 Let me start off and thank the SRB for the invitation. Thank you Francesco for organizing this great conference including me in it. This is and for setting up a remarkable panel and I'll get to the introduction straight away. The topic is sustainable finance and there are a number of facets of sustainable finance which my colleagues will cover. They don't need an introduction but let me hammer home a few points. Stefan Ingves, both as governor of the Reichsbank and chair of the vassal committee and also long service as chair of the SRB's advisory technical committee. So as you'll appreciate in those various guises bringing forth some of the frontier thinking around these issues. Francois Villouard de Gallo, governor of the Banque de France 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 who have come together under his 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. I'll speak further on that. Christian Thiemann bringing extensive private sector experience in the insurance industry currently CEO and chair of Athora Germany participant in leading the EU's high level expert group on sustainable finance. I first met Christian though it wasn't the first time 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 going to say a few words on that once I finish introducing the panel but again perspective on how mainstream finance can bring us sustainability and professor Dirk Schoenmacher widely accomplished 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 new book out is it out yet in December you might he's a very modest man but I'm going to ask you to speak to what's in the new book I've had a chance to see a sneak preview I I don't want to say too much because we have this panel so I'll just make a couple of quick points one is that these issues span macro prudential stability of course the the primary focus of the SRB micro prudential issues and in my view mainstream finance and it's on that last point that I'll end my introductory comments which is that yesterday I had the honor I was at the one planet summit in New York President Macron Secretary General UN as the 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 shall we say the periphery of mainstream finance have come into the come into the mainstream that's partly is a consequence of and quite rightly a consequence of the actions that have been taken by governments because after all governments make climate policy 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 as of today there are a hundred trillion dollars of assets backing the task force that's 20 it's three quarters of the world's systemic the important banks virtually all the european banks including the uk eight of 10 of the largest asset managers including the major passive asset managers who actually use their are now using their votes as passive asset 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 percent of those proxy recommendations are both supporting 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 are disclosing against those recommendations and they'll be a big focus in the run up to the japanese g20 summit around actually fulfilling the demand for this information providing supply so all of this has implications for for the financial system without further ado i want to turn to the turn to the panel and really ask what i'm going to ask and i'm going to go just for guidance starting with stefan and and work 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 how it helps mobilize finance to fund the transition to a low carbon economy we'll start with stefan they'll be 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 to risks and financial sector financial stability generally speaking it struck me that climate change and financial stability have at least one thing in common and that's something about the time frame because basically time frame is somebody supposed to say no today in order to avoid 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 on climate change you're 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 a an unknown but with a high likelihood disaster at some time at some point in the in in in the future and then the time horizon it's 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 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 or with right with the right information then essentially it becomes easier to turn to internalize externalities and then we need various ways and methods to make that make that happen and that's what partly this this conversation is is is all about 30 issues 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 what not what not to do and my pollution might affect my neighbor and and that's why it's 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 echo systems 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 to banks and to others let me let me pick a couple of examples in that have happened in the very very near near time during the summer first example is from july in sweden where we're an insurance company in the southern parts of sweden started to refrain from ensuring housing in a seaside location in the southern parts of the country because they say that if if the sea level rises this is not going to 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 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 and it affects households you are going to have winners and losers in all of this so that means that the distribution of risks will look different in the future compared to compared to in the past let me give you a third example and we can argue to what extent this is about about the climate change or not 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 German power prices soared along with with the 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 during the summer and that meant that all of a sudden out of the blue the spread increased by 17 times compared to a normal days 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 different topic how to deal with with clearing corporations when things go really really go wrong but it's a remarkable event in the sense that sort of all of a sudden nature changes and things things happen where my Basel committee had I have sort of sensed that from time to time people come and kind of hint that the regulatory regime 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 go about dealing with this because prudential rules are there for very special prudential reasons and that is to deal with the deal with risks so I think that with this is a starting point one should make a difference between the the need to increase resilience due to climate change 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 sustain sustainable investments and when it comes to the lateral then it's probably issues on the fiscal side and others other rules not really prudential rules that are supposed to be dealt with did to be used to deal with 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 by the private sector itself but that is provided that there is good sensible reasonable information out there so that informed decisions can can be made and with that 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 with information it might be still be hard because it's not absolutely clear at this juncture what that information is supposed to look like but it's not it can't be wrong can't be wrong to have it and it can't be wrong to work work on it over time in order to standardize this type of information 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 what should central banks do and this is where it gets gets a bit difficult because as a central banker it's also up to us to be aware of these 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 it's another set of other set of topics topics there 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 there are not all that liquid and as long as the time horizon is very very long it's it's debatable what 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 that we did not expect in the 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 from a credit or capital allocation perspective and finally better access to information 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 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 so excellent so just to as I hand over to Christian to re-emphasize a couple points you made which is first this this element of the horizon and the time horizon and the related to that transition risk and one of the elements of the financial stability risk is is this going to be a smooth transition occasioned by far-reaching climate policy and and and timely climate policy or are there going to be jumps in in the level of riskiness and we've seen some of those jumps in in policy in the past whether it's been in certain electric utility markets you had an example of a market risk there secondly re-emphasizing as I would hope and have expected not to use prudential policy as a substitute for climate climate policy but ensuring that there's resilience Christian I mean you have a unique perspective on this on this panel but I would say more broadly 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 wherever you want thanks very much mark I would say that for me the 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 and I think there we are on a very very good way there's a lot of progress I think the the FSB's task force will go down history as a unique experience where the public sector and still a private sector process that let not a regulation but voluntary measures that are equivalent and do the right thing and that's very unique so I see the whole insurance sector mobilized on on the climate risks that's evident we are under here after the biggest natural catastrophes on record I see the whole banking sector very deeply engaged in in in thinking about the credit process and think about disclosures I see the whole corporate sector utilities energy sector 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 we are still in touch we have now 500 companies large sector companies we are still talking to them encourage them what we are telling them is five 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 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 how we do get funds into climate mitigation 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's 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 if you think of education all the long-term issues and the question is what is needed to foster that and regulations 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 supporter factor but even the high level expert group was very cautious on this because the capital frameworks there to cover risks and so it would only be justified to the extent that one could really be sure that the risks of a certain investment allow 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 are relevant the first there is a total lack of infrastructure investment across europe 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 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 the second element that discourages investors is not the capital charge this has been lowered by by jopa and many others so that's 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 illiquid asset and you have policy holders to pay so we have had many many bad experience with government changes and feed in tariffs that have destroyed cash flow projections of project in 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 your fantastic role of the tragedy of the horizons i would say there's also the tragedy at the short end 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 equities and instruments which is for the long term if any of you goes to your financial advisor he or she will tell you you have to hold this instrument for a couple of years because this is when the returns were materialized 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 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 how does that impact long-term investment and i would say it does impact it through some rules in the system and this 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 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 u.s. 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 marked to market so you can have a lot of volatility 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 u.s. for example they have the short-swing profit rules if you are director you cannot trade the stock of your company on a horizon shorter than six months so there is many times discuss 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 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 and i'll ask you to expand thank you mark and it's nice to see that the topic is really high on the policy agenda and it has already been longer high on the on the agenda of the markets and i was asked to from my book to reflect on markets and products which will become green and writing a book and my academic colleagues know that there's a journey and what i really found out that it is not about certain niches and which are good as front runners like green bonds but there's really it's about mainstream finance which gets changed 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 and saying that a silent revolution is already happening because if i would ask you which percentage 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 percent so 50 percent of these assets already take into account these issues 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 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 and but and this is the risk perspective and i think i really like christians thing of two arms so the the risk side and i'm now at the business school so you get really different perspectives so i will call it the opportunity side and what you find academically you have these studies there were finest people they like these empirical studies 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 so for example your work at central bank supervisors 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 if you run your empirical studies on these issues so you take for each sector the material issues then the first studies already showing 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 they would say yes it is about strategy of the company it's about the business model and then are your future proof so the sustainable development calls i'm happy that christian also broaden from climate to raw materials land use water use social cost it is really the big company is not on the utility so the uni lefers and philips on health care so it's broadening and the basic issue is issue business model the future working on the future it is an opportunity or not so are you kodak still making the printed photographs 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 and you have the early runners and then the middle crown so what's happening in business and exactly the same happens in financial institutions i talked about this 50 percent of investors who now look at these issues so is the company i'm investing is see ahead of the game already in the transition or is he using the old technology still it's not only fossil fuel companies if you are a car company and you're still have to traditional motors and a carbon tax will kick in so you move to electric but you don't have electric motors your company will be worthless stranded assets but this more than only the big oil company 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 and then the interesting thing is because otherwise you get clue me that it is exciting as bank or as investor to to invest in these future proof companies to identify them and what are the mechanisms and i think there is already consensus let's not wait for the regulators so things are coming and i think also taxation some countries have it like sweden haven't really substantial carbon tax if we get more pictures on the television of permafrost and canada and russia the melting ice caps then politicians will start at some point to convert 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 but as soon as they smell they have to do it they do it overnight so it will be not the economist scenario but the 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 because the politicians owe a promise to the electorate not to business so if the cream left is introducing a carbon tax it is not going to compensate the losers look at the energy when the here in germany 80 percent 90 percent of equity value is lost on the utilities and is borne by the market these losses and 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 an coalition without the green left so no carbon tax yet so that's how it can happen and that's what i want to do as a wake-up call here 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 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 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 a longer horizon than the normal stress test that you look what is in the portfolios of banks and asset managers really across the financial system because mario drake also said we have to look beyond banking with macro potential really sector-wide and then we couldn't do the climate stress test on the whole financial system and the dutch central bank did already last year and survey on all financial institutions on their carbon intensity of all assets including real estate so these things are happening we're speeding up the 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 you become a bit gloomy 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 climate stress tests and where is that technology and how can it be developed françois i referenced your your parentage of the network for greening the financial system which yesterday was described by i'm trying to remember to describe by some head of state described it as the most exciting name in climate finance and there was probably some irony in this no no no it was a sincere it was a sincere point because it was about greening anyways but we we are excited about it exactly right 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 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 wrong run one of the determinants of financial stability so it's not a sherry on the cake it's at the core of our mandate 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 and that is the business of insurance this would be mistaken first because part of it is not covered by entrance 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 transition risk 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 of brown and green assets so obviously credit risk 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 to such transition risk and we had a magnitude of around 13 percent 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 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 Mark was there Mark is always an attendee of the planet summit 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 Eldersen the Bank de France has a secretariat 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 amongst the 18 members they come from five different continents 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 U.S. Fed in the NGFS 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 off the record the Fed says join no the Central Bank of Canada couldn't join as a first step so but it has been expanding and there is a great mobilization 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 the first work stream is about sorry I take the exact title 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 risk their measurement and their disclosure here obviously we have the fantastic help of the TCFD 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 revolutions the comparability of data 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 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 work stream number two about macro 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 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 and second issue how can we assess the impact of shocks on the problem 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 to make progress I believe that such tools video forward what I call the video forward-looking stress test are probably much more powerful than some regulatory tricks if I may use this expression to qualify the green factor I'm very cautious about the green factor for the reason already mentioned by Stefan and Christian just to conclude what does the next we have a third work stream 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 of the international community and we will publish the first full 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 excellent okay fantastic as I expected a very rich set of of comments and I think as you will appreciate if you're if you're new to the topic a lot of substance underneath so it's not 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 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 and Francois commented directly on it I wonder and this is partly influenced by some of the discussions we've had at the NGFS about if not a green supporting factor what about a brown penalizing factor and I'm going to throw it open to anyone who wants to comment in the sense of it satisfies both the prudential caution and and and some differentiation I welcome any thoughts from the this is not no this will not be official by the committee tomorrow in a personal capacity well I wouldn't surprise me if over time that's the heading the direction we would be heading in because that's basically being aware of future risks yeah 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 Wattenfall is kind of a household name in this country basically they as far as I know 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 you sort of bought something yesterday that's 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 now Wattenfall 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 whether actually you could you could sustain that yeah Christian then my sense would be I understand of course it's much easier because it goes in the way of regulatory approvals prudence but on the other end 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 that's you had the horizon in order to do that 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 sites tend to favor a brown factor penalizing so this is not very surprising but we should have one very simple principle it should remain risk-based yeah and not intention-based and on this field asserts the jury is still out but there are probably more reasons for a brown penalizing factor which are more risky in the long run is that for advantage green factor excellent Turk and I can give also an extra argument for that because I talked about opportunities here 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 there will be scaled up but which one will be really profitable and on both sides there is 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 for high carbon concentrations in in your asset side the alternative would 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 but the supervisors who then act on it yeah excellent I'll just I've mentioned just because I brought it up the 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 reference some analysis in it around this issue and I think going in the prior would have been once you control for other factors you wouldn't find out performance on the green on the green side but in the case of UK mortgages they found the controlling for income controlling for location there was actually some of performance which which is interesting and that's well one can one it's 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 for all of this and depth to it let me let me shift to if I could to scenario analysis and and stress testing because this has come up and I didn't be helpful it would be helpful for me but for others to get a bit of perspective of where are we in how early days are we in scenario analysis and and stress testing and and and where do you see the direction of travel and I'll start with you Dirk if I may given your your perspective as you remind us rightly on both opportunities and risk and of course strategic resilience goes to very much to the opportunities 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 the more or less the inventor of scenario analysis given the the lower horizons of of their investments so he I did explain sustainability he explained how scenarios work and all the students were mid-year so they knew how to do evaluation of a company so we gave them cash flow analysis by an analyst so like 10 15 year outs of JP Morgan of Shell of axler metal and then told them okay you caught 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 axler metal both teams came to about one third of the stock and they had not only carbon but they had fine dust and water usage so they were really without any guidance from us they were really deep going so my main message is the main thing is they really look properly at this ESG so really look very carefully at what you want to test so and go very deep there so if you want to take a climate issue something else go very deep and then it is less important whether you put a 30 or a 25 percent percentage on scenario because that's anyway subjective but go very deep on the on the on the factor itself do it serious and then what all people already said here and coming from you mark is you need a longer horizon than one year clearly you need a longer horizon so don't mix it up with the standard stress as you're already doing banking make a separate one across the financial system would be my advice 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 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 because this is new and how quickly I'm 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 because if you extrapolate trends going forward you see the delta is really growing so you 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 that say you know we discount really very much what happens five or ten years down the road so I would say that's where 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 want to come back on this issue of long-term perspective and again investor perspective and I think one of you mentioned that when I think was you actually when that there wasn't necessarily once you control for climate there's not necessarily outperformance and because there is a school of thought on ESG 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 and I 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 some outperformance because there is certainly a correlation between companies that are looking at these types of risk climate related risk SDG risk and who think about other long-term structural challenges opportunities to business they tend to be more long long-term thinking is that I just welcome you yes that that's absolutely I think what you described is sort of consensus the the aspect the conflict however is a little different 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 company you know 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 the speech for the analysts that come and if you ever run a company you you get frequent visits from the analysts that that that come there is either this professional investors and they want to know how is the current year going and next year that's the horizon and I ask you all technical questions about the return on equity the dividend payout ratio the degree of leverage and so on it's it's this year and the next and if you tell them oh 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 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 you know short term optimization and say I switch technology 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 between the long and the short term because and many investors have the same and I think it's a really real paradox because when you talk to the asset managers they tell you the same story they tell you I'd love to be sticky a long term but I'm always measured against competitors by you know by indicators tracking and so on if I deviate from the benchmark for one quarter 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 excellent can I can I pick on yes yeah you and then Francois and then I'll come to the floor on the empirical evidence what we redid one of the US studies and they were very strong on out performers and then we found that quality was really important as factor quality stands mainly for the quality of management 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 is because it is about the future and do you have your future of your company on your on your eyes do you have a good strategy and that I think that's the key issue do you dare to be long term ignoring the short term which is difficult and the question can you afford it yeah sometimes you can't really afford it and that's where you go to trouble yeah interesting um Francois and then Stefan two quick remarks the first one about this schizophrenia you just described question and this is a key issue there is a paradox here 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 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 raise the issue one technical word about that we are convinced in the ngfs that this is probably one of the most powerful tools but let us be honest known 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 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 that methodology and we learned much about it in the last 10 years how can we converge the two 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 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 we need for climate change but this is the work we are trying to deliver in the coming years excellent Stefan well for the past 30 years when I've been in this business I've always listened to people who complain about marking to market and same thing today so in that sense it is not new and there are many contradictions and difficulties in all of this because essentially stress testing is marking 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 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 marking to market and that's not so easy to deal with if I just add a notion of granularity in this debate I think it's not for or against marking to market 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 mark to market everything except real estate so this causes then a lot of short on 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 mark to market to these very asset group yeah okay um 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 uh Merit Professor Pagano and if uh just for the benefit I think many are known to each other but uh even if you're world famous uh uh if you can tell us uh right there yes I was let us know who you are as uh Francois Villarro I was uh talking about this translation uh this translation of um the climate um scenarios into a stress test requires a very complex type of operation I imagine because uh different scenarios climate scenarios would be presumably associated with all kinds of socioeconomic phenomena such as a mass migration uh deriving from climate change or um very complicated general equilibrium effects including also political reactions to climate change uh so essentially the mapping may be extremely complex because it's not like you know uh something that we have to model essentially the whole social social and economic system how it would react to the climate change to translate it into uh economic consequences that then we can map uh in terms of stress for the companies or the banks so so I was wondering as he was talking about you know uh what we really need in terms of analytics uh 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 um so governor behind you um I'd like to go along the same line I'm the Romanian central bank Daniel D'Anne yeah thank you Daniel um like what strikes me here is that uh finance is willing to be more for looking to be strategizing when we acknowledge that markets are myopic I mean we more or less we have economics of insanity if we think about climate change and what could happen with our planet instead of having economics of sanity so how can we internalize in economics I mean it's the externalities and and the self-destruction we have embarked on this is one 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 I mean the people who are trying to look to strategize and to think look it's it's dramatic but then what are the under analytical underpinnings which should help us when it comes to economics I think economics is a huge problem or models and then how can how can we have finance in the driving seat how can we have the sort of due diligence which should convince economies 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 sustain not finance should be sustainable our economy should be sustainable so okay two excellent questions I'm going to turn in I'm going to 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 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 in my business yeah now that's already starts to get pretty complicated but it it it steps out from whether or not whether or not that will happen 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 these are complex mapping questions from Professor Pagano and and from 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 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 then we have to translate it in economic consequences and all your questions are perfectly accurate but it's not completely blank sheet if you look at IMF or OECD studies we have already economic simulations we have probably less consensus on then and it's still macro but we could elaborate and then we have to translate these macro consequences in micro for each company or each financial institution but we are on the journey so I cannot say when we will be 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 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 dollar probably till 2030 but here we have market developments which are completely spontaneous and driven by supply and demand and we 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 and this is one of our challenge some qualitative improvements 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 in the right direction excellent question 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 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 under investment I think today the problem the financial sector has it cannot invest in assets that don't exist we still have a shortage of green infrastructure energy transition project transport transition and I think that's also a role for economic policy it's easy on China they say we do you know a gigantic battery plant and they do that very simply in a market economy this is very very difficult and the question is for economic policy makes 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 let give us the opportunity to finance them okay Dirk on these scenarios exactly I should set mark what 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 dollar midterm but in the in the longer term 100 dollar carbon price we did that with the Dutch data so these are initial results so we have this date of the financial system and then we apply this 100 dollar carbon tax overnight and then 50 percent about 50 percent of the equity capital 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 I'd see it going across the stage it's S-C-H-O-E-N and finally to pick on the savers with Francois you said I think that it starts now our pension funds they're doing surveys among the beneficiaries and they say of course we care about our pension in a livable environment 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 Sincales they have this paper okay they say if 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 animal meeting and vote against it so this idea of pro-social shareholders and so in that sense things can move and I think that's why what they're 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 an asset manager have a duty to check on sustainability when they make an investment they're 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 we'll close for Governor Lane yes at the at the back please yeah I couldn't help noticing that your angle is very much micro prudential 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 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 passenger styling so I heard a lot about capital a lot a lot about valuation 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 to cover for the pensions or to cover for the cash flows 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 10 years ago I was at the IV I will enter the first green bond yes it was a 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 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 land to projects 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 of the debt every euro have been used for that and on that point I want to to say one point is that Europe was the first mover on the green bonds side before even before World Bank but certification is a critical point because reputation after will be at stake if we are not able to show that you used money in the right way okay excellent so I'm going to go to Christian for observations on on if I may green bond the green bond market is now over 300 billion euros I believe outstanding but that and then obviously you can come in on the other but I I would phrase the 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 smooth the smooth landing but Christian first on the green Carlos indeed it's a very very important second I think we can be proud the AB 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 a hundred eighty 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 to mayors to local politicians you always come back to the issue it's the development capacity that they are lacking to do offshore wind is a very complex issue technologically legally financially to leave this to to local politicians they need capacitors our plea was whether the AB or somebody could grow around and help and draw experience of from Denmark to Portugal let's say 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 what's missing most excellent Francois on the on the plane you're flying the plane on the plane the plane is for me or far 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 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 percent at least uh till 2030 and we will not sell that mainly through finance it's a political will with many of the instruments Christian which you mentioned 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 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 how to measure them how to disclosure 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 opportunity side finance is really incentive to take into account the climate transition we will help avoiding the plane crash excellent uh Stefan the one issue is to deal with let me call them present risks and if presently the risks are higher today than they were yesterday that should matter in terms of how we think about them and what capital you need how much equity you need in order to 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 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 the the proper information that you would need when you think about which investments to make and then given the information available provided that it's sort of recent 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 dirt the plane crash basically what we're talking about here is the 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 of not too many planes coming down and forward-looking business leaders and then I'm tapping a bit also on on what Stefan is saying forward-looking business leaders are exactly looking that so they aim for the aim is avoiding reducing this externality rather than only capital and that kind of thing and 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 health care phillips has is doing integrated reporting and one issue they put out as a coal is health care for three billion people so not only earning in the west a lot on the medical equipment but also helping out in Africa and other areas and at the same time they're reducing carbon efficiency they're doing that 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 steering companies to that journey and trying to support these forward-looking companies avoiding the short term mission but that's the big challenge yeah you know that's exactly it was excellent excellent way to bring it together I think one thing that this this trajectory 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 of capital can do what they do best which is to pull forward action to anticipate and to make those investments possible and cost effective and and everyone in this room can think of the analogues to you know monetary policy credibility and and macro-prudential policy credibility and that once you've established it it works there and and what these individuals and the srb and many of you can do is 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 and and that is the virtuous circle that is made possible so thank you all now just I want you to note the the difference I show up 10 minutes late I'll 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 you get a formal introduction or am I introducing you this is the formal introduction is the formal introduction well we're in for a treat Philip Lane is going to give us a talk let me please join me in thanking this excellent panel for everything they do and for the