 when are we going live? All right. Hello and welcome everyone to this seminar. I'm Uli Volsson, a reader in economics and the director of the Center for Sustainable Finance here at SOAS University of London and I'm most delighted to invite you to welcome you all to this first webinar of 2021 of our ongoing SOAS Economics webinar series on intensifying inequalities and the limitations of global capitalism. And so here with this webinar series we try to bring together different perspectives that will help us to better understand how inequalities take root in our societies and economies and how they relate to the crisis that we see in the global economy. And so some of the contributions in this series include discussions of feminist economics, racial inequalities and economic imperialism and this is co-organized by the SOAS Economics Department in collaboration with the Student Let Open Economics Forum, the SOAS Feminist Economics Network and the Black Economist Network. And so there will be a lot of interesting events coming up over the next couple of weeks, so do check out the program. So today I'm really delighted to have with me Katie Ketwood and Greg Waziminiuk to look into a very topical issue that is harnessing finance in an age of environmental breakdown, rethinking the role of financial authorities. By now I think everyone is well understanding that we are in a climate crisis and we're now of course also in a pandemic and so we can see firsthand how problems related to sustainability or rather non-sustainable economic developments are undermining all our well-being and there has been now for the last couple of years a very intensive discussion among financial authorities, monetary authorities on what they could and should be doing to address climate and other sustainability problems. And so this is kind of the backdrop against which Katie will give a talk. Katie Ketwood is an economist and a policy fellow in Sustainable Finance at the Institute for Public Purpose at the University College London next door and so she's been working a lot on issues around financial governance and she will give us her take on what central banks and supervisors should be doing and afterwards we'll have a comment by Greg Waziminiuk who is a dear colleague of mine at the Department of Economics at SOAS and he's also an assistant research professor at the political economy research institute at the University of Massachusetts Amherst and so Katie will talk for around 40 minutes and then we'll have maybe 10 maximum 15 minutes comment by Gregor and then we should have hopefully half an hour for open discussion and you are very welcome already during the presentation by Katie and also Gregor's intervention to make comments in the chat. We do record this event and we'll make it available online afterwards so be aware of that and without further ado I'd like to invite Katie to deliver her presentation and really keen on hearing your views on this really important topic. Great to have you Katie. Hello, hi everyone thank you so much for your introduction Uwek. It's great to be here kicking off the 2021 SOAS Economics webinar series and so without further ado let me kick off with my presentation and there we go so let me know if you can't see my screen there. So yes today I'm talking about the role of financial authorities in looking at the role of finance in an age of environmental breakdown and the research I'm going to talk about today is very much building upon a working paper that I published with my co-authors Josh Ryan Collins and Uwek Chonet last year and also drawing from a previous paper that my co-authors were part of the year before with Frank Van Le Ven from the New Economics Foundation and so it's very much a group effort here in terms of rethinking the role of financial governance in these unprecedented times and my talk today I really want to focus around basically delivering a critique to this idea of what role the market should play and what role financial or financial authorities should play. I think in green finance narratives at the moment there's an over reliance arguably given to market-based mechanisms, pricing mechanisms as a means to green finance and reorient capital flows away from harmful activities and towards more sustainable activities but I think there are a number of sort of theoretical and conceptual problems with this approach which means that a far greater role may be warranted for financial authorities than is currently appreciated at present. So before I delve into the economics and the financial questions I thought it's just worth reflecting upon where we are, environmental breakdown. I think the past three years, four years especially, the green finance movement has obviously grown enormously and has focused especially on climate change. Over the past year of course with COVID-19, the potentially zoonotic virus reaching pandemic levels, biodiversity has also come onto the agenda but the main point I want to make first of all is that we're not just dealing with climate change and biodiversity loss here. Environmental breakdown really encompasses multiple threats all of which are interconnected and I'm going to refer primarily to biodiversity and nature loss in my talk today but I don't want to withdraw from the fact that they are obviously interconnected with all of these planetary boundaries. You may have seen this framework before from Johan Rockstrom which is useful because it kind of conceptualizes the non-linear dynamics which we're dealing with here. Each planetary process has a threshold or a tipping point beyond which there is a dramatic change in the functioning of the system and these thresholds are essentially unobservable but the delay between the initial damage and the eventual impact is such that you know by the time we sort of realize we're near a key ecological tipping point especially when it's observable at the planetary process it'll be far too late and the massive uncertainty caused by these non-linear dynamics is something that I'm going to talk about quite a bit in my in my talk today. Now nature obviously provides multiple services to humankind such as pollution and regulation of our air and water quality and resilience to natural disasters and the damage and degradation of the biosphere in general is threatening the provision of these services but importantly this is taking place on a much shorter time horizon than climate change. So we hear quite often about the tragedy of the horizon Mark Carnivis he made that that term very famous. I don't really think this applies to many of the nature-related threats which we're dealing with today. You would have seen reports in the news this week of catastrophic declines in insect populations that is actually already having an impact on crop production in the US for example that's been documented due to the loss of pollinators and as I mentioned COVID-19 obviously linked to zoonotic disease transitions widely suspected to be linked to it and zoonoses are linked to land use change due to habitat loss and degradation which basically greatly introduces the chances of viruses to spread to human populations. So here we are nature-related impacts are really up the agenda of financial policymakers and business leaders especially over the past year because businesses are of course dependent on these free benefits provided by nature. The total economic value which I've deliberately put into current marks there is estimated at about one and a half times of global GDP per year and you know financial authorities I think are now seriously taking you know nature loss as a material risk to both economies and financial systems. The network for greening the financial system which is a group of 75 central banks and financial supervisors has recognised this much as well as the Bank for International Settlements. There's a great quote there that the stability of the earth system is a prerequisite for financial and price stability which I love because it kind of speaks directly to about the mandate excuse which we so often hear from central bankers. So how are these risks being conceptualised? Well so far it's sort of very similar to climate change almost a copy-paste you might say. Businesses have said to well they do they face potentially material exposures to both nature loss in terms of the so-called physical risks or more accurately I guess you could call them biophysical risks given they are also biotic processes involved and they also face exposures to those actions intended to mitigate those losses and transition risk factors and through their loans and investments to the real economy financial institutions also exposed to these risks and the interaction and concentration of these risks at the financial system level may also give rise to systemic risks which is something I'm going to talk about later. The empirical links are unfortunately under-researched but the Dutch central bank has actually done some very interesting quantitative estimates of what the magnitude of these financial exposures could potentially be and they found that 36% of Dutch financial institutions are highly or very highly dependent on at least one ecosystem service and the linkages you can see in this very nice sanking diagram here. But this analysis is actually likely to be an underestimation of the true impacts because it only considered first round effects and they also gave several estimations of transition risks identifying large exposures in nitrogen intensive activities for example which is one sector which is likely to become more strongly regulated in the future. But as I said further analysis is really complicated here because of just huge data gaps and there's no widespread corporate reporting on the dependencies and impacts of nature and there are methodological challenges to do with the complexity of the problem. So a new task force for nature-related financial disclosures the TNFD was launched last year and this kind of aims to solve this problem by creating a framework by which companies and financial institutions can track and disclose their nature-related exposures. It's still in its panning phase but from what I know it sort of aims to release its voluntary guidelines in 2023 and there are other disclosure and reporting initiatives out there such as the proposed sustainability standards board by the international financial reporting standards foundation. Now while of course you know I completely acknowledge we do need more information in order to understand these issues I think the key question here is there's a difference between having information to explore risks and to better understand them and relying on these kind of information-based disclosure frameworks to manage risks and manage them in a way that is sufficient to safeguard the financial system and this is where I think the mainstream green finance narrative is perhaps missing a trick. I think you know we do the focus on the provision of information and risk analysis as the main mechanism to green finance really has its origins in a particular branch of economics which prioritizes the market as the most efficient mechanism to effect change and there are theoretical critiques to this which I think are important to dwell on. So to delve into that I'm just going to go back into a bit of theory and the most prominent sustainable finance initiatives really conceptualize environmental problems as examples of market failures where by a lack of information is leading to a mispricing of risk or costs and benefits and therefore sub-optimal market outcomes and they really take the position that internalizing hidden environmental costs benefits and risks is the mechanism by which market prices can then incorporate more sustainable resource allocation and shift financing flows into the correct greener direction. And so many of these proponents some of whom I've quoted here in these quotes call on policymakers financial policy essentially the role of financial policy in order to create the conditions for markets to resolve this mispricing problem. So these solutions include the disclosure frameworks I've already talked about, quantitative risk modeling and also new financial instruments which allow markets to set prices that's on where there might may be finite quantities available on available in nature depletion. An example of this is biodiversity offset schemes which the European Commission are currently taking a great deal of interest in. Now this market failure narrative is steeped in a neoclassical understanding of environmental problems which sees them as externalities externalities are of course unaccounted positive or negative effects of an economic decision on another person and the name comes from the fact that the effecting question is outside the contract of a market transaction which brings many economists to say that in order to account for it we need to extend the realm of the market to cover the externality hence the market based solutions I've already discussed and the theoretical basis of this really comes from work done by the Ronald Coase in the 1960s on transaction costs. His theorem basically said that when transaction costs are zero and if trade in an externality is possible private bargaining can resolve the externality into a Pareto optimal outcome regardless of the initial allocation. Now this is often misinterpreted as markets will generate the most efficient outcome once we have assigned property rights i.e. we've made the externality tradable but I think this is a misinterpretation because Coase was actually very explicit about the rigid assumptions underlying his theorem you need perfect information no differences in market power between the different bargaining parties and of course perfectly competitive markets that elusive unicorn in reality obviously there are costs from trying to implement property rights such as getting information the costs of negotiating collective action and designing and enforcing contracts and institutional rules and Coase's main point really was that market efficiency is often impeded by transaction costs and when these are very high efficient outcomes that may be better served by the creation of institutions including government institutions and you know the exact choice of social arrangement really depends on the context but this nuance is often lost in the market based logic of environmental problems today and it's particularly lost within green finance debates so I think that's one theoretical point that's worth dwelling on. The second one is that this notion of externalities also embeds the notion of the natural world as something that is external to the economy that you know the environment is another form of capital that serves as an input to production and I think this ontology is problematic on two counts firstly it takes a weak sustainability perspective whereby natural and man-made capital are implicitly seem to be essentially substitutable and secondly it ignores the reality that the economy is actually embedded within and entirely dependent upon the natural world and this latter perspective is really a contribution of ecological economics which wouldn't diagnose the situation we're in as a market failure but rather as a paradigm failure you know whereby the the scale and the intensity of of economic activity is threatening the finite carrying capacity of the earth's natural systems and this perspective is obviously far more compatible with this idea of planetary boundaries that I've already discussed so in terms of how financial policy makers are engaging with this intersection of finance and environmental issues they very much are taking this market focused logic to heart we work on a bit too far ahead there for some reason it's not staying on my previous slide very well and so rather than financial policy makers rather than exploring any kind of more discretionary interventionist policy action central banks so far have emphasised this need for more information for markets to account for environmental risk with the implicit assumption that risk measurement will result in in risk management thanks to the the efficiency of the market mechanism and you know the the dutch central banks the dmb their their their analysis the conclusions they drew from that are very illustrative here you know despite identifying material exposions to both nature related physical and transition risks the conclusions that the the dutch supervisor came out with focused on developing these frameworks for disclosing risk and and model it modeling it quantitatively as a prerequisite to doing anything else and the ngfs that that network of central banks i i mentioned earlier they've suggested similar priorities for for financial policy makers in their official guidance on both climate and non-climate environmental risks however i think there are a number of conceptual problems to this measurement based approach to financial policy oh that slide is now working well there we go um so i think the first question to ask is is it possible to identify all environmental information necessary to make a meaningful estimation of financial risk now the complexity of the challenges facing disclosure frameworks has already been made apparent by the tcfd the task force on climate related financial disclosures which over three years since its launch is still not implemented by many companies in financial institutions it's very far from being a well established widely established mainstream disclosure framework yet the fact is that nature loss is actually far more analytically demanding than climate change and this is even though of course climate change is itself a complex wicked problem the actual mechanism for for climate change is at least something that can be delineated and measured with a reasonable degree of accuracy so you have anthropogenic emissions which lead to changes in atmospheric gas composition in which then lead to temperature change and the metric for corporate reporting on emissions is actually very well established you have this tons of co2 equipment metric for example by contrast nature related risks present massive additional complexities due to the fact that they are multidimensional so we have multiple different services environmental services to society that are under threat such as pollination and pest control and resilience to natural hazards i've already mentioned these are caused by multiple anthropogenic drivers such as intensive agriculture plastic pollution deforestation and all of these dramatic changes are taking place at multiple scales from the global to the local level and also as i mentioned that they're already taking place over a much shorter time horizon than climate change as well so the the complex system dynamics i mentioned earlier really present manager challenges for this this level of risk measurement non-linearities means that biodiversity especially is much more than just the sum of its parts a loss of keystone species for example can result in the collapse of entire ecosystems and these dynamics are not precisely quantified within ecology let alone financial analysis and then thinking about the logistics of actually putting in place a risk disclosure framework in order to quantify environmental information it's important to note that the measurement of these ecological impacts is actually very site specific so if we're thinking about one firm they're going to be exposed to and responsible for multiple nature related threats so within agriculture you have for example pollination water scarcity land use soil fertility amongst other things and each of these threats is going to have different impacts within different local ecosystems and across different points in time and so what this graphic is trying to show is that you know the idea of replicating such granular analysis up to the financial portfolio level really implies an almost insurmountable level of complexity unless you start making very broad and aggregative abstractions and in the process of that aggregation there are key tail risks which may well escape identification and then a second question to ask is you know even if we manage to generate a sophisticated database of information or an environmental breakdown is it possible to quantitatively generate meaningful estimates of financial risk resulting from it now financial policymakers particularly central banks recommend that financial institutions generate quantitative estimates of their potential exposer using risk modelling tools and they've made you know recent admissions that historical information is obviously not going to be particularly useful in analyzing these unprecedented threats so they now recommend what's known as forward looking scenario analysis this is where banks basically test their balance sheet exposures against a range of plausible future scenarios such as a best case a median case in a worst case to see what the impacts are going to be but this raises you know questions in itself given the complexity and the multi-dimensionality of the problems we're dealing with how exactly do you choose what constitutes a plausible scenario and this actually applies equally to climate change but I think the problem is even more acute for for biodiversity risks and nature-related risks because scenario analysis requires that you take some sort of view on the the probable pathway for economic transition and with climate change the proxy is that is taken as often a carbon price but there's no equivalent for nature loss and resolving you know the various impacts of various environmental threats actually involves very deeply political questions institutional reform policy reform regulatory reform at various levels from from local to global so selecting some scenarios to reflect such in certain futures is obviously going to be highly subjective and I would argue it's akin to crystal ball gating to be honest and the reason for this comes back down to the dynamics of system complexity even if you have all of the initial inputs to a complex system you cannot deterministically estimate its future outcomes because it requires you to take a view on you know potential behaviors and interactions of multiple different variables and this really comes back to the ontology of human environment interactions that I mentioned earlier ecological systems socioeconomic systems and financial systems should be more commonly appreciated as tele-coupled complex adaptive systems which means they're interconnected through flows of energy and matter but also information and finance across space and time and the way that the effects of the pandemic for example have cascaded across highly interconnected global supply chains and the global financial system is really testament to this complexity and you know I don't think anybody would claim to have been able to quantitatively estimate either the timing or the precise magnitude of of the economic consequences that have resulted from the pandemic and you know another point to to mention is and this has been written about extensively I swear that the scenario models favored by financial policymakers are still relying on these integrated assessment models I am which have a number of constraining assumptions in in and of themselves such as rational expectations and efficient markets one of you know the most notable one is that they often abstract away from financial markets altogether which is an interesting analytical decision in the choice of tools to assess financial stability I think so for all of these reasons you know we make the argument that policymakers need to move away from quantifying environmental threats as probabilistic risks and instead depreciate them as situations of radical uncertainty this is a distinction first made by Frank Knight in the 1920s and also highlighted by Keynes quite a lot in his work and it basically emphasizes that in the absence of historical trends or known probability functions the precise timing and magnitude of future outcomes cannot be meaningfully estimated this is obviously especially the case for environmental breakdown both the biophysical threats and also the socio-economic structural transition implied are completely unprecedented so the idea of rational expectations I think it is not not entirely suitable I think rather uncertainty is a much more useful concept to centre ourselves around and this also undermines the market failure type of understanding that we saw earlier and the reliance on generating more information for markets to price in the fact is that there are substantial unknown unknowns and the relevant information may never be known to markets until it's far too late and central banks have actually acknowledged the limitations of scenario modelling under these conditions of uncertainty however their favourite solution to this conundrum is sort of to call for more research on different types of quantitative methodologies that might better account for these dynamics and of course you know whilst the move towards heterodox approaches is always welcome I think given the urgency of the threat that alone is an insufficient course of action so one final shortcoming of the approach taken by financial policy makers so far is also that it takes arguably a very one-sided view of the interactions between finance and the environment as I noted earlier this notion that sustainability issues poses risks to companies and financial institutions is quite widely established this risk exposure channel but less acknowledged is the other side of the equation the fact that companies also generate impacts that contribute to sustainability issues this concept of double materiality has been emphasised by the EU commission with regard to corporate financial reporting but it's not yet widely spoken about at a green finance level despite the fact that exactly the same concept of course applies to financial institutions not only are they exposed to nature related risks from the businesses that they finance but on the flip side through those very same loans and investments financial institutions actually facilitate the business activities that give rise to these impacts so in this way there is a a financed impacts channel and a typical response given by central bankers might be that they are only interested in risks to the system in line with their narrow mandates to protect price and financial stability but here I think there's a critical underappreciation of the role played by the financial sector and actively generating and potentially propagating such risks and the concept of endogeneity I think is really crucial here endogenous risks are those risks that emerge from within our and are amplified by the financial system itself so by financing harmful activities connected to negative environmental impacts financial institutions may in fact be giving rise to future financial materiality firstly through the creation of transition risks the fact that these harmful activities may become more strongly regulated in the near future and secondly through future biophysical risks that will arise from those negative environmental impacts so rather than it being a one-way street the transmission of nature-related threat to financial risk should be more appreciated as a series of feedback blooms but the important takeaway here I think is that finance cannot continue to be seen as this passive intermediary by facilitating anthropogenic drivers of nature loss and private financial flows are actively undermining the intentions of broader government policy with regards to the ecological transition and there is growing empirical evidence of this this financed impacts channel and so the the Dutch central bank calculated that the financing practices of Dutch financial institutions contributed to over 58 000 square kilometers of habitat loss elsewhere there's analysis by a consultancy Profondo who's found that the world's largest banks provided more than 2.6 trillion dollars financing linked to the destruction of ecosystems in 2019 which is more than the GDP of Canada so taken together um these three points I've just outlined you know I'm trying to explain why we can't rely just on markets to price in risks efficiently themselves firstly the the relevant information might never be known because the fact there are unknown unknowns involved secondly quantitative risk models have inherent limitations when dealing with radical uncertainty and finally you know financial markets themselves can't be assumed to be efficient you know they're prone to irrational speculative behavior when they play an active role in facilitating some of these negative impacts through their financing activities all of which suggests that there's a need for some sort of policy oversight and intervention that goes beyond just supporting new frameworks for risk disclosure and wobbling so the greater role for financial authorities and so my rationale here is is three fold firstly then there's a risk argument which I think is well understood given that environmental breakdown is obviously widely acknowledged to pose risks to pricing financial stability and so I think that argumentation is already within central bank's mandate secondly there's an argument for a need for policy coherence financial policy needs to ensure that private financial flows are supporting or at the very least not undermining border government policy and this sort of mandate is implicitly included within some advanced economy central banks such as the ECB which has a secondary mandate to support the union's economic objectives and thirdly there's this question of the mobilization of finance which itself is is also two-sided on the one hand we need more finance flowing towards activities which are compatible with ecological transition whilst at the same time flowing away from from the harmful activities exacerbating the problem so given the failure of markets to ensure these things are happening at present you know we argue that a far greater role by public financial institutions is warranted and central banks should be one past of a broader ecosystem of public financial actors which should also include national investment banks that can affect change in this area so the case for immediate policy intervention is also supported by the precautionary principle this is well established in the legal sphere which recommends the use of preventative policies to protect human health and environmental health under situations of scientific uncertainty where there is threat of serious threat of irreversible damage and this also acts as a counterpoint to those government failure arguments because it insists on not postponing action in the case of climate change and environmental breakdown of course the costs and risks of inaction escalate the longer that mitigating action is delayed so that hence the justification to take a risk averse policy stance in the face of uncertainty so what does this look like for financial policy well we're saying that instead of asking for new research in the face of a threat which is the approach of some central banks at the moment and we're saying that certain policy decisions can be taken based on the science that is widely agreed upon already so my co-authors Josh Ryan Collins and along with Frank from Neff you know they've articulated what they call a precautionary financial policy approach as an alternative to the current risk measurement approach and this involves firstly a move to complement quantitative analysis with more qualitative means of understanding and managing environmental risks secondly a shift in the purpose and the mindset of policymaking from market fixing to market shaping which involves you know the co-creation of new markets with other public and private actors new markets are compatible with the ecological transition and thirdly and I'll touch on this point briefly in the conclusion the need for increased coordination across different parts of the financial policy ecosystem so more fiscal monetary prudential policy coordination I'm going to tackle these first two points in turn and illustrate how they could be applied to the problem of nature related risks so firstly dealing with uncertainty using qualitative approaches and now our argument is where there's little doubt as to the potential magnitude speed or direction of a harmful trend and you know fixating on precise quantitative results is not necessarily going to improve insights for decision makers and at the worst it can actually distract from the best course of action and so instead of relying on complex modelling we're talking about using rules of thumb general direction setting learning by doing and none of this is alien to financial policy makers actually as these quotes here show since the financial crisis regulators have acknowledged that systemic risks can't be precisely measured through tools like scenario analysis and they actually now make use of relatively simple indicators such as credit to GDP ratio ratios and you know other measures such as the non-financial indicators such as bank size and interconnected lists in order to make decisions on how to implement macro prudential policy oh sorry I really skipped ahead there here we go and the second point is you know how to rethink the purpose of financial policy in order to shape markets and the key insight here is learning to work with system complexity so you know the precautionary financial policy approach takes the position that financial policy makers are not exogenous to the financial system you know like a weather forecaster would be to the climate for example rather they are active market participants and the interventions they make feedback and influence market outcomes and there's a recent body of literature examining how policies can be designed to harness complex system behavior in order to accelerate this kind of transformative system change and the idea is you focus interventions on sensitive intervention points in order to trigger desirable feedback loops and positive spillover effects in your advantage and an example of where this has worked has been in the global coal industry for example where changing tax and subsidy policy has really tipped the costs of new coal power plants over the threshold compared to their renewable counterparts in in most major markets and these ideas should be highly relevant to financial authorities actually given that complex threshold behavior exists in both in both ecological and financial systems and for nature-related risks an obvious point to target would be those flows of finance that are going towards the harmful corporate activities now a common critique of this sort of discretionary intervention is that they could have unintended consequences in the case of central banks is often argued that there's a trade off between physical and transition risks and that means that policies to tackle the former could end up crystallizing short-term transition risks but actually here I think the concern is misconstrued given that that financial authorities are part of the system they're not exogenous to it interventions can and should be designed and deployed to minimize these potential market dislocations by proactively encouraging actors towards an orderly ecological transition so you know just as central banks already use monetary policy their monetary policy signaling power with forward guidance you know clear timely communication to markets could signal the introduction and phase tightening of environmental interventions now this market shaping role obviously goes beyond the core mandates of central banks at present which is where the concept of policy coordination becomes more important and I will reflect upon that shortly so what does the precautionary approach look like in practice and well in our paper we articulate one policy approach that central banks and financial supervisors could use to account for the risks of financing financing nature depleting activities and the idea is that they draw up what we term an exclusionary list of harmful activities you know in collaboration with relevant government ministries for example and these activities the list would be you know where there is clear scientific consensus that they are causing negative impacts such as tropical deforestation for example and this this then determines eligibility within the central banking toolkit monetary policy operations which obviously have key effects on market prices can exclude assets that are linked to such activities whilst prudential regulation can be used to discourage financial institutions from financing firms undertaking these excluded practices and a clear advantage I think of this approach is that by targeting those harmful flows it's directly addressing potential sources of indigeneity within the system itself so this table shows the sorts of activities that could be included in an exclusionary list and it's worth saying there's actually considerable precedent for this kind of approach private banks already define the sorts of activities and practices that they won't finance as part of voluntary sector specific lending and investment criteria now in practice these are often inconsistent across firms and there's little incentive to conduct robust due diligence procedures so many of the banks linked to the deforestation in the profundo analysis I said earlier for example they did already have deforestation policies in place they clearly weren't particularly effective and there's also precedent within financial authorities too so the Brazilian Central Bank has restricted rural credit in the Amazon to firms that have stuck to environmental regulations and there's been some subsequent econometric analysis that has shown that the policy has resulted in material reduction and more recently of course the SMB has announced it would exclude coal mining investment portfolios now the NGFS in its latest guidance has opened the door to this sort of exclusionary approach noted in its prudential guidance published last year that supervisors could prohibit certain financial institutions from carrying out certain activities and where the level of risk is deemed too high and this guidance is actually given from a micro prudential perspective but you know given the systemic and endogenous nature of these risks there's a strong argument to extend this guidance to system-wide exclusion criteria so just some some final reflections I think some of the points I've raised during my talk are going to clash directly with current debates out there at the moment on this concept of market neutrality which is still one of the guiding principles of financial policy within advanced economies but I think the point I wanted to make is that once we recognise that the market is not generating the desired outcomes with regard to environmental breakdown and its intersection with the financial system the justification for clinging to such a principle which you know in any case was not particularly strongly adhered to breaks down quite dramatically and indeed Christine the guard has obviously come out and also questioning this concept of market neutrality recently and as has the ECB's legal research agenda this year which will be also tackling the question of market neutrality so it's some interesting developments I think that are going to happen over the course of this year and it's our hope that a precautionary financial policy approach could become one of the alternate paradigms that justifies financial policymaking under particular conditions in this case the conditions of radical uncertainty but the discretionary approaches I've also touched upon here do raise questions as to the role of financial authorities in the future and you know I recognise there's a dilemma here monetary policy and financial policy cannot and should not be solely responsible for resolving environmental breakdown that's obviously highly unrealistic and will be on their mandates however you know waiting for the government to take the lead on action risks them failing to deliver on their their core mandates of price and financial stability and also failing to act on these endogenous dynamics within the financial system risks undermining broader government policy on the transition so you know to that end we argue that further work is really needed on what sorts of coordination can can be levied between different financial policymakers in particular between fiscal and monetary and financial policies in order to address these dilemmas and to give central banks the the legitimacy to continue supporting border government policy and you know as I'm well aware this coincides with the border debate about the role of central banks within society and you know as the pandemic response has made abundantly clear central banks are powerful public financial institutions and they have an array of tools at their disposal to support government objectives and I think there's going to be a lot more research digging into these questions over the course of this year and I look forward to chatting more about those questions in the discussion so that's it from me well thank you very much Katie I'd be very tempted to to give an immediate response but I will hold back and I would like to invite Gregor to deliver his comment and Gregor if you could perhaps try to limit yourself to 10 minutes so that we have around half an hour left for Q&A at the end and again you're all welcome to there's a first question coming in the chat from Yanis so you're all encouraged to put your comments and questions in the chat Gregor over to you. Thank you and for this presentation which went beyond a lot of the discussion about these physical and transition risks that are often dominated by the problem of climate change and as you also document in your writing some of the climate change mitigation measures may actually exacerbate some of the other nature related risks so I think it's really excellent that you are trying to look at this broader problem of nature related financial risks and have given a critique of the current approach of financial regulators to dealing with these essentially via the attempt to measure this risk actively and then hope that market participants will act on it in accordance with well functioning financial markets that price in all information. I'm just going to give a few comments here and there and the first one relates directly to this to this information and pricing and how we are thinking about it and I hope that this may somehow add something to the subsequent discussion but you brought the idea of market failures into play which of course is kind of a well fitting term if the market doesn't process the information fails but I think it's useful to think this through with some nuance. You also mentioned COS and externalities and I think here we're kind of dealing with two different but related types of failures if I'm following you well so on the one hand we have these non-priced in externalities that are somehow imposing a cost on society but they do not impose a cost on the participants directly involved so the original story not the original but the famous stories with the upstream factory that pours some pollutants into a river and then society quote unquote downstream is being harmed and you know Pigu said that that could be taxed away and then COS kind of critiqued that approach and many people misinterpreted him as you as you say but Mike but it seems to me from what you are saying is that some of these risks are already owned so there are property rights people so and and COS of course as if you we assign property rights then in principle we could deal with these externalities and and find good prices between the parties involved and so it seems to me the debate here is about risks that are already owned so somebody's having a loss who owns these these assets for instance or extends loans to the companies that are somehow exposed to these risks but they just don't know about it so that seems to be a little bit different from this classical Pigu CoS story about you know we have to make a market for carbon emissions for instance and then trade the the permits or tax carbon because it's not owned the the risk but here it is they actually all own it they just don't don't know it so I think that's interesting and it goes more into these which you also discuss the the incomplete and asymmetric information problems which then lead they end themselves to kind of the principal agent situation and I think it would be interesting to and some adverse selections possibly and it would be interesting to to think through who's the principal and who's the agent here it seems to me that the financial firms are really the agents that are doing poor investments and the the owners and society is the the principal in some sense but but these are just some comments on this problem of market failure which I think is is a very useful lens but also there there are some nuances there that at least I'm grappling with now not thinking about this all the time now a second comment relates to the bigger picture you know a lot of discussions how to deal with these nature related problems for human societies you know think about the green growth or de-growth there sort of the two big yes no dichotomy things but there are of course many pathways within these and I'm wondering to what extent you know in what kind of world these central banks are talking about you know mitigating these risks via risk disclosure or also you are discussing some of the alternatives is it a green growth world which you know or is it is the world that really changes how things are how people conduct their business because I would think that this puts important constraints on you know how much risk you can mitigate just by I mean you know if if society engages in certain activities because it wants to keep growing for instance I mean isn't there someone who really is going to be affected by this anyway or can this just somehow be magic the wave with with in all the risks with with if not identifying risks then somehow taking these prudent actions and that's also related to a third comment you brought up IAMs the integrated assessment models which are of course very prominent in the business of sketching these future worlds based on now in the IPCC and these shared social economic pathways and most of these tend to be kind of green growth types with optimistic growth projections by and large but I did want to defend these IAMs a little bit first of all not all of them have rational expectations there are quite a few that are just myopic period by period constrained optimization models and there are even so-called heterodox approaches for instance E3ME in Cambridge is a demand-driven macroeconometric model that works completely without any you know agents optimizing this or that and full disclosure I'm working with the modeling team so I may be biased but they you know and and I'm wondering furthermore if it's really if they have to somehow be able to sketch these financial downside risks don't they rather paint a picture you know a canvas on which financial actors could actually think about what sort of risks would arise for them so aren't these models more in the business of sketching potential you know real worlds with real nature losses that then you know the financial community somehow has to grapple with and right that leads me to almost my last point which is a bit controversial perhaps but you know a lot of these problems are already really dire today not I mean you you showed the Rockstream paper the first one I think was published in 2009 and the nitrogen cycle was already beyond all bounds but I mean financial markets as far as I can see have done really well in the last 10 years so like I think I would like to understand a little bit more like everybody else I guess and it's hard to do this because we don't have the data and the information but you know to what extent are financial market actors actually justified in in having sanguine expectations about future you know large corporate performance large bank performance at the center of capitalist economies because these firms will continue to to have markets to sell to the top so and so many percent of earners in the world largely concentrated in a few countries and the you know the people at the bottom of the pyramid who are living in the areas that become increasingly uninhabitable that try out those other ones that take the brunt of the losses but they don't really you know maybe the financial system is quite well insulated against those shocks so it brings me back to my initial point and I close I'll see Uli popping up there sternly looking at me I think that you know to what extent is this an externality in the in the pigoovian sense the financial sector perhaps benefits from the activities it's doing and its shareholders but the society at large is actually the one that is at risk so kind of you know meta comments on some of the very detailed interesting knowledge that you've shared with us and I hope it stimulates discussion thank you very much Gregor also for for being good on time and glad if my view and my appearance helped that so we have a couple of questions already in the chat and I also have some some questions but I'd first like to invite Katie to to give a brief response to Gregor's feedback but if you could really try to do that in like you know just a few minutes because so I'm keen to bring in others sure and thank you so much for your um considered response Gregor you raised some really interesting questions there I think I'll start off on your third point on integrated assessment models and the use of models in general and you're completely right there are some great heterodox approaches out there emerging and it's especially great to see that financial authorities are taking more of an interest in using some of these more novel methodologies and I think the point I was trying to make and perhaps I didn't say this very clearly I'm not trying to write off the use of quantitative analysis uh quantitative analysis is really important in order to explore future scenarios to understand them better and what I take issue with is when financial authorities and policymakers in particular are leaning on the results coming from these models as a prerequisite in order to take any further intervention and that's how I think they're being used at the moment sort of as a shield to shield them from these difficult questions which I think need to be taken more urgently so that's what I would I would say on models um on your second question on um you know green growth versus de-growth where are financial policymakers on the spectrum um I think it's a good question I think I'm not sure I can give a fully comprehensive answer to that but my initial thoughts I would be they are not really considering um the implications of this question in their scenario modeling at the moment um the NGFS published their their guide to climate scenarios last year and um those scenarios all assumed you know pathways for economic growth um under all of the the representative scenarios and they also had some quite problematic assumptions embedded within them in terms of assuming quite dramatic rates of decoupling um between growth and and CO2 emissions which is obviously um an assumption that's highly contested by by ecological economics so I would suspect um I don't get the impression it's an issue they're engaging with actively or at least openly but I suspect they're leaning more towards the green growth side of the spectrum there and um on your your first question on on global public goods and and externalities and where property rights are being assigned I'm not sure I I sort of fully grasped your question there um but I think the an interesting point to make in terms of who owns these property rights are they being assigned what what I would say is you know actually we're we're dealing what are essentially a series of overlapping public goods um from various scales from local scales to global scale so I don't think the property rights are particularly um defined at the moment and I think just because you have exposure to an asset which is potentially impacting a nature-related threat I don't think that necessarily means you have uh property rights over over that threat over who it impacts for example um and this is just this is a result of the the mobile nature of some of the threats we're dealing with you're talking about pollution your your example gave upstream uh and downstream parties to a to a pollution problem well I think you know a lot of environmental breakdown is this writ large right you have um uh the the the the delineation of who is affected by a threat is very often very separated from where the source of that that impact has come from and I think this is where um new financial instruments have really been touted as a potential solution to this issue um I mentioned biodiversity offsetting very briefly in my presentation I had wanted to go into it in a lot more detail but all sort of constrained on on time but these new financial instruments are really trying to create these new markets create property rights um where they where they don't exist at the moment and actually um you know I would say they they suffer from a lot of agency problems like you mentioned such as asymmetric asymmetric access to information between regulators and developers and um very few incentives to to correctly estimate the potential risks and benefits so I think these instruments we also need to be raising um critical questions out as well but um yeah I'll leave it there and I'll hand over back to you Ulrich for the for the Q&A thanks Katie and and so we have quite a number of questions piling up already so before I give my own news I'll pick up some of those so from Janis de Femos who's also uh a colleague at the economics department here at SOAS um what do you think are the key implications of the precautionary principle for one the links between climate finance and climate justice and second the question of whether financial and monetary policy should be or should reflect physical risks okay um implications for the precautionary principle on climate finance and climate justice this is an interesting one to be honest I think it it really takes the question more into the legal sphere rather than the the economic sphere um the way um my co-authors and I have sort of conceptualized the precautionary principle is as an alternate paradigm to justify policy making under conditions of certainty uh sorry radical uncertainty um so extending that to um notions of justice particularly from a financial policy angle I think is um going beyond um where our initial analysis has taken it but I think it is an interesting um uh direction to to look at for sure and on the the question on on physical risks I'm not sure I fully understand um what you're getting at there maybe Janis if you just jump in and explain yes and maybe if I can just give give one sort on on on this justice aspect because that's something I've been uh thinking about quite a bit and also doing some stuff so uh what what our research has shown is that clearly um climate vulnerability is um having a disproportionate effect on um uh the poorer bottoms of society and um so uh trying to to address this justice injustice inherent to to climate change I think is a really important aspect and it is also contributing arguably to to um microeconomic instability um so I think there there is kind of the the the justice aspect but there is also again uh the financial micro financial stability uh aspect that I I think needs to be addressed so I think there are uh two different rationales why why financial governance should be concerned with that and we actually had a comment uh by uh me you see me you see up sorry for um wrong pronunciation who also pointed to the um financial inclusion dimension um kind of saying that this is not not sufficiently addressed in the discourse and I'm just gonna gonna put a link to a recent report that we published the Center for Sustainable Finance uh together with the Alliance for Financial Inclusion on uh its uh topic of inclusive green finance where we make the link between green finance and and financial inclusion and and how uh exactly um the bottom of society is disproportionately affected and and how we need to mobilize uh finance in a way that it helps uh uh adjust transition um there's a lot of interesting stuff going on there but um uh this just had a had a side remark um so there was um a question from um Q sorry I'm not good with reading out names um uh Q ah Q Dan Yin sorry completely wrong pronunciation but um how do you personally see central bankers own scruples about taking up a more active role in the fight against the climate crisis e.g. Bundesbank president Weidmann's critical remarks on ECB greening its QE this is a great question um it really sort of captures the the crux of the debate we're at the moment I think in terms of the role of of central banks in society and um vis-a-vis their mandates and and border government policy in terms of of president Weidmann from from the Bundesbank um you know from what I remember his his critical remarks have really centered on a very narrow interpretation of what the ECB's mandate is in terms of price and financial stability and he leaned very heavily on this market neutrality argument that I mentioned the fact that um central banks uh in their policies to try not to um create further distortions in market prices by you know favoring certain sectors or or not favoring other sectors and like I said you know my position on this really is that market neutrality is not a policy that's ever really been adhered to by central banks um they have a history of favoring um certain sectors in their policies um so you know just to take the most recent responses to the the pandemic for example the Federal Reserve which has been empowered to act as essentially investor of last resort to a number of financial markets including junk bonds um ETF funds um various corporate bonds and of course you have the um in the the Bank of England and the ECB also have very active very large corporate bond purchase schemes which are not market neutral you know they explicitly do not in court um by financial institutions for example that is uh not a market neutral decision it's a conscious decision and the you know the ECB's asset bond purchase program also has explicitly favored um that industry in order to shore it up in the in the aftermath of a difficult period in the capital markets after the previous crisis so you know my position on this is that um you know President Wideman for example is really taking an unrealistic um he's unrealistically optimistic in terms of how market neutrality is being implemented at the moment and we need to the challenge now is if we recognize market neutrality is no longer a functioning guiding principle for central banks we need to find alternate paradigms in order to replace them uh given the nature of the threats we now face today and the argument you know we're making in our paper is that a precautionary approach is one such paradigm that could be applied um to the particular challenges faced by environmental breakdown uh for example so that would be my take on that if I may add in the context of um uh market neutrality and central banking and climate change I always like to bring up quote from uh Lord Stern uh who uh very appropriately described climate change as greatest market failure ever uh and um by adhering to some supposed market neutrality I would say central banks are basically perpetuating that market failure but um I would also agree with you Katie that more broadly speaking uh the very notion that uh central bank policy can be market neutral I think is is a big fallacy um every interest rate decision has huge distributional implications um and um so uh but but I think uh I mean I remember the discussion we've had a couple of years ago um and uh it has changed completely I mean the the uh having very senior central bankers um and that actually includes Jens Weidmann um admitting that market failure uh sorry that that um uh market uh central banking is not uh always market central bank is not always market neutral um is a big step and of course now now the question is how how how we're going forward um but uh I do sense a big shift in the discussion um there was a um it was more common than a question I think from from Patrick Flynn um who wrote my take on this is that the financial institutions are taking leadership towards establishing this disclosure framework and the corporate incentive is to be transparent about a climate risk related book and get your credit rating priced fairly as a result but is there a disc disincentive for non-transparency compliance question um yeah this is a really interesting question actually um I think there's several ways you can look at it um firstly I think um well let I think firstly it's interesting to see what kind of people are actually making use of the climate disclosures that are being put out there at the moment um Daniel Clear who's the head of sustainability at HSBC Bank was quoted making an interesting point that you know he can count on one hand the number of times institutional investors have asked him about HSBC's TCFD disclosures um which I think you know is a really fascinating insight you know spending all of this time and effort getting companies to disclose this information and investors aren't necessarily looking at it and personally I think this comes down to um limitations of um you know the cognitive capacity of markets to fully account for all of this information especially when it's sort of buried in in corporate sustainability reporting booklets and it's not being laid out necessarily in the most obvious fashion in terms of disincentives for not being honest in in your reporting um I think there's an there's a there's an interesting interesting incentive problem um with regards to the regulator here because um at the moment um central banks and financial supervisors are encouraging uh banks to disclose their risks but at the same time saying that there's not going to be any uh regulatory consequences for those disclosures um this for example came out in the Bank of England's biannual um climate scenario consultation which um is a great supervisory exercise they're actually going to launch later this year but this kind of raises really critical questions I think um you know okay the Bank of England is saying your um disclosures are not going to be they're not going to have regulatory consequences at the moment but the fact the supervisor is asking for them means they may do at some point um so what really is your insensitive incentive as a financial institution to make a conservative estimation of your potential exposure and by conservative I mean obviously a potential over estimation of your of your exposure if the consequences further down the line could be that you have regulatory consequences um so yeah I think the incentives question is very interesting and um is is um I'd be interested to hear other people's thoughts on this as well and I would be interested in hearing your thoughts on the demands for introducing mandatory disclosure across the board um so I am among those who does not think that disclosure by itself will will do the job I mean we need much more we need industrial policies we will need um a lot of different action in financial governance um but I would argue that disclosure is one important element it's only one element uh but we need mandatory disclosure for all financial institutions and also all listed companies and also all larger companies um to provide the basis for for further analysis and again I don't think it you know it's sufficient but would you agree that it is it is it is necessary absolutely but I think as you say it should be appreciated as one tool within a broader ecosystem of measures that um kind of uh you know guides companies towards a more sustainable way of doing business and I think one of the great things about disclosure is actually and one of the the many advantages of the TCFD and now the TNFD is that for the first time they're getting some companies in some sectors to actually think about these issues um in an analytical sense and even if quantitatively it may not be possible to generate particularly meaningful estimations resulting from you know um precise measurements the the qualitative process of thinking through how your business model is exposed to or is impacting certain environmental problems is obviously a very useful exercise and definitely want to be applauded and I think they've made great progress in times of getting that up on people's agendas in the corporate world you know very much agree um so they're the question from uh Ikealo who's asking about central banks in the global south for example in Africa um that have to tackle climate change and have sustainable green growth um what what should they be doing or should they rely on the goodwill of the global north for sort of climate change this is coming back to that the justice question again um again a really good question um I think the the central banks in emerging economies actually present a really interesting case study here because um they very often have um very different mandates to advanced economies in that there's often a lot more coordination already existing between fiscal and industrial policy and on on monetary policy and particularly coordination also with um with national development banks where they exist so um there has been some work done on this um by my colleague Josh Ryan Collins and also um Simon DeKow at the LSE Grantham Institute on the ways that some emerging economies central banks um are actually using their regulatory toolkit already um to a green macro prudential policy for example and also um to sort of steer credit towards and away from certain industries so you know I would put it the other way around I think that the global north has got lessons to learn from um some countries in the global south that are already putting in place actively um some of the uh the potentially green macro prudential policies green monetary policies um which we which I've been talking about today and Ikealo being my green finance course we'll hear much more about that in the coming weeks Regal yeah I'll perhaps add a couple of words here um uh to the uh interesting question by Ikealo which I mean it sounds to me a little bit like you know we're drifting into this tail wag the dog perspective I mean I think we have to also remember that financial markets cannot and central banks cannot tackle climate change by themselves and um I just wanted to go back to this global um public goods problem uh if that is really what we're worried about then all we would need according to standard um you know mainstream economics perspective is actually a right price for providing um oh you know for polluting uh the comments that thereby uh take away the public good or do not provide it sufficiently which can be done entirely without financial markets and so the only problem for financial markets then would be to respond to these prices but without the prices I mean again as a financial actor you're not punished right for um for engaging in in in making a profit in the existing um price system of course all that then may lead ultimately to a collapse of the whole system because you know maybe the climate becomes uninhabitable to most uh to to humans in some in many places um or water will rise and you know all coastal cities will go away but um I think like you know as long as these kind of prices aren't in place it's it's pretty difficult to to expect that from the financial sector to tackle this and so in that sense um yeah I mean global north global south um certainly hang together for all of these global goods that that somehow have to be protected but um and of course the financial sector could ideally be um leading the way in some of these aspects I'm just not so hopeful that you know as long as you you are incentivized to make profits from um certain activities it is part of that profit making machine that that can somehow tackle the whole problem by itself I would take a somewhat more uh optimistic approach um and so central banks and and supervision you know can be central banking supervision can be extremely powerful and um uh if central banks use their power and also supervise it uh they can make a huge difference uh so as um Katie pointed out um they actually have a big market shaping power yeah so uh markets uh develop over time and and um uh central banks have historically played a very important role in developing certain markets um and they they certainly can continue doing so so um maybe that's not not not not the greatest example ever but in in the green finance space um uh central banks and and other public financial institutions have been instrumental in developing the green bond market now the green bond market's not going to solve all our problems but um they can help um uh rewire uh finance and uh so very concretely what what central banks in developing countries can do well they can help um foster um long term or kind of uh capital markets for for long term investment in for example climate uh um uh climate resilient infrastructure now um there has been a huge discussion about shifting the trillions and and you know trying to lure capital from advanced countries into developing countries um i think what is much more important is to mobilize domestic resources uh to to invest in uh the areas that are really needed long term kind of sustainable infrastructure uh and so on and uh here central banks can really play an important role in building these markets they can for example also build an environment where digital solutions which are becoming ever more important uh can be used for um uh the sustainable investment there's huge uh uh opportunity in that area and it's really just starting to happen there's some some exciting work going on um and of course and that is a very important dimension um uh developing countries are typically much more exposed to to physical risk and um many are also very heavily exposed to transition risk um and uh central banks are in a very important position to help their governments to um analyze and mitigate these macro financial risks and and so i think that actually a lot that they can can do uh to address these climate issues but this would really warrant another uh seminar and i know we we are having just two minutes left and i would just like to give these two minutes to Katie to to to give us some some final sorts and i i think we should have at least another half hour but anyway uh Katie two minutes for some final sorts sure um so thank you everyone for your great questions and um your great comments you're working and Gregor i've really enjoyed that discussion i guess i have three takeaways really in terms of where where we go from here i'm aware that the agenda i outlined in my talk is obviously um very conceptual and sort of very talking about level of um theoretical implications at quite a high level but i do think there are practical steps that need to be taken by financial authorities now um in order to you know increase their institutional capacity and understanding um the the interactions between between finance and environmental breakdown and and as a first takeaway i think they should be wary of considering environmental risks in isolated silos but already seeing you know this trend towards dealing with climate in one hand and then biodiversity on another and then you know what next do we look at water and soil also in isolation no i think really nature related financial risks need to be appreciated as the multiple interconnected threats that they are which and they the fact they also interact with climate change so there needs to be from the start a holistic way of approaching these um these types of environmental threats secondly i think this concept of double materiality and the potential endogeneity of nature related financial risk um needs to be much more explicitly recognised as as dynamics of of relevance to financial authorities particularly financial and supervisors and that means you know giving the impacts of finance just as much weight as risk exposures and finally um you know coming back to this idea of the precautionary principle i think from the start yes i recognise that there does need to be some level of research and information building and capacity building but financial authorities need to acknowledge that the bar of certainty that they may need to justify to put in place regulatory interventions may need to be far lower when they're dealing with these radically uncertain threats and so you know it would be great to see that emerging research agenda focus on some of the qualitative methods that i spoke about you know adaptive policy design sensitive intervention points these are the some of the relevant concepts that i think it would be great to see financial authorities um focusing on as they as they build their research agendas in this area so yeah so that's it from me wonderful thank you very much kati um i should maybe yet that the reason why i'm really i tend to be on the more optimistic side is that i've been in this convalescent for a good decade and the convalescent has changed so dramatically and it's not that everyone is fully on board with the ideas that kati for example has put forward tonight but there really is a lot happening now and and i do see that this is really a moment of change and so i am mildly optimistic that we will be moving in the right direction not at the speeds that we need to be going but i think we are going to see major changes in the central banking space and so discussions like the ones we're having today will certainly have to continue so thank you very very much kati thanks everyone for joining and and giving you questions the last task for me is not only to thank kati and gregor very much but also to point out that the next webinar in this series will be in two weeks time on 27th of january and it will be on the elusive quest for structural transformation africa will china make difference by alimayu guida from ades abe by university so please switch in for that one and thanks everyone and stay safe and bye bye thank you very much thank you