14:41
and draw experience from Denmark to Portugal, to say what has worked, what hasn't worked, because we have now lots of examples where renewable energies, for example, have worked and others haven't worked. So one agency that can transplant experience then really develops new projects. I think that's what's missing most. Excellent.
01:15:01
Francois, on the plane. You're flying the plane. On the plane. It's a plane is for me, of course. No, obviously we all agree with your question. Our aim is to avoid the plane crashing. Two or three thoughts about that. Finance is important, but finance cannot solve the whole issue.
01:15:21
It's obvious, but it's very important. If you take the Paris Agreement, the EU has committed to reduce its carbon emissions by 40% at least, until 2030. And we will not solve that mainly for finance. It's a political will with many of the instruments, Christian, which you mentioned.
01:15:41
But finance can help. And we focused more on risks today, but we touched upon the issue of green finance and how can finance support the huge investment needs we have. And here I want to support what Carlos said. The question of certification is very important. If we want to develop it on a sustainable basis
01:16:03
in significant quantities in the years to come, we have to improve the certification. If not, sooner or later, we could have a qualitative doubt. I don't elaborate more. Last remark, I see no contradiction between everything what we said about risks,
01:16:22
how to measure them, how to disclose them, how to look to them in a forward-looking perspective, and avoiding the plane to crash. On the contrary, I think what we are doing through finance is an alignment of interests. And if through the risk side and through the opportunities side,
01:16:43
finance is really incented to take into account the climate transition, we will help avoiding the plane crash. Excellent. Stefan. The one issue is to deal with, let me call them present risks. And if presently risks are higher today than they were yesterday,
01:17:00
that should matter in terms of how we think about them and what capital you need, how much equity you need in order to carry those risks. A different thing is to think about investments and risks in the future and how to price those risks so that when you look into the funding mechanisms
01:17:20
that you use, if you want to invest in, let's say, something brown for the future, you probably would end up with a problem compared to wind power. And then you need to have the proper, the proper information that you would need when you think about which investments to make.
01:17:41
And then given the information available, provided that it's sort of accurate information, then one needs to have mechanisms such that the price mechanism is such that some pretty bad investments can't get funding and some pretty good investments should more easily get funding.
01:18:01
Dirk. So the plane crash, basically what we're talking about here is a transition of today to a new type of economy which is low carbon, inclusive, and a lot of other things. So in a transition journey, so that is your safe space
01:18:20
of not too many planes coming down. And forward-looking business leaders, and then I'm tapping a bit also on what Stephen is saying, the forward-looking business leaders are exactly looking that. So the aim is avoiding reducing this externality rather than only capital and that kind of thing.
01:18:42
And if you look at the World Business Council for Sustainable Development, and let me give one clear example outside climate, but just for example, healthcare. Philips is doing integrated reporting. And one issue they put out as a call is healthcare for 3 billion people. So not only earning in the West
01:19:02
a lot on the medical equipment, but also helping out in Africa and other areas. And at the same time, they are reducing carbon efficiency. They're doing it more efficient, the rest they compensate. So they're really committed on this future. And I think that's the challenge. And then finance comes in later,
01:19:21
steering companies to the journey and trying to support these forward-looking companies avoiding the short term issue. That's the big challenge. Yeah, no, that's exactly right. It was excellent way to bring it together. I think one thing that this trajectory
01:19:40
for the financial sector makes possible is that the more credibility there is around climate policy, so the more Paris is translated into climate action, the more financial markets, allocators, and capital can do what they do best, which is to pull forward action to anticipate
01:20:02
and to make those investments possible and cost-effective. And everyone in this room can think of the analogs to monetary policy credibility and macroprudential policy credibility in that once you've established it, it works there. And what these individuals and the ESRB and many of you
01:20:22
can do is to help build the tools so that the financial system is resilient and responds to a political will that comes from society's underlying demand. And that is the virtuous circle that is made possible. So thank you all.
01:20:41
Now, just I want you to note the difference. I show up 10 minutes late. I mean, admittedly, I was told I was supposed to start at four, but I showed up 10 minutes late. Governor Lane has been patiently sitting here for 45 minutes, right? Nothing to chance left, nothing to chance. And I don't know if you do get a formal introduction
01:21:00
or am I introducing you? This is the formal introduction. This is the formal introduction. Well, we're in for a treat. Phillip Lane is going to give us a talk. Let me, please join me in thanking this excellent panel for everything they do and for their insights. Thank you.