 Good afternoon everyone or good morning if you're in Europe and welcome to this very special webinar on addressing sustainability related risks during the COVID pandemic and focusing on the role of central banks and monetary authorities. As you will no doubt be aware we're joined by a very esteemed group of presenters and panellists to discuss this and hopefully we'll have a very fruitful discussion and we want to encourage you to also join in and send us your comments and also be a part of the discussion when we go to that part of it. I want to introduce myself first of all, I'm Aziz Durrani, I'm a Senior Financial Sector Specialist at the CSUN Center and the CSUN Center is a non-profit organization it's owned by 19 central banks across Asia and we've been very active in the sustainability debate and helping the central banks to work through the various policies and issues that will be required as we go through this pandemic and of course it's particularly relevant to Asia because we've been feeling a lot of the immediate impacts of various climate related issues and risks and of course like most countries in the world the recession that's hitting us now is is also going to be very difficult to deal with and of course that brings a key challenge because of course a lot of the fossil fuel based industries create jobs and employment and so there's going to be natural conflict between managing those and at the same time encouraging growth and new sustainability infrastructures and I think a key part of the the debate should therefore be of how we can encourage new growth in in those green industries to to take over some of the job losses and so on but anyway that's that's enough of an introduction I think it's time to get on to our main and first presentation for today I'm very pleased to introduce Dr Marjoon who's the director of the research center for green finance development at Tsinghua University and he's also chair of the ngfs research work stream so uh Dr Mar please please take over thank you very much Aziz can you hear me okay yes indeed we can great thanks again and on behalf of ngfs I'd like to welcome all of you for attending this important seminar on environmental and climate risks as you probably know the ngfs was set up the back two years ago initially by a central banks including some of those in Europe in UK and China and others and now this network has expanded to a platform of more than 70 members including the central banks and supervisors and also we have many other international organizations joining as observers so it's becoming a very important platform for global coordination in terms of designing and promoting green finance related policy initiatives recently the ngfs launched a set of publications on environmental risk analysis these publications were supervised by the supervision work stream which I chaired in the past two years until September this year so I am pleased to have the opportunity to present these publications to this webinar with a view of promoting the adoption among finance institutions on ERA or environmental risk analysis now just give me one second and I'm trying to upload my my PowerPoint Aziz can you hear me and see the slide yeah yeah it's all good the presentation is on the ngfs publications there are actually two publications which we put out in September this year one is called environmental risk analysis overview and the other one is called occasional paper which is a much much longer document 600 pace with detailed methodologies on how to conduct such analysis and as I said I was the chair of a supervision work stream which was also called the work stream one and the ngfs that produced these two documents and now I am the research work stream head which is in charge of promotion or dissemination of products coming out of ngfs and the first set of products are the ERA publications so my role is switching but I'm working on the same subject I will cover the overview which is official view of the ngfs on how to conduct environmental risk analysis and how to promote such methodologies and then the occasional paper which is a set of case studies that involve more than 30 organizations usage of their methodologies and finally I will be opening up for some Q&A now in terms of background as you probably noticed that back in 2019 the ngfs was already publishing something saying that climate change is a source of financial risk this is the first time a group of central banks and supervisors stating that which clearly shows that this is a growing consensus among policy makers and obviously with this being a risk you need to analyze the risk and the risk would involve identification of the source of the risks, measure the exposure to such risks and quantify the consequences of such risks in terms of impact on financial assets. The problem is that in most places in the world the financial sector including banks, asset managers, insurance companies are not fully aware of such environmental and climate risks and therefore they could excessively invest in polluting and high carbon assets because of unawareness and thereby exacerbating environmental degradation and climate change. At the same time by investing in such brown assets they pose challenge to financial stability because as I will show you later on such exposures could lead to significant decrease in valuation of the assets and could lead to a very significant increase in non-performing loan ratio of the loans or the bonds that they hold and with that recognition the ngfs began to organize our members which are central banks and supervisors and also external experts starting from late 2019 and we begin to draft publications on environmental risk analysis. Now here just a small footnote on terminology by environmental risk analysis we include both pure environmental related risk analysis for example air pollution, water pollution, land contamination but also include importantly climate risk analysis and this term of ERA is just a short form of climate and environmental risk analysis. The view of these publications is to promote the adoption of such methodologies in the financial community especially among banks, asset managers, insurance companies. Now starting with the overview which looks like this on the left-hand side of this slide it's a publication from the ngfs so it represents official view of the ngfs and this overview provides a non-technical review of the tools and methodologies which cover a wide range of scenario analysis and stress testing and these are what we call forward-looking analysis because they don't show you what happened in the past but will show you what may happen in the future and it could be one year, three year, five year or even 20, 30 years forward-looking analysis and we looked at both transition and fiscal risks. I assume all of you understand the difference between these risks but in case not physical risks would involve examples such as sea level increase, the increase in intensity of natural disasters as a result of climate change and transition risks would typically involve energy related transition for example by energy transition policies you will see decline in demand for fossil fuel energy and related products and increasing demand for renewable energy and such transition of demand supply and pricing would lead to upside and downside risks to certain industries that's related to energy or related to carbon so these are the type of risks which we cover using scenario analysis and stress testing of course the report also covers some what we call more static analysis using backward-looking information and taking the form of ESG carbon footprint accounting and natural capital risk analysis of course some of these are including forward-looking elements as well and after reviewing the methodologies we also identified a couple barriers to wider adoption of such methodology in the finance institutions and against these barriers we will propose a couple of options to promote wider adoption of the EIA. Here I'm listing the couple barriers I think these are important for central banks and the supervisors to understand and therefore based on your local conditions may adopt a certain actions and some of which could be out of the option list that we provide in the report. One of the barriers is the lack of awareness as we understand in many countries especially developing countries the awareness of environmental climate risks are still quite low not many senior managers of banking insurance companies and the SM managers are aware that the exposure to environmental risks and climate risks could lead to financial risks and the second problem is the lack of data whether it's environmental data or data that's linking environmental risks such as exposure to high carbon access to the financial losses and limited capacity to develop internal methodologies and a lot of banks as a manager because of size is relatively limited they are not in the position to invest millions of dollars to developing such methodology internally so need the external help and especially emerging markets I think application is more limited in the process of compiling these documents we feel that more than 80% of these methodologies that's developed or used are in OECD countries emerging markets are still very very limited in terms of development and adoption of methodologies and finally the methodology themselves and the data that's used by existing methodologies are still having problems whether in terms of accuracy in terms of completeness in terms of user friendliness there are still a lot of issues that need to be addressed against these barriers we developed a couple options for example enhancing awareness of the need for ERA how do we do that we have a fuller discussion in the test one of the options under this heading is that the central banks and the banking regulator themselves should conduct environmental risk analysis and assess the system risk arising from the banking or other financial sectors exposure to climate and environmental risks so that raising the awareness of those institutions they supervise and secondly some public goods need to be developed namely government or supervisor hosted capacity building for developing methodologies and developing databases some which could be shared within the industry and also we think some organizations maybe government maybe industrial association maybe mdbs should support or sponsor some demonstration projects so that they can look at some typical cases for example co-related climate risks and one such methodology that developed that they can be shared and disseminated to the rest of the financial community for adoption at a much much lower cost and also disclosure is important we feel that if the financial institutions are not required to disclose environmental climate exposure and not required to disclose ERA analysis results they may not have full incentive to do that so some efforts to move from a voluntary to semi-compulsory and eventually to compulsory requirement for disclosure may be needed and also developing key risk indicators are important and so far the methodology is developed by more than 30 organizations are all different and they use very different risk indicators the comparability of such risks are very poor and we need to work towards some harmonized set of risk indicators to measure environmental climate risks and finally we need some taxonomies to define what is green what is brown and so far there's no universally recognized green and brown taxonomies which also pose challenge on the comparability of the results whether it's about risk exposure or about the financial risk arising from risk exposures now moving on to the occasional paper which as I said is a much more detailed report on methodology that's not called a ngfs official report it's called occasional paper modeled after the IMF occasional paper and the occasional paper viewed as views of the asses rather than the ngfs that's why we have more flexibility including academics including finance institutions and third party vendors products into this report this is the paper content of the occasional paper you can see it has 37 chapters written by more than 30 organizations and we break them down into eie for banks eie for issuing investors and insurers and also we looked at other methodologies then forward-looking methodologies such as stress testing and scenario analysis and finally we discussed couple cross cutting issues which include data issue assumption issue and the methodology issue and so on so forth so I think this is so far the most complete collection of methodology in the space of ERA now let me give you just a couple examples that are contained in the occasional paper here is one chapter which myself and Dr. Sun has written using the Chinese co-fight power generation sector as a case study to look at the transition risks of banks lending to this particular sector so the exact question is that what if a bank continues to lend to co-fight power generation sector what's going to happen to a non-performing long ratio in the coming 10 years and we use this set of model which involves four different modules initially setting the climate scenario for example you know base case scenario and two degree scenario and under different scenarios the different assumptions on transition policies and with such a transition policies will measure the impact on some macro and sectorial variables such as demand supply and pricing of energy related sectors and then we're putting these sector related results into the financial model of the companies we looked at three representative Chinese co-fight power generator and we're putting this financial impact data into the company financial model and end up with a whole bunch of new financial ratios in the coming 10 years and these financial ratios then is used to estimate the PD probability of default of these companies in the coming 10 years and we end up with the default probability number using different scenarios or under different scenarios and finally we'll make a comparison to show that from scenario one to scenario two how much the increase of non-performing long ratio or probability of default increase in the coming 10 years now the exact questions we ask in terms of transition are the following what if we have the five shops number one the demand for co-fight power generation is going to go down due to energy transition which means that the revenue for co-fight power generator will go down and secondly because of the technology progress renewable energy sectors such as solar and wind will see the cost going down significantly in the coming 10 years and therefore putting downward pressure on several power companies pricing power therefore their pricing of the co-fight power generator will also go down as a result and certainly carbon price it will likely to go up in the coming 10 years according to world bank forecast carbon price will have to go up by 10 times if China is to need the Paris agreement which is a carbon neutrality target that Chinese president has recently announced and with carbon price going up by 10 times the co-fight power generator if they're not aggressively reducing carbon they will have to pay much higher price for buying such carbon quarter that's a cost increase and finally because of the deterioration in financial ratios due to the first three reasons the funding cost of these company will go up as a banks or bond market will begin to downgrade their credit rating and finally some of the Chinese banks are considering increasing risk weights for brown assets which may include the co-fight power generation as a result of this policy change they may also see increase in funding cost so these are the five shots which we designed to describe the energy transition and by putting these shots into the sweet of model we end up with these charts for the three representative Chinese co-fight power generation company all of them will see significant increase in default probability in the coming 10 years and in one case which is the average of the three company we show that the default probability will go up from 3% today to 22% by 2030 note this default probability is about one year default probability it's not cumulative yet so very obvious huge risk of continuing your investment in co-fight power generation sector or continuing your lending to that sector and knowing that it's going to significantly change the composition of the investment portfolio or lending portfolio of the bank comparing with not knowing the risk I think the environmental risk analysis can significantly change the portfolio of institutions including banks and investors towards greener and reducing the exposure to brown and therefore saving themselves from engaging in very risky operations now give you a couple of other examples contained in the occasional paper I don't have time to to to elaborate so I'll be be very quick this is a case study called climate value and risk using large European banks as the data sources and they looked at low carbon and high carbon investment strategies and they showed that the value risk of high carbon exposure are very very high and here's a case study from another chapter of our occasional paper done by vivid economics which shows that out of the sectors on the listed market the energy sector may see something like 40% drop in valuation and obviously because it's involving a lot of high carbon energy sources such as coal and oil this is another case study done by two degree maximum initiative which shows that the probability of default of bonds issued by coal relay sector is going to go up by about four times and there are many case studies in the physical risk space as well so far I've been talking about mainly transition risks and the physical risks would involve typically these modules starting with stochastic events to hazard module to vulnerability module and finally setting the impact on financial losses and the case study by CISO shows the impact of physical risk on insurance sector where they produced a lot of numbers on the percentage increase of insurance losses and this is another case study which can decompose the source of financial losses from different aspects I guess macroeconomic impact at production level and due to extreme weather or business interruption and so on so forth there are other approach other than stress testing or scenario analysis which we saw before these include ESG scoring methodology water risk credit risk tools and natural capital credit risk assessment and also air pollution related stress testing all done by different organizations so that's all I like to highlight for this presentation and this if we have time we'd love to you know answer a couple of questions from here yeah thank you very much margin we will come to the questions and the kind of panel session just a bit later but thank you very much for a very enlightening presentation that that kind of you know lets us know exactly where the NGFS is and some of the work being being done on the back of the COVID crisis now of course as as you may be aware this webinar itself forms part of the sustainable crisis response project which is being funded by Inspire and it's being led by a research partnership made up of E3G the SOA Center for Sustainable Finance Season and the Bennett Institute for Public Policy at the University of Cambridge and the idea is that we've been holding events such as this and undertaking research to to to hear the views of different speakers and experts in the area and then we're putting together some policy briefs to help guide central banks and monetary authorities in Asia and also globally to you know ascertain what are the what are the next best steps of actions that should be taken in in 2021 and beyond to to both deal with COVID and ensure we get a sustainable development coming through that so that then brings us to our next presentation and it's on a toolbox that has been developed on sustainable crisis crisis response measures for central banks and supervisors and and presentation of some lessons from practice so very pertinent to this topic and I'd like to introduce the speakers who along with Ulrich Wolt who you'll hear from a bit later have helped put this together so can I introduce Simon Decau who's a research officer at the Grantham Research Institute and Climate Change in the Environment at the London School of Economics and Political Science and Nick Robbins Professor of Practice in Sustainable Finance also at the Grantham Research Institute on Climate Change in the Environment at the LSE so Simon and Nick please join us well thank you so much Aziz and great to join you really fantastic to follow yourself Dr Mara in your presentation of the ERE ERA handbook I mean a great treasure trove of of insights there so delighted to be part of this this workshop so first a little bit about Inspire it's the stands for the international network of sustainable finance policy insights research and exchange and it's been set up with a specific purpose of channeling sort of best ideas and rigorous research from the academic and analytical community around the world to to support the work of the the NGFS which Dr Mara outlined we are a research stakeholder of the NGFS I'm delighted to be the co-chair of the of Inspire along with Ilmy Grantham who works at the Climate Works Foundation heads sustainable finance there and we have the relationship with NGFS we have an advisory committee with Dr Professor Wang Yao in Beijing Pierre Monat from CEP in Switzerland and Jacob Temer from two degrees initiative in Berlin and what do we do we commission research on a variety of topics that are relevant for NGFS for central banks and supervisors we convene researchers policy makers and practitioners and we aim to communicate which is what we are doing doing today so next slide please so in terms of our I suppose two research modalities we have been commissioning research we do we have been doing this through an open process we've had four calls proposals and have now commissioned over 30 pieces of research from a whole variety of different topics and then also we've been working with NGFS through Inspire to support the ERA occasional paper which Dr Ma has just presented and also to provide support for the reference scenarios which NGFS has been developing on on climate change and doing that together with Bloomberg just to give you a sense of the range of themes that our research is looking at so we're looking at micro-prudential number one macro-prudential looking at risk differentials and taxonomies monetary policy that was the subject of our most recent call we're looking at sovereign bonds obviously a key asset for central banks we're looking at the effect and the impact of green policies in the real economy and then the one in the middle theme six is sustainable crisis response how is this terrible health crisis this economic shock of COVID how is that impacting the way in which central banks and supervisors are trying to support the greening of the financial system that's the the theme of our toolbox which we'll present to you right now next slide please so here's the cover of the toolbox it's the second edition and as we know in this crisis is a very dynamic crisis is going through many stages this was initially conceived in in March as the crisis really took hold and we were really trying to ask the question how is it that central banks as they respond in a whole variety of measures to support the financial system and economies through this economic shock how can they connect this with the rising ambition and commitment to deal with environmental risks climate risks and also support the greening financial system so this is the second edition first edition in June and this is a work in progress so still very dynamic thank you next slide so in terms of the need to act swiftly right now clearly we've seen extraordinary measures in terms of the nature and scale liquidity in the trillions by central banks and and that has really been essential to support economies in the face of this unprecedented shock in the last 100 years clearly at the same time these organizations have been deepening their commitment to taking action to confront climate change and other environmental risks and as I say we released our first edition of what we call our sustainable crisis response toolbox setting out central banks how they could join the dots between the two and that really set out the architecture the the main themes of the toolbox and in this second edition what we've done is look at actually what is happening what is going on we've expanded our empirical assessments and looked at what actually has been been carried out by central banks and supervisors and and how are they incorporating climate environmental factors and how could that improve in the future thank you so it says why when we're thinking about this immediate crisis should central banks and supervisors be thinking about climate change isn't this a sort of a distant issue and really something that they should put to one side and really focus on the the immediate crisis we think that actually it is essential for central banks and supervisors to be thinking about climate change and wider environmental risks at this moment firstly what we found very striking is this year in 2020 the shock caused by COVID-19 has really served to deepen rather than deflect the strategic case for central banks and supervisors to integrate long-term risks into their operations I think particularly the fact that COVID-19 is a zoonotic disease it comes from the animal kingdom and it has shown the fragility of human systems economic systems financial systems to environmentally environmentally based shocks and we know that zoonotic based pandemics are actually exacerbated by environmental practices such as deforestation, biodiversity loss and climate change so I think in a sense it has been the mother of all stress tests and in very which has roots in environmental degradation so I think it's been very profound in that sense as making clear that these environmental risks are not distant threats but actually are here and actually can have systemic and profoundly damaging implications. Building on that what we've also seen sorry Simon if you can just go on the final one sorry thank you, is that actually the shock that we've seen has actually accelerated many many many trends and some of these transition risks which Dr Marwa talking earlier for example in terms of oil demand clearly hit very badly by the closure of most transport networks and this has brought forward the peak in global oil demand by many years from the late 2020s and 2019 is now recognised by many as being the likely peak in global oil demand and so in a sense it's actually as an accelerator of some of the transition risks thank you next time. So why particularly as central banks are thinking about responding to the crisis using a whole range of tools monetary tools, prudential tools and other tools what are the key reasons for thinking about climate factors and other environmental factors. First is to think about their own balance sheets and to make sure that climate risks and other risks are properly reflected in their own balance sheets particularly as we know we have pervasive market failures so we cannot expect that the prices of assets in the market are actually reflecting a full extent of environmental risks that's the first reason think about your own balance sheets. The second actually obviously is to think about the climate related risks in the financial institutions that are supervised by central banks and regulatory authorities and to make sure that as you make an intervention to deal with the crisis that these micro risks are dealt with then clearly there is the importance of ensuring that crisis response measures do not lead to an increase in actually climate related risks across the financial system I think concerns that some of the initial responses on the fiscal side not so much on the central bank side but on the fiscal side have actually supported fossil fuel based economies exactly the sort of sectors that we actually need to see being moved into transition and phasing phasing out and finally obviously central banks and supervisors have strong links to policy agencies and governments and these governments are now very clearly saying they want to see a green recovery from COVID-19 which is in line with the Paris Agreement and Sustainable Development Goals and central banks and supervisors have a role in actually supporting governments to achieve this green recovery. So this is my last slide then I'm going to hand it over to my colleague Dr Simon Dickow who will go into the details this really gives you a sense of the key features of the toolbox what we did with this was look at the the range of different mechanisms that actually were being used by central banks and supervisors and we did this in in sort of two steps firstly saying what is the range of tools that are used from a conventional perspective and we could call that often it is often sustainability blind and how can these tools be calibrated to respond to the crisis so that's the sort of first step step a and then second is how could those same tools be sustainability enhanced through incorporating climate and other other factors so that was what we did so really looking across the spectrum of of crisis response measures and then looking at the sort of plain vanilla version and then looking at a green version and on the on the left you can see the range of tools at a very high level the nine tools in three categories that we have identified so firstly monetary policy so ways in which collateral frameworks have been deployed looking at indirect monetary policy instruments non-standard instruments and then direct monetary policy instruments and then there's prudential policy both regulation of supervision both at the micro and the macro prudential scales and then there are a range of other policies one other financing schemes than the the way in which central bank portfolios are being managed and finally supporting sustainable finance which is a sort of a new area and as I mentioned earlier we've seen a rise in commitment by central banks and supervisors alongside crisis response I'm now going to hand over to you Simon to really go into the detail of what we found and our recommendations thank you yes thank you Nick so I will I will very briefly discuss what we found in practice and then outline our ideas for what the next next steps could be so how sustainable is the current crisis response in in practice we have we have investigated this well we have investigated the policy response of central banks and supervisors in 188 economies and our investigation is based on the IMF's response to COVID-19 policy tracker and our key findings are well almost all instruments that are included in the toolbox are currently being used as a crisis response measure by central banks and supervisors although and this is the crucial point here not in a sustainability enhanced calibration and generally we have observed that central banks have moved very quickly to extend their collateral frameworks to include a broader variety and quality of assets so this is something we found almost everywhere and then many central banks and supervisors have east counter-cyclical capital buffers and general micro prudential regulation and supervisory standards again something that we found in in in many countries um yes this figure provides an overview of the relative use of these nine different instruments of the toolbox and as you can see with the exception of changes in in central bank portfolio management practices which is our category eight here instruments in all categories have been have been widely used and unsurprisingly of course the the adjustment of indirect monetary policy instruments which is category two here is used is used in 48 percent of of the countries and is therefore the dominating crisis response instrument and this is followed as as mentioned on the last slide by a change in micro prudential instruments which is category five here in 40 percent of the countries and usually these are implemented as a release of of supervisory requirements or or expectations and yes all together i think this this this figure shows that a broad variety of instrument categories from which from which financial supervisors have have drawn their response so very broad broad approach lots of instruments have been used and um yes so yeah turning to the sustainability dimension we have found the following in only one economy has has the central bank explicitly calibrated a crisis response instrument in a what we would call sustainability enhanced way and this is the reserve bank of fidgy which has raised its crisis response import substitution and export finance facility to provide credit to to well among others renewable energy businesses at a concessional rate and yeah however as as the figure shows central banks and supervisors in 40 economies 20 21 percent of the total have taken steps to address sustainable finance or implement related policies in parallel however these are not directly related to the to crisis response measures and with regard to regional trends we found that central banks and supervisors in europe and asia have been most active in terms of introducing these parallel sustainability measures and then um yeah these these measures have also been taken mostly by central banks and supervisors in in high income countries um so yeah generally with the toolbox we want to provide a framework um to allow for the for the categorization of a range of measures that central banks and financial supervisors can take to support a sustainable recovery from cobit 19 and at the same time to ensure um that their crisis response measures do not have unintended consequences in terms of enhancing climate and and and other sustainability risks and it will of course be important to further um yeah for further research to explore in in great technical detail um how these instruments can be applied and in and the particular circumstances facing facing different central banks so this is something we will do next however we think that yeah that the updated toolbox provides a starting point for achieving the the integration of these sustainability factors into the crisis response policy frameworks and we would like to yeah we we picked four priority areas where we think action is particularly urgent first amending collateral frameworks to account for climate change related and other environmental risks a lot of central banks have expanded their collateral frameworks and it would be good to to also take these risks into account then removing the carbon bias within corporate asset purchase programs and align refinancing operations with paris agreement goals for example the bank of england's asset purchase program has been shown to be aligned with i think 3.5 degrees so that would be an important step here third adjusting prudential measures to minimize climate risk and strengthen disclosure and stress testing requirements and finally adopting sustainable and responsible investment principles for portfolio management including the policy portfolios of central banks um yes my last slide the next phase of the of the crisis response so in terms of next steps we think that it would be important to bring together these these two largely separated separate tracks of crisis response and sustainability commitment first well regarding the easing and and credit expansion policy it would be important that sustainability considerations are incorporated to avoid a significant expansion of lending to economic sectors that are not aligned with transition plans and under ambitious transition plans this this expansion could constitute a significant investment in essentially stranded assets so this would be this would be our main argument here um then the widespread and undifferentiated undifferentiated counter-cyclical release of regulation um and supervisory expectations in face of significant transition and also physical risks is is rather problematic and we would argue that if prudential measures are released assets and related exposure to sectors bearing the highest transition risks should be exempt from this release and um yes then of course the ngfs as well as a lot of national central banks and supervisors have made significant progress as we also just have seen um in expanding their capacity and knowledge on climate change and related risks and the implementation of all these measures that are being discussed should be brought forward and be applied to all these crisis response measures already uh yes finally further dialogue and analysis is of course needed to explore how how these well-established approaches such as as market as the market neutrality principle can be updated in light of of market failure such as climate change and we would also like to mention your biodiversity law specifically and with this yes i would like to hand back to Assis and the discussants thank you okay thank you very much uh simon and thank you also nick that's an excellent presentation and some real um strong areas where we can focus uh the next steps and direct um central banks to to move towards now i think um in order to kind of comment on these ideas it's very important to get a view from from the private sector because obviously these are the institutions that are going to be more directly affected uh and uh it's it's of course very interesting to us to hear the views uh and also see how some of the measures there they're enacting so uh can i first invite uh harry cho who's the head of sustainable finance asia pacific at ing um to to give us your comments on on what you've just heard and perhaps talk a little bit about what what you're doing at ing sure thank you so much Assis and thank you for really fantastic presentation summarizing what i'm sure was thousands if not tens of thousands of work which is very very important to move the needle in this part of the world and globally so thank you so much um just very quickly to touch upon some key points that really stood out in listening to the three um presentations um the fact that everything from here on which has not necessarily been the case when it comes to risk analysis is that we need to be forward-looking and whilst in the past if in individual institutions wanted to forward-look when for example it comes to probability of default models as mentioned by dr majin the key crux and difficulty was the fact that there was no backward-looking data that was required by central banks and regulators and so um i think we very much so welcome the fact that there is now this clear consensus that we must continue with the research to equip the institutions to do forward-looking analysis and to reflect the risk that we're facing the regulators and central banks are also adopting this approach with time um i think the fact that there is significant amount of progress whether it be standards or awareness in always cd countries is an important point in that when it comes to the emerging markets and certainly the case here in asia there aren't that many always cd country members um in the asia pacific so how do we actually narrow the gap between knowing um where one may want to go but the realities of how it is on the ground so to narrow the gap between the science-based targets and paris alignment that we all need to head towards first is the reality today of balancing between social and economic progress that is where a significant amount of work is likely needed and where private sector can also step up in help in helping um there was this mention of how to ensure that there is a harmonization and proliferation and awareness and um one of the approaches that ing took from day one when it came to climate action and climate change was theory of change so it's no good coming up with our own methodology and we started a bit earlier with um coming up with our own um scenario planning as well as climate action methodologies from 2016 there's no point in doing it by ourselves so we have open source whatever we had created so far in order to share it with broader number of institutions um we in particular worked a lot with two degree um investing initiative to the II and now the methodology that we had set for climate alignment again forward-looking climate action was adopted by dozens of financial institutions banks already so with that maybe I can just share a few slides um let me see if I can share my screen okay so I just approached to climate so we we we look at both climate action and climate risk as two sides of the same coin climate risk of course is taking on a risk assessment that addresses the impact of climate change on our business and of course our change uh that the impact of us on um uh the impact that we are having on the companies that we finance as well which leads to climate action so um how can we address the impact of our business on climate change and that's where we had come up with certain methodologies working together with peers and um leading think tanks and academia the third point um from practical commercial perspective is we must link these practices to transition financing opportunities so I'll share a little bit on that I had assumed that someone uh earlier on would share this fantastic map from the one of the ngfs reports that summarizes how the climate related risks actually transmits to the economic channels and that actually um transmits onto actual financial risks now this is can't say for every single financial institutions of course some institutions at a stage of really understanding even what climate risk is but many institutions today have already understood this and we're internalizing and operationalizing the fact that climate risk does transmit to financial risk we have just published um couple months ago our first climate risk report and whilst we haven't published anything quantitative at this point things are moving into quantitative analysis to see how do we embed this climate risk into for example the modeling that is required or alternatively other internal tools that we can use for example um you know for example changes in the pricing that our internal treasury deploys for funding across the different parts of the world or um uh changes changes in the risk weighted asset pricing and so on so um if you haven't seen this particular graph or the report where this came from I we would uh highly recommend that one of the things that was also mentioned again I would like to just show what it had actually meant in practice for institutions such as ourselves um on the risk side let me start with number one the risk side we had started very early on looking at energy transition what does this mean and we realized that you can't really only look at the supply side but you really have to analyze which of the sectors that we have most exposure to as well where who have the most usage of fossil fuels and um you know for each of these sectors it was our view that we need to come up with some kind of a scenario planning which is depicted on the left hand side fortunately even though this was actually created before NGF this excellent reports came out we were very very pleased to see that um the four processes were very much so aligned so utilizing this kind of framework um we had done further analysis to see for each of the key sectors where most transitions need to happen including where we have our balance sheet exposure setting the two boundaries two extreme boundaries looking at what is a fast forward green scenario and we really hope things won't be any lower than business as usual so setting that as um the wait and see scenario essentially and seeing what are the technological changes that need to happen and you know how does the funding pattern need to change over time so that can also direct us as to um even though we are not private equity or venture investors where can we foresee changes in probability of default as predominantly debt based institution and how to then help our clients manage this risk as well um so just final slide on the risk side um the the report that I mentioned we have outlined what we've done so far on the physical risk side as well as the transition risk side as already mentioned there is no industry standard out there on stress testing certain um regulators have outlined for example bank of england as already mentioned so um we've utilized our own um scenarios as previously mentioned um the scope of coverage so far had been for transition risk we are looking at it from global basis as um each of these sectors operate as well as our own business operates on an international basis on the physical risk side we commenced on the dutch mortgage portfolio only which may sound small but us being a dutch institution vast majority of our mortgage um and really state asset base actually is in the Netherlands so um understanding for example and we had teamed up with swiss re um who obviously the insurance providers would have best data when it comes to physical risk as this is their bread and butter daily business and such collaborations would likely continue in the future to understand um physical risk as to if there is changes in rainfall or heat um or water levels rise what does it mean for different uh parts of holland and um whilst we have looked at this at postcode levels and this year the idea is to increasingly become granular over time so it can be on a per house basis on the transition heats uh heat map side um again this will become more quantitative in our disclosure as well as the the work that we do internally over time but we have clearly identified also leveraging on the UNEP FIT CFD program um the the work that that's been done and we've also been part of that pilot what are the um sectors that we consider high risk medium risk and low risk and to continue to build upon this based upon four key risk factors namely direct and indirect emissions costs low carbon capex capex and revenues some uh deployment over time as well um so I'm running just a little bit of out of time but we just wanted to show you we can't leave out the climate action side whenever we discuss climate risks because at the end of the day you have to understand what are the risks and prevent that but actually take even further action to proactively fund the changes we need to see and this is where um uh our so-called climate actual alignment dashboard comes in so for nine of the um heaviest carbon emission sectors on our balance sheet we have utilized external data wherever possible the the best um internationally accepted scientifically back pathways as to where the globally the world needs to go on a per sector basis where is the market at based upon for example forward-looking capex that's been announced by the various companies and where is our portfolio at today and um you know utilizing convergence methodology where do we need to get to and you know one of the two of the key ways that we would actually look to take action is first of all engage engage with the companies who are our clients in each of these sectors but secondly we will also make choices in where we allocate our capital as can be seen by um already 2015 coal announcement no more coal announcement we made and upstream oil and gas um aligned to the sds trajectory which will be tightened over time as the sds trajectory itself changes is our sds trajectory they will be decreased in how much we invest in upstream oil and gas um so maybe i shall leave it there and maybe i can touch upon some of the transition finance topics in the q and a okay thank you very much harry um can i invite our next speaker grace hui who's the managing director head of green and sustainable finance at hkx just to give your views as well please thank you assist i would like to thank ngfs and inspire for organizing this joint event it is a privilege to be here to share my views with you all and also such distinguished panelists i agree with henry's comments earlier uh so much work has gone into the research publication of these two reports everyone who work in the finance sector will benefit from reading them i certainly did so thank you and gfs inspire dr ma simon and nick um assist i think wanted me to introduce myself so i am grace hoy i'm from the um hong kong stock exchange in the uh managing the green and sustainable finance area um so i'm here to share with you um our exchange overall esg journey um from both as a market regulator and market operator perspective so having heard the insightful presentations my overall takeaway is that the financial sector including the central banks supervisors and regulators are making good progress in greening the financial system however there's still a lot more we all need to do if we were to effectively manage climate risks and mobilize capital to support the transition to a sustainable economy in both presentations we heard about the options for mainstreaming environmental risk analysis e r a and also priority areas for integrating sustainability factors these areas all required an in-depth understanding of environmental risks including environmental related risks such as credit legal market and operational risks and climate related risks such as damage caused by extreme weather events and how environmental and climatic sources of financial risks can be mapped to physical risks and transition risks i wonder how many of us in the financial sector fully understand these risks and be able to identify and manage these risks but should that be an excuse not to do enhance awareness of the need for e r a an excuse not to require mandatory disclosure of climate risks in line with tcfd similar to the excuses we have been hearing from number of years now for not fully integrating esg risks in our policy decisions because there's no unified taxonomy the answer is clearly no i remembered when we first made esg reporting mandatory for all hong kong listed companies at the hong kong exchange back in 2015 when voluntary reporting was not working we received a lot of criticisms as the markets claimed that there were not enough experts knowledge not enough guidance materials not enough tools and there's no uniform standard we went ahead anyway but we did it with a comprehensive esg resources website to accompany the new mandatory requirement including online tools such as carbon footprint calculators and the step-by-step guide on how to do the reporting five years on all listed companies continue to publish esg reports and the disclosure is improving we believe it is important that we continue to collaborate with listed companies to help them improve their esg practices through education and insight we continue to provide new online tools online seminars and guidance materials to help directors better understand materiality assessment target setting and reporting boundaries this year we elevated the esg debate to board level by requiring them to incorporate esg into their business strategies assess risks and opportunities and explain the approach on material esg related issues to their stakeholders this is a major step forward because listed companies now have to treat esg reporting as more than a tick the box exercise it encourages companies to incorporate esg and opportunities into their overall corporate strategies i therefore completely agree with the options for mainstreaming era mentioned by dr ma including developing analytical capacity and databases and encouraging disclosures of environmental risk exposures there are many era tools the industry associations the central banks and academic institutions etc could help develop and put online for easy access as well as era related training that these institutions can provide online in turn this can also help raise awareness of the need for era secondly encouraging disclosures of environmental risk exposures in line with tcfd recommendations is also essential at hkx we have recently required all listed companies to disclose significant climate related issues which have impacted and may impact the issuers we regard this as an important step forward in corporate reporting an area which an exchange like the hong kong stock exchange can push forward and continue to enhance with continuous enhancement of esg disclosure requirements we believe it can help facilitate risk assessment for collateral frameworks mentioned by simon and nick earlier to further enhance esg disclosures and bring together issuers and investors to drive the development of sustainable market day solutions early this month hkx has launched asia's first sustainable and green exchange stage as a next generation esg platform providing both issuers and investors with an information portal with increased transparency and guidance on green and sustainable finance as impact investing is gaining momentum in global capital markets on stage you will find an online repository covering green social and sustainable bonds which the issuers provides information such as post issuers report like the user proceeds and environmental and societal impact of the investments we believe this transparency is important as it gives investors confidence and it also allows investors to make decisions on whether to invest in these products stage is also an online repository of green and sustainable finance resources promoting market education not sharing and stakeholder engagement in sustainable finance we provide online resources such as case studies webcast videos research papers and other publications aim to help make help market participants and reach their understanding of sustainable finance esg integration and sustainable investing in the long run we will work with stakeholders such as ngfs and inspire to bring more sustainable investment services to facilitate esg investment and esg integration in this region on that back to you assist thank you okay thank you very much grace it's very interesting to hear some of the actions that you're taking at hkx and also to harry in talking about what's happening at ng so i'd now like to move on to the panel session part of this webinar and i'd like to invite the audience to submit your questions that you may have for the panel so can i invite harry uly dr ma to to switch on the web cams and we can start the discussion i think it won't be possible for participants to to ask their questions in person on this platform so please use the q&a box below and send your questions through and and we'll deal with them as we go we should have enough time to to get around to all of them okay so perhaps just to start off the the discussion dr ma you were talking about the the issue of taxonomy and some of the work ngfs is doing around that i think this is going to be a bit of a challenge and although we see for example you know the ecb is preparing their own the world bank has been working on it and of course individual countries particularly in asia are also working on it there are going to be differences in in in the different definitions that different countries want depending on their industries and and and what they're trying to do so do you see that do you see this you know a way that this can be resolved or do you think it's going to continue being somewhat of an issue for the next five years or so thanks as is i think on the taxonomy issue if i remember correctly grace mentioned that the lack of taxonomy lack of harmonized taxonomy is not excuse for you know doing nothing i fully agree in fact there are a lot of taxonomies available already in fact it's been evolving very rapidly back five six years ago when i was co-chairing the g20 green finance study group a lot of discussions on lack of taxonomy the only couple of taxonomies and recently uh when i was part of the iso international standard organization tc322 which is the working group on taxonomy discussing this issue we began to hear complaining of too many taxonomies i heard there are 200 green taxonomies available which are developed either by governments or regulators or institutions or third party organizations or associations and so on so there are taxonomy available and for any organization which wants to do something related to using taxonomy they can pick one of these right so there's no excuse of doing nothing and i think acting now is is feasible by picking one of the most suitable existing taxonomies of course too many taxonomy will pose problems for example lack of comparability of the results lack of transparency and maybe someone would you know use a lower standard you know out of many to engage in activity that seems to be greenwashing so these are the issues arising from too many taxonomy which mean that we need to make some efforts to harmonize the various taxonomies and these efforts are ongoing just give you two examples one is the international platform for sustainable finance which was launched initially by EU and China joint together with i think a dozen other countries and this network has recently launched a working group on green sustainable finance taxonomy which is co-chaired by China and EU and i was appointed as a China co-chair together with Marcel Haug from EU and we just had a conference call on the working group which is now drafting a sort of first version of the report towards a common ground taxonomy using China green finance taxonomy and the european sustainable finance taxonomy as a basis so there's some hope that between the two very large green finance markets which are China and the EU we could reach some consensus on common ground taxonomy in a not very distant future and with that i'm hopeful that the chinese issuers will be able to issue green bonds in europe using the common ground taxonomy and european issuers will be using the same common ground taxonomy to issue green bonds in china and other markets for example hong kong could consider this as a reference for their adoption or as the basis for designing its own taxonomy if they don't want to you know build it from scratch um the other effort to which is iso i mentioned earlier is a consortium of many more countries i think more than 30 countries were involved in this tc322 of iso which began to look into harmonizing green finance or sustainable finance related standards not just taxonomy but the include taxonomy verification impact assessment disclosure engagement there's so many different standards across many many different products so i was joking under tc322 that we may need a 25 standards related to sustainable finance and iso tc322 could serve the function of a bookshelf for such standards going forward okay thank you dr mike certainly uh uh encouraging to hear that and and and you know we we can just hope that that progresses as planned uh because i think you're right there is the the risk of greenwashing if there's too many different standards and so on um the the second point i wanted to raise and and perhaps i can bring an uli um on this but it's it's also from from nick's presentation so nick please also feel feel free to feel free to comment um you know nick you were saying we've kind of hit that peak oil period and certainly the responses from seeing how covid is spreading uh uh is kind of giving a lot more incentive for central banks to think about um you know climate risk and how it's directly impacting us and and to really push us in that direction but perhaps maybe playing devil's advocate given the the recession that is now on us um there might be kind of the the the the opposite pressure particularly next year once we start getting past the worst of the pandemic uh as people you know start getting out again spending money wanting to fly using airlines um but also governments trying to create jobs and so on that we might go the other way uh we're already seeing the copper price shooting up and commodities going up in in in building up this growth could could there be a risk that we might overshoot uh and and go the kind of the other way in trying to uh promote growth and leave the the green side of things behind in the short term we'll jump in then uli your thoughts i mean i think that we this is a profound shock and crisis we're in and i think if we look back and dr mo you probably have some thoughts as well but actually the green and sustainable finance agenda has moved forward through crisis um so the gfc the global financial crisis led to a major major shift forward and the covid crisis where we will not go back um and i think certainly there's a recognition and a real shift we're at a real pivot point that the the green net zero economy is actually the best and perhaps only way we're going to deliver uh growth developments and jobs in in the next decade and this requires a really very very substantial uplift in investment this is going to be an investment led process just to touch on one thing a report uh in my country the uk which came out last week uh a report which i chaired is that the capital investment in in net zero needs to increase fivefold this decade this is not a sort of smooth transition to net zero this is a a really rapid increase fivefold increase this this decade in all areas of of the economy and what is important is that now this is seen as a way of creating jobs driving innovation and a really different structure of the economy it's going to be investment led structure and i think the the estimates suggest that by 2035 actually the this upfront investment you need rapid upfront investments is actually going to mean that gdp growth is going to be higher because you're going to be switching fossil fuel imports so for fossil fuel importing countries india in the region actually net zero growth is a fantastic bargain uh so you have more domestic investments and and and and less imports and fantastically reduced savings so so my sense is these and it's always good to to be challenged but i think there's a profound shift not least because so many countries are now committing to net zero and the decision from president g to make his commitment on behalf of china and then president elect biden means that i think there's going to be very little place to hide for investors i'll stop there if i can just maybe add to that um recently and this is before china japan and south korea came out with their net zero carbon commitments uh 2050 to 2060 hopefully um the move for china would go from 2060 to 2050 as well um but the research that we had done and this was done by our um think research i think research institute was to um analyze the covid response from where the money was going in terms of response and what percentage of that are actually um even remotely green um and it's this was also put against um so yale university also has what's called environmental performance index which shows how each um many of the countries around the world are doing in terms of uh environmental performance there was a bit of a trend in those who were higher up the environmental performance indicator who had higher percentage of green stimulus as as part of the overall stimulus package that were being put forward in the coming years um and and you know a lot of the countries in asia still did have zero if not very insignificant amount and put towards anything that's remotely green and so there is still um fair bit of work to be done but indeed it is very very encouraging and at a more commercial level we are starting to see this filter through in the investment choices that real economy companies are making and the request does coming through in terms of the funding requests as well that there would be this uh increasing transition towards net zero carbon of course not forgetting the the just transition and that would absolutely be required in in the emerging markets context thank you really did you want to first of all uh well hello from me i'm coming in a bit late now but um uh i'd first like to say that uh having worked with marjun on uh the njfs collection uh of environmental risk analysis and and with nick robbins and simon dickow on the inspire toolbox uh i'm very happy that we could bring these two together in one joined njfs inspire event um so um really glad everyone could make it um so on on your question aziz i i mean there definitely is this risk that that uh and we've we've seen that uh i think at the start of the crisis when uh everyone went into crisis mode and and kind of uh used tried and tested responses which were not really what we should have seen so in fact in the inspire toolbox um on the second version that that simon and nick uh presented today we could see that the crisis responses um were not really aligned by by central banks and supervisors were not really aligned with you know the the sustainability imperative that we really should see and um i think uh this is understandable because you know at the at the height of the crisis in march when the global financial system was about to implode uh i can see that that central bank and supervisors had had other things to worry about uh then kind of sustainability dimension this was really very short termistic firefighting but we have uh progressed and and i think uh it's clear that this is you know not not a crisis that that that is over uh in a very short period so we need to to have again this longer term perspective and um so what we've been arguing in in the toolbox is indeed that uh the crisis responses taken now will have profound impact and if we have all kinds of liquidity uh enhancing measures that don't take sustainability into account we are building up all kinds of additional risk that will come back to haunt us later so i think they're the very strong uh imperative also for the the regulatory uh side to really take these sustainability risks into account in the current actions and uh furthermore i think not only um has the the pandemic shown the vulnerabilities of our economies and and financial systems and and kind of really uh should lead us to to to strengthen the systemic thinking uh of our policy actions but we've also seen now um really meaningful uh commitments on the climate front so climate scientists have been very clear for for long that we really need to to get our act together that there is a great sense of urgency but now we have uh just over the span of a couple of months uh commitments from uh the major leading economies the EU, the UK, Japan, South Korea, soon the US um have committed to net zero emissions by 2050, China by 2060 and this means that uh if if all of that is really happening there's going to be a massive uh reorganization of our economy so the transition risk uh is really you know and and central banks and supervisors have a very clear responsibility to address the transition risk and so i would argue and i'm sure that that most of you will agree with me that we really need to get our act together there's a real urgency and even though um uh you know there's a lot of things we don't know there's also an awful lot we do know dr mass presentation has shown very nicely that we do now have the methodologies to analyze these risks and of course you know this these need to be refined we need to have more granular data better quality of data and all that but in essence we really have the tools uh that we can employ now in uh prudential regulation also kind of integrating into monetary frameworks um to really uh get things going and um uh uh um it was Grace who mentioned uh from the uh Hong Kong example um voluntary disclosure is great but it doesn't really work you know you have a few people who will uh be brave and and go forward um the time has come to to uh have mandatory disclosure of uh environmental or social risks across the board i mean obviously not for small uh media enterprises but for all larger companies for all listed companies uh for all financial institutions um if we don't do that now uh you know we will carry on with these discussions about oh we need better data we need you know we need to better analyze it everything and and this will just not not not be enough because we we have less than a decade to really fix our economies uh and address uh the enormous climate risk and of course we also have a biodiversity crisis and all that um so so there is really a great sense of urgency um we we need to have this great sense of urgency really also in the uh prudential uh community in the financial sector so time for for just uh thinking about what we could be doing i think is coming to an end we really need to do uh a lot of things now yeah thank you really and certainly i i mean i agree with uh with the fact that things have fundamentally changed and and the debate has changed so we can't go back to where it was but i think you're right we really need to keep that pressure up particularly next year and and my main worry is you know we had a whole um uh portfolio of non-performing loans building up even before uh COVID-19 hit uh as a result of COVID-19 and particularly once all the forbearance measures uh kind of roll off i think that's only going to get worse and that's where we'll see the real friction uh in trying to do things so i think that's it's going to be critical to keep the pressure up now let me now take one of the questions that's come in and again can i encourage all the participants please do send your questions to the q and a box um so this one is from uh ramin schrethera and basically asking how can we incorporate uh e r a and climate change in the stress testing of banks uh and i guess i mean um you know the ngfs has already published uh numerous scenarios around this and a number of central banks uh mas dnb the bank fangolin e cb already have published various reports on how to undertake stress testing and in fact how it's going to work once they once they formalize it so there's a lot of material available uh but perhaps let me let me turn to grace first and um uh perhaps grace if you have any kind of views on on how this should be incorporated and what you're seeing uh in the companies you look at thank you um i think uh we we basically follow the tcft recommendations right um we we encourage companies to do you know stress testing and scenario analysis um i i the the difficulty i think it remains that um in in hong kong at least um uh there there are not enough experts there are not enough people who understand how to do these stress testing um and we need to consider how we can help these people um because you know i i was serious when i said you know how many people in the finance sector do actually understand these risks we've been discussing um i can tell you that the the the the the financial sector may be a bit better but we have 2500 listed companies um and you know it goes from large cop to SMEs and i can tell you the the the the knowledge gap is huge um and um and we we we can continue to promote following tcft um but i think we still need to give the tools um to help them to report yeah yeah so you know definitely a big gap there and hopefully once once the banks and financial institutions start implementing this it'll force the businesses they lend to to also start uh giving this data and looking into it because they'll need it to make the the credit decisions um can i just jump in on this uh topic uh i think the first thing regularly that you're considered doing is to require disclosure of environmental and climate risk exposure by these financial institutions rather than scenario analysis and stress testing because exposure is a basis for considering the forward-looking analysis if they don't know the exposure there's no way you can measure the future financial risk arising from such exposure so i think that's relatively easy um you basically ask you know within a couple of years these banks SM managers should tell me what percentage of assets are high carbon assets and by forcing them to calculate their number uh they automatically have the incentive began looking into what if in the certain scenario these exposure would translate into how much increasing MPL ratio how much decline valuation and so on so forth that's a i think the first step most regularly they should consider and second thing the regulator should do is to work out some sort of methodology demonstration projects by themselves for example in Hong Kong if HQMA can begin to do a sort of a mock stress testing of a model bank and put it on the website of that model exercise i think it will be doing a lot for the industry and the same thing can happen to the you know SMM industry if the SFC can consider doing a couple of model uh sort of uh uh uh examples for typical SM managers with exposure to high carbon assets and showing them need a couple methodologies which are commonly used already and that will go a long way in promoting adoption at the uh in the local markets okay thank you you are also going to share your views right i think it's already quite well covered so maybe we can move on except just to highlight that there is bank specific group on the United Nations Environmental Program for Financial Institutions for TCFD it is already in pilot stage two and there there is quite specific explanations and discussions around how a bank can go about meeting this including as Dr. Ma just mentioned on understanding what exposure is what are the methodologies you can use and either how to even think about stress testing in the first place and there is plethora of resources out there now to help you on this yeah early yeah and just to follow up on that i think we need mandatory disclosure but we also of course need complementary support we need capacity building among the regulators and central bankers but also of course in the in the financial sector so this has to be a package and the aim basically has to be to to mainstream this kind of analysis so that it's not you know just kind of niche and we don't need a kind of the green bond market and kind of that is a tiny fraction of the overall bond market or we don't need kind of a small fraction of green loans we really need to mainstream this across all financial decision making and that obviously requires capacity building but without having some real push from from supervisors we can wait very long until it's really happens i think okay thank you let me let me go back to the questions and apologies i think nick had to had to leave us because he had another meeting but simon you're here no doubt will represent these um so this question is from actually from a colleague of mine at season glintaski he's just asking about how do we deal with the free rider problem so if you know most of the central banks and supervisors are doing their part to incentivize their regulated firms to move out of prone financing for example then other authorities perhaps in smaller countries possibly won't really have to do anything but will still reap the benefits of less climate risk and i guess that works the other way as well in that you know a lot of these polluting industries are in other countries but the effects of the pollution might be being felt in in much smaller countries that can't do anything about it so i can see you're raring to go and perhaps i'll invite simon afterwards as well to get some comments go ahead really yeah well great question but so i think um it's important two things first um uh kind of historically of course you know climate change has been caused by the large economies a large advanced economy so um if if we have small developing countries that were to free ride um i don't really have a big problem with that so kind of from a climate justice perspective um uh that would be okay and and um i mean of course you don't want uh a small advanced countries to free ride but um uh so that's kind of the first part of the answer the second is um we are living in a global economy and um uh transition risks are not just domestic so transition risks are not just about domestic policy making they're also about what's what's happening in the rest of the world so if we take the european union which is now getting very ambitious regarding climate policy take uh the u.s uh which which also with the new administration uh will have very ambitious climate goals if they are moving ahead with an ambitious climate agenda this will have repercussions for every country that wants to do business with them and that's basically everyone or of course if if you have uh the second largest economy in the world china which is also uh uh uh uh uh moving to net zero um you know if you are a country that that is exporting uh carbon intensive uh stuff or that is uh exporting coal fossil fuels well you better watch out you know these are real risks that that will will affect you and uh if you're a supervisor in in one of these countries you need to take notes yeah so so um uh these transition risks are real and and the physical risks of course uh no no border either so um every uh financial supervisor in every country needs to to look at what are the physical risk in my jurisdiction and and make sure that that these are taken into account in all lending investment decisions so uh I think the free rider problem uh is not a real one okay thank you okay dr ma I think there are many ways to deal with a free rider problem just give you two examples uh one is from international finance uh flow perspective because a lot of projects especially large infrastructure projects are financed by international capital if these international finance larger banks asset managers are fully aware of ESG risk and they adopt uh ESG principles they will not finance high carbon projects anymore so even if a country wants to do a high carbon project it may not get um in the low cost financing to support them that's one uh sort of a mechanism the other mechanism is green supply chain globally they're increasingly uh a large number of very large uh companies which are buying raw material equipment and the inputs they begin to adopt ESG principle green supply chain principles which mean that they will only buy supplier uh from uh companies which are ESG aligned and therefore those smaller companies in certain countries which want to continue to do um you know uh uh brown activities or brown production may not be able to sell their products to the uh larger companies thank you and simon did you have anything to add i think we've covered the quite a bit yes maybe may yeah i i think uli uli already answered this this question about the free rider problem and and much and also very well and maybe to respond to this question by lionel and also the um anonymous attendee sure yeah so that's so yeah so the question from from lionel market the climate bonds initiative he's asking how do we navigate or respond to the social and economic priorities in asian when trying to push to sustainable or trying to push the sustainable recovery agenda what are the key messages that we need to convey to the central banks and the other question is then what contributes to uneven development of sustainable finance and how can we overcome that gap so go ahead sami yeah i i think these these are very interesting because so what we found in in in our paper is that a lot of central banks basically extended or introduced instruments that were formerly considered not necessarily appropriate or at least not part of the standards head of central banking instruments in some countries um for example a lot of central banks have introduced um tools to support sms across the board um through through supervisory release or through through monetary measures and um i think this is this is also very interesting for the for the asian region because a lot of central banks are using these instruments and i i think it would be important to discuss whether some sustainability considerations could be could be added to them and this can be absolutely country specific so for for the peoples bank of china um we have discussed early on i think in june with marjun when we launched the first crisis response about refinancing and green refinancing whether this this is something the peoples bank already does is my understanding and that could be expanded because it is an existing instrument and the same is true for for for other countries where we see in the crisis response okay these central banks are have these these instruments in their portfolio why not add sustainability considerations to this to this new expansion yeah just to kick start these uh an answer to these two questions i'm sure other panelists have have something to add here yeah thank you simon uh does anyone else want to give a quick yeah please let me add a couple points i think in emerging markets where we see uh less capacity for environmental risk analysis i think the public goods aspect of e r a uh need to be emphasized because a lot of methodology a lot of data a lot of assumptions actually do not need to be produced by you know thousands of institutions or hundreds of countries um there are a lot of common elements which can be developed by uh you know uh multi uh national development banks by industrial associations by networks such as ngfs and so on so forth that's where you know we we can play a role uh by making these methodologies and data assumption more like public goods for emerging markets so that we can help reduce the cost of them adopting such methodology and the other thing is that the some emerging markets uh countries policies especially financial policies uh have not really assess the green impact of their existing practices for example uh i think simon mentioned SME policies a lot of SME policies which are helping financing the activities but in fact these activities may be very polluting or uh high carbon in nature and some of these uh financing incentives offered to emerging market uh for example agriculture's were actually supporting activity that using a lot of pesticides fertilizers chemical fertilizers so on so forth which is leading to you know soil degradation so this is because there's a lack of assessment of the green or environmental impact of these existing policies and some capacity for central bank to supervise the regulated assessment in this regard i think we also needed i may just add to that um the way that when we speak to our clients for example in southeast asia or even more developed nations is that uh you need to future proof not only your business but your fundraising um in particular the companies that have international trade flows as dr mel also pointed out they would be they would be companies and in particular the supply chain you're going to see so many changes on what will and will not be accepted as good enough or green enough um or too harmful um on the on the other side from fundraising and financing perspective if if companies do not buckle up and they actually look at what are the requirements of their respective shareholders or bondholders or um you know financiers who are also subjected to rising tide in sustainable development then at some point they will misprice the risk of running their business in certain parts of the world and so specifically for the purposes of future proving the business there is i believe a misconception that you either can pursue an environmental agenda or pushing for social agenda um and you know they really can be brought together they are one on the one hand if they don't address and future prove their business and fundraising they will face higher costs inevitably um and lower demand for the goods that they produce so all of these has to be taken into holistic balance and made you know it has to be understood by the companies and you know the regulators and governments have a role to play in using both hard regulation and um you know even incentives or um you know helping companies and corporates and um the stakeholders and the broader society understand this point so you know what is the real gap that we see in developing of sustainable finance um is uh you know every day we're out there educating as much as we can on what it means to future prove your business and some financiers some companies some CEOs they get it some don't and those who are more exposed to international fundraising for example from financing perspective get it the investors are knocking on their door say where's your disclosure what are you doing i was recently speaking to a company in um metals and mining space who are doing amazing things and they're they've moved the very hot heavy energy kind of the production chain from pretty much very heavy coal or fossil fueled power base to already 20 percent moving to renewable power and they intend to move 50 but they haven't heard of TCFD because they're private entity so um you know these are the kind of cases that we encounter in real life and you know that there somehow needs to be continued role that each of us play around the table to narrow this understanding and to help future prove the businesses um that that we need to move okay thank you i'd like to comment on that uh if that's okay uh harry um i i absolutely agree with you the difficulty for me at least from from hong kong perspective um is that um the investors are still asking for where's the elbow you know what's the return you know because they're all in there right for a very short term you know rather than a long-term investment it's like short term so so there you know whilst they they they have investment policies that drive into you know sustainable investing but they are not really in um sustainable investing because they do the very simple ones you know exclusion exclude tobacco companies exclude you know fossil fuel companies but you know how do we actually really get investors to care um so that uh the cost of capital for these uh issuers are really going to be expensive yeah yeah thanks very so i mean i think that that's a key point because uh there is that pressure from investors and i think that's one of the roles of the central banks and the financial authorities is to is to change those dynamics to to to make things more expensive if if they're going the other way and maybe that's i'll come to that in a minute but bolia did i think you wanted to share your thoughts as well i i i actually also wanted to to endorse was was what harry said and um it's really important i think to to to emphasize that uh kind of from a from a macro perspective um there is no trade-off between sustainability and and and development or also long-term development in particular um and um uh so this notion that you know kind of if we focus too much on on the green dimension now you know this will will inhibit recovery this will inhibit growth this is really the wrong take and and um people if they haven't seen uh the imfs uh october uh world economic outlook report i can really go recommend there the nice chapter that shows how investing in a green recovery can generate higher short-term returns uh higher employment but also uh at at at lower cost and and also in the long term um so it is actually good economic policy making um and obviously down on the ground at the micro level there will be winners and losers as always but but i think for public policy making uh there is a very strong rationale um and uh since cost of capital was mentioned um uh we we have been able to show in in research that um uh companies in in more climate vulnerable countries um actually have to pay a higher cost of capital which is also holding back business development and of course also um kind of then overall economic development of these countries and it is really important to to to emphasize time and again that um climate change is very unjust and and uh it disproportionately hits uh the poorer or um kind of uh parts of society and of course also the poorer countries so um addressing uh climate risk is very uh social and and uh so the the discussions we've had about just transition where where nick robbins has been one of the leading proponents of that work are really important because we will not be able to um move ahead uh with climate policies if we don't uh support uh those that are most vulnerable and most affected by the physical and transition impacts of climate change um so we really need to get this is right because otherwise we will stumble and and i think um uh we increasingly need to um uh uh have a greater role of the financial sector also in in supporting this just transition so um actually last week we launched a new report that we did with the Alliance for Financial Inclusion about inclusive green finance that we emphasize the links between climate vulnerability and and kind of uh the vulnerabilities of poorer people um at the same time how finance can enable uh is just transitioned by by enabling people uh empowering people creating new opportunities uh for for job creation and so on um so i think that's a really important um uh dimension yeah thank you really and and certainly that that's a very good point in terms of uh you know the evidence is is quite clear on on a macro scale uh about the importance of this um but i guess coming back to kind of grace grace's point um it's it's those micro decisions it's the companies uh looking at their individual balance sheets and i think one of the problems in this area is the fundamental risk management framework the basal framework that we use um has um because it hasn't taken climate risk into account it it essentially gives um a boost to fossil fuel industries because it's not charging correctly for that for that risk so i i wanted to kind of raise the issue of whether we we think that there needs to be a fundamental change in that in that regulatory framework and perhaps dr ma the people's bank of china has been one of the kind of four leaders in this in in terms of charging you know green promoting rwa's and brown penalizing factors when when uh looking at these kind of uh exposures so is that something um that we think uh central banks and regulators should be looking at and encouraging and if so there's obviously issues with that around arbitrage as well how do we kind of deal with with some of those concerns um dr ma do you want you want to kick off online um well it's a complex issue uh this issue of um introducing green supporting factor and brown penalizing factor uh have been discussed i think for nearly three years um when the ngfs was started two years ago it was a major topic uh under the work stream which i chair uh which called supervision work stream and in the first year um the members were talking about to do have enough evidence to support the um the perception that the green assets default less if that's the case then many central banks believe that we could consider reducing risk awaits for green assets because they were less risky so it's consistent with the principle of improving financial stability using regulatory policies such as changing risk weights now the question is um where do we have the data uh are the data you know robust enough to support the conclusion the only thing we found at that time was in china we have the data for five years which show that the green loans indeed default much less than the uh the rest of the loan portfolio in the banking system at that time the green loans uh npl ratio was 0.4 versus 1.8 for the entire banking sector's loan portfolio so uh there was one piece of evidence but the question then switched to you know what else any other country have data no they don't have largely because they don't have taxonomies that's why uh regulator didn't ask for the collection of such data without data there's no proof and even if you have a data to prove that the historically green loans default less then people will ask it do these represent future trends you're only talking about in the past right green loans before that and can you guarantee us a green loans default less in the future you know what it can answer that so uh gradually i think the debate is becoming in the collecting data from the individual institutions instead of at the country level because most countries have no taxonomy no systematically collected data um but still that discussion didn't go very far because most financial firms have not collected such data yet even if a few of them have the data uh the data points are too few to prove that so that's sort of the the temporary uh status of the discussion it didn't go anywhere but i think there's one interesting new trend which is financial institutions such as banks adopting lower risk weights for green and higher risk weights for ground uh brown assets by themselves such as lattices which did this i think more than one year ago and it was doing very well we are learning from lattices and some of the chinese banks are beginning to look into these examples of maintaining overall risk weight or regulatory risk weights unchanged while um introducing adjustment factors to green and brown internally uh within the bank okay yeah thank you dr ma and i guess i mean i think yeah on the on the maybe to rephrase the question slightly it's it's maybe not so much about green assets defaulting less and so on um because that's as you say we don't have the data and and that may not be the key issue but it's the fact that the brown assets are getting a kind of uh extra boost because the the external costs of those have not been incorporated in the risk decisions and so um the pricing should be much higher once we start taking that into account and perhaps that's the angle um that that we may need to look at it uli did you want to yeah i just posted in the in the chat um uh there's a bank of england working paper from january which looks at uh mortgage lending in the uk with micro data and they actually find that um uh energy kind of mortgages for energy efficient property default less so so this is actually uh some supporting this notion that kind of green lending in some cases may may may have um lower default rate um but otherwise of course there is very little evidence uh for that um but i would like to add that that um you know kind of i i think it's pretty clear that the risk in certain carbon intensive areas are very high so so that would uh i think uh vorrand um uh uh kind of penalizing factors for for dirty activity so so um uh the the the issue around green supporting factors i think is a bit more more touchy particularly that's just yeah just just one point as is um it is worth highlighting um in the eu there is what's called infrastructure supporting factor now which um was introduced last year as part of the capital requirement regulation and it's essentially is a broader set of regulation but um in in order to get 25 percent risk weighted asset discount one of the criteria is actually alignment to eutaxonomy and infrastructure is defined fairly widely in this so actually the european banks have been able to enjoy already by showing that uh for the sectors that actually do fit as part of the infrastructure definition um that there can be actually lower rwa um among other factors by the fact that it is actually aligned to eutaxonomy um and so that actually has been a boon and we expect to see um this as a test bed that may potentially widen the the gap from regulatory perspective on pricing of the rwa as to what was put in behind the academic and uh historic evidence on the causality rather than correlation i'm not 100 certain but this is something that is already a live case and one quarter of rwa pricing is quite significant okay thank you harry i'm i'm aware of the time um we're almost at the end of this session so perhaps what i'll do is we've got one final question so maybe we can address that and give each of the panelists a chance to give kind of their their final comments um but the question is around the issue of greenwashing uh and to what extent uh can investors be assured that corporations are taking real action and not just talk and obviously that's that's a very key one and i think um you know as dr ma was saying first we need to publish the data before we can even consider it at least the first step is publishing the data then we can start to look at how bad it is and what actions are being taken so that would be a first step but uh grace perhaps perhaps you can kick us off because i'm sure you know a lot of the companies that they're not publishing the data somehow how can we we be sure they're actually acting on it and making action um and so for hong kong all the listed companies have to publish in the estuary report so that's a good start um however the the data in the estuary report is not necessary been audited or assurance work being done to the numbers so i think where we are doing it we're we're we're driving the voluntary assurance practice as well the more credible the data is the more investors will will will trust the data and and in terms of greenwashing part of doing the stage it is to encourage more additional disclosures that are voluntary so that investors can see where the green proceeds or the social proceeds have have gone into which projects and the impact has been uh resulted from from from from such investments the impact on environmental impact and societal impact so all of this you can see them from on stage this helped reduce the risk of greenwashing thank you okay thank you um simon do you want to share kind of your thoughts on that yes yes just to support what what dr ma has always has always said that um i mean the importance of taxonomies is is is really is yeah we can't underestimate this here and i i think the the european taxonomy also provides a nice example of how it was developed last year and how the ecb then managed to pick up on this and discuss whether its collectible framework could be aligned with this of course this is all only on the on the green side and it would be very helpful to also um somehow classify those sectors that are most polluting and therefore have the highest transition risk but um yeah important to to also internationally look at the different taxonomies that have been developed and to find an alignment of these i think this could be a crucial step to avoid greenwashing thank you harry you've you've gave us quite a quite a bit of detail on that infrastructure facility but anything else any final thoughts you want to leave us with yeah so i i think um obviously the bottom up disclosure is very important but uh investors and financiers are also looking at more systemic solutions and so for example the asset owners net zero carbon alliance is one it's a coalition of asset owners who have come together and i believe that they would be publishing a paper soon on their take on how to actually look at calculating the um alignment as well as the carbon footprint of companies not only companies but also potentially instruments as well different types of instruments that public investors or non-public investments uh investors may invest in um so i would also add that there is significant uh work that can be done at the investor levels for them to actually take their own assurance if you'd like on um you know kind of third-party checks on what the company discloses having said that you cannot you know the information that is not there you simply cannot digest further so um you know just really putting forward the uh not only where is a company today but the forward-looking direction on you know what is their strategy to alignment to for example paris agreement or um and you know very much so also to focus on the social side um you know these are the the disclosure part is just that i cannot emphasize enough how paramount it is for not only direct access to the information that gets disclosed but further crunching of data by the investors themselves or by intermediaries such as ESG rating companies um or verification providers so um yes okay thank you harry uh dr mar any final course as i said many times i think there are three key uh factors that determine the uh uh the extent to which green washing is possible one is taxonomy not only we need taxonomy for green sustainable finance activities we also need taxonomy for uh these dirty uh or we can call polluting and high carbon activities uh with high quality taxonomy we can help avoid some of the green washing what do we mean by high quality it should be detailed enough it shouldn't be uh should not be a very broad uh very simple set of uh a category we need to have something like a few hundred lines in the taxonomy so that the users will easily identify which category my project will fall into um the second thing is about disclosure we need to move as grace said the gradually from uh voluntary to semi voluntary and eventually to compulsory disclosure requirement so that we make make sure that information will be made available on ESG and certainly we need to have some sort of verification um in some areas if it's pure green that's relatively easy but in most areas uh whether it's actually green or not green is not very easy to uh to see so uh some expert verification third party opinion uh will be necessary uh to ensure that the green washing is being controlled okay thank you and finally we'll come to Dr Uli thanks Aziz well um I fully agree with with with what's been said uh it basically has to be part of uh financial accounting and reporting um and and verification is really important so just like like any other financial information uh you know should be verified they should also apply to to the green or non-green dimension um and uh again I would like to to reiterate my point that we need a very clear steer from financial authorities um so the time is over where we can just hope for for everyone to do the right thing that we need financial authorities to give very clear not only guidance I mean they also need to give guidance but they need to give very clear set of regulations very clear expectations how how uh sustainability risk should be managed and and with with all the dimensions that were reported um and I'd like to thank everyone for really great discussion uh and over to you Aziz okay thank you very much Uli I think it's been a great discussion and I think the the uh overarching conclusion is is quite clear in that um the the the outcome from covid certainly is pushing towards uh much more um sustainable development sustainable recovery and uh in central banks and monetary authorities dealing directly with climate risks both on the monetary and uh prudential risk sides but um there's definitely a lot of risk coming around the corner as we start to go into the multiple recession and or depression potentially and trying to get out of it and hence there's an added bonus uh on on the central banks to actually make those um decisions and changes to the risk management frameworks very clear so I'd like to thank all the participants for for joining this discussion for sharing your questions with us and for staying throughout this event and of course I'd like to thank all our speakers Dr Majun, Dr Uli Volts, Simon Decau and Nick Robbins, Harry Cho and Grace Wee thank you very much for your time and I'd also like to thank Inspire as they've the funded they've funded this sustainable crisis response project which is which is behind this webinar and I'd like to thank our our research partners within that who are E3G the Solar Centre for Sustainable Finance at the Bennett Institute for Public Policy at the University of Cambridge so thank you all very much I look forward to some some positive actions coming out of this and to continue this debate and and make sure it reaches fruition thank you and and thanks a lot to the NGFS for co-hosting this with us thanks Dr Ma thank you Dr Ma thank you everyone thank you thank you bye bye