 2023 may have been the hottest year on record. The global average temperature reached almost 1.5 degrees above pre-industrial levels. The climate crisis is becoming more and more tangible. It is forcing changes to the economy and the financial system, and therefore also for the ECB as the central bank for the euro. We just published our new Climate and Nature Plan for the next two years, and this is what we will discuss today. You're listening to the ECB podcast, bringing you insights into the world of economics and central banking. My name is Stefania Secola. I'm joined today by Irene Hemskeck, who's leading the Climate Change Center here at ECB since its creation in 2021. Welcome, Irene, and thanks for joining us today on the podcast. Thanks so much, Stefania. I'm happy to be here today and talk to you about the very urgent topic of the climate crisis and what it means to work for us at the ECB. Let's start from the beginning. The ECB's first climate action plan was one of the results of the big monetary policy strategy review that was concluded in July 2021. It was a big step forward. The first time we defined what we, as a central bank, can do to help tackle the climate crisis when it comes to monetary policy. There was, of course, a lot to do and a lot of work going on in other areas, in banking supervision and financial stability, for example. So in 2022, we compiled all our climate-related activities in the ECB climate agenda. Now, the time for a first review has come. Irene, what has changed over the last two years? Thanks so much for this question, and I think it's an important one. The first climate action plan that came out of the monetary policy strategy review was published in July 2021. It contained a long list of climate actions that we were planning to take on what are we doing with our corporate bond holdings, what are we doing with our macroeconomic projections, are we improving our statistical indicators to also have the data from climate change. And I can tell you today, we delivered at all fronts. So we have committed and we have delivered. Not only on our monetary policy operations or monetary policy actions, but also the reference you made to banking supervision, to financial stability, to also, we also did an assessment what is the impact of the bank notes that we use in our daily lives. So at ECB, we have taken action at all fronts and we just need to continue to do this. All these activities have shown all they come to the conclusion that we better take action now and invest in a transition, then leave climate change unabated because the cost will be much higher if we don't do anything and have the climate heating and the planet heating and face the consequences of that. So taking actions at all fronts, it doesn't mean that we're there. And I think we also have to be modest there. We have set steps and I think important ones, but we're definitely not there yet. So over the past half year, together with all the colleagues involved at ECB and the team, the climate change center team, we did a big exercise. We took stock of everything that we had been doing and we also looked into, okay, but what is it that we need to do next? And we didn't only look inside the organization, of course, we also looked into, okay, what are NGOs telling us to do? What is the agenda of politicians? What is, what are scientists telling us? What are academics telling us? So we really had a big stock take and also what are other international bodies doing, like the G20, G7, how are they approaching the topic? So we compiled all this information and we looked into, okay, what does it mean to us and where should we really be focusing on? So this is what resulted in the climate and nature plan that we just presented. We need to focus on a few areas where we see that really need more work. And that is how do we navigate through this transition? First, secondly, what are the physical impacts of climate change and how can we take that into account? And thirdly, and that's a new, very new topic on the agenda, that's how are we dealing with nature-related risks? And indeed, as you said, it looks like the climate crisis has become much more tangible. So you mentioned it, we see more heatwaves, floods and other extreme events are more and more frequent and devastating everywhere, also here in Europe. So what is the impact on the economy and the financial system? Yes, so I think in the introduction you mentioned, we're facing already 1.5 degrees global warming. This is basically part of the Paris Climate Agreement that we were trying to limit global warming to two degrees and put efforts to limit to 1.5 degrees by 2050. Today, we're 2024 and we're already facing these impacts. So this really affects the economy. So you can think of the wildfires in Greece. We have seen this will affect tourism. The low levels in the Panama Channel is a big traffic jam of ships, container ships there. This of course will also affect supply change of bringing the goods around the world. And thirdly, there is an impact of government expenses to deal with this. So it is key for us as a central bank to see how these kind of events affect the economy and also the financial system. So for example, we have been looking into what is the impact of food prices on inflation. So we looked at the heat in 2022 and we found out that it already contributed to 0.8 percent point to food price inflations in the Euro area one year after. Another example I want to give, if you think about the, I don't know if you remember it, but there were heavy floods in Slovenia in August in 2023, just a few days of heavy floods. The damage that has been calculated is comparable to around 5 percent of Slovenia's GDP. Just washed away in a few days time. This means that governments have to deal. And I'm just giving this as one example because Slovenia is of course not the only country facing these kind of extreme weather events. And then thirdly, the financial risk. So imagine houses in Europe that are in areas that are threatened by floods or wildfires. The value of these houses would go down, right? If you would buy a house nowadays in an area that is threatened by flood or wildfire, either you would negotiate the price to go down or maybe you would not even consider to buy it. Imagine a bank that has a mortgage based on that house and imagine the bank has a lot of mortgages in areas that are to houses in areas that are threatened by these kinds of events. This will cause financial risk for the banks that are invested in those areas. So there I think you see the impacts of the physical risk on the balance sheet of governments. You see it on the supply change of the economy. How do we really get our economy going and also on the financial risks for banks? Absolutely. And how does our climate and nature plan address this? And what can we at the ECB do about it? Well, a lot of the things that we do is of course finding out how does this really impact our work. I sometimes have the feeling that we're just scratching the surface because so many things are happening and there's so many transmission channels that are affecting us in many ways. But of course, we're going to see, we identified a few areas there where we're going to concretely work on. So we will expand our work on the impact of extreme weather on inflation. We're also looking into ways how we can improve the climate scenarios and our macroeconomic projections just to take this better into account. Another element is there, how can we make sure that we enhance the data to really support those analysis? So we probably have to work with other data to make sure that we know this. And lastly, and this is a very important point for me because we also have to look into the measures that are needed to adapt our lives and our economies to a hotter road with more extreme weather. How high are we building our coastal protections? How much will it cost? Who will pay for that? And of course, specifically, how will this impact our work? So we will be exploring more and more the topic on adaptation and resilience. And of course, this is essential for us at the ECB to know, but I think with publishing these kind of results and analysis, it will also inform policymakers, it will inform financial institutions, it will inform maybe listeners to this podcast about the impact of climate change that we are already experiencing and where we see it happening. Yeah, absolutely. And this is so important. And our plan also focuses on the green transition. We hear from many experts, and you mentioned it too, that the transition is already off track. So what can we do here? Yeah, that's a good point. And what I said at the ECB, we really try to do everything we can, but if we talk about green transition, of course, governments have the best tools in hand to make sure and guide our pathway. This is the economy we want to build. This is the way we should do. These are economic activities that we are going to phase out or not, and these are the subsidies we provide. So of course, the first and primary responsibility sits with them. But President Lagarde always makes this really, or she has done so in a few interventions, made a really nice comparison. We're all in the bus. We're all in the same bus. So governments are the drivers of the bus, but we're in it as well. It is up from now till the end of 2013. So only six years that we can meaningfully do something to bend the curve from the three degree scenario or hotter world scenario we're on now to bend it lower and bend it along the Paris Agreement. I think we're really in the last phase. There are last few years that we can meaningfully do something about this. Yeah, absolutely. So that's also why we identified as one of the focus areas for the new climate and nature plan, navigating the transition. So we identified a few actions that we're going to take. First of all, what are really the structural implications of such a transition? And then you can think of labor markets, so jobs will change. So how do we make sure that the labor markets are in good shape? What are, how are we going to meet the new supply demands? What kind of resources do we need for this transition? What kind of other structural changes in the whole value change, meaning from building something from scratch to the product that it's finally you can find in the supermarket? How will that work? So all these structural changes, this is something we're going to look much deeper into. So really the economic analysis on that. Another aspect, how are we going to finance this transition? Yes. So the European Commission estimated that it will require investment of around 1.25 trillion euros on average each year from now to 2030. And that is a lot of money. But where is this money coming from? It's not only the public finance, the governments who can pay for that. It's not only the private finance. And so how can we make sure that this finance is being unlocked? What are the barriers there? And how can we make sure that happens? So we're going to investigate deeper in like, what is the investment gap and what is the money coming from there? Sounds like everybody has to do really something in this. It's a huge, huge undertaking. So everybody's needed for this. Yes, absolutely, absolutely. And we really have to look jointly together. Okay, what is the economy we want to build? And how are we going to build in what are the trajectories that we're going to invest in, make it happen and look for the opportunities and change a bit of mindset of we've been doing this for forever, let's change it. Okay, maybe we can do it another way. And that is as efficient. And what you already see is that the investments in the renewable energy and also the production of renewable energy is rising faster than expected. So there are luckily enough very good examples and promising developments at this point in time. And the last point I want to make on this is also like, and that's a bit what I refer to, like we're also in the bus. So, of course, we have to take into account the risks and the effects and we have to analyze it. But we also look into within our mandate, what can we contribute to the transition? So what we'll do is we'll also look further into what kind of considerations can we do in our monetary policy management instruments. We already implemented the tilting of our corporate bond holdings. So that means that we're investing more in corporates that have a better climate score to have a better in the transition to a net zero. We committed ourselves to review if there are elements to do, if we can do something about it. But here, what you said, we all have to do something at this front. Yeah, yeah. And you just mentioned monetary policy in this context. In fact, some have criticized DCB for keeping rates high, which makes green investment more expensive. What is your reply to this? I've read this, of course, but first I want to say that price stability is the best contribution that we can make to foster the green transition. So if we have prices stable and we keep inflation low, this is also very important prerequisite for any investments people make or the economy needs. But having said that, if there is a reason for us to reconsider any action that we can take, we'll do it. We have it in the plan. If we have anything that we see that we can do, which fits our monetary policy mandate, that that the data is available, that everything is there, we can reconsider at that point. Thank you. Thank you. And looking forward to see how this develops. Finally, something that caught my eye in the new plan is the addition of the word nature in the title. We recently spoke to executive board member and supervisory board vice chair, Frank Alderson, on what biodiversity and nature loss mean for the economy, banks, and therefore also for us as a central bank. And dear listeners, we'll add the link to that episode in the show notes for you. So how is nature reflected in the new plan? So nature is quite prominently reflected. So it's one of the focus areas of the new plan. So we see it really as an emergent topic that we just need to explore further. The top podcast you refer to already, I think, sets out really well on why it is important. But let me put something here or add something to this conversation here. We did some initial work on it at the climate change center at ECB. We looked into what is the dependencies of our economy on 4.2 million companies in Europe on ecosystem services like water, like land, like pollution or fresh air. And we found that over 70 percent of companies in Europe are highly dependent on one of these ecosystem services. At the same time, we know that the ecosystem serves so nature is degrading massively. So if you look at it, we just need to know more what is really the impact and how does it translate to inflation? How does it translate to financial risk? And here I also want to mention that at the supervisory side of the ECB, we've been looking into climate and environmental risks already for for a few years. Yes. So there also what are the financial risks that banks have from environmental degradation? Therefore, we included in the plan very prominently as one of the three focus areas that we're going to further explore what does the nature degradation means for inflation, financial stability and also for financial risks for banks. Thank you. Thank you so much for being our guest today. It seems to me that the key message here is it is urgent to take actions for all. I mean, there is not one actor that can say, OK, I've done my bit and here I stay. Irene, as you might know, I like to close our episodes by asking our guests for a hot tip. What do you have today for us? Yes, this is a great question and I have one tip and that is talk to strangers. And that's basically why I come up with this tip is because to fix the climate crisis, we all hold a piece of the puzzle and we need to work together and we need to look beyond the bubble that we are operating in and learn from each other where the opportunities and challenges lie. So what I've done since over a year now, every month, I try to talk to someone that I would not usually have encounters with, but I'm just curious to know what is it that you're facing on the green transition or the nature crisis that we're facing and how are you going to deal with it? And to give you a few examples, we had a great conversation with climate scientists. So Andrea, the climate scientist in the climate change center, we group together climate scientists and we ask like, what should keep us awake at night? Well, tipping points, like what is it that if the ice sheets melt and the sea level really rises or these compound effects, you have a drought and you have other complications there. So that really gave me insight. OK, these are areas that we need to focus on and the physical risk focus areas really also coming from that talk, right? But it doesn't it isn't always like just science. I also talk to the bakery around the corner, right? How are you facing the energy transition with your high energy bills and the food prices that you're facing? And he told me that he just bought this electric fan to do these deliveries and really saw the impact of the food prices already with the with the bread he's selling. So also like these things. And this month I'm going to visit the Port of Rotterdam to talk together with executive board member Frank Alderson to talk to some companies. How do you finance the transition? What are the hurdles you're facing there and what are the challenges and also the regulatory barriers you'll be facing? And this is just so important to get insight because we need to move so much more to action and we can't do it alone. So we need to learn from each other and get out of this bubble, talk to people, learn from them, get inspired and find solutions together. Thank you. And action starts from being curious. Don't hide that there is a problem and actually ask everybody around you how do they leave this? Thank you so much. Really, really interesting hot tip. This brings us to the end of this episode. I want to thank Irene Hemsgeck, head of the ECB's Climate Change Center for joining our conversation today. Thank you. Dear listeners, check out the show notes for more on this topic and you've been listening to the ECB podcast with Stefania Seicola. If you like what you've heard, please subscribe and leave us a review. In the spirit of Europe, I'd like to end in Croatian and say, Dovigenia. Until next time, thanks for listening.