 Hello and welcome to this London Climate Action Week event on climate change and sovereign risk. I am Uli Vols, I'm the director of the SOA Centre for Sustainable Finance and it's my great pleasure to welcome you to this event. The game plan is as follows. Together with John Byrne from Schottmann Institute, I will present the new report on climate change and sovereign risk. And then we'll have a panel discussion with some excellent panelists which I will introduce later on. We will also welcome your comments and questions. So please participate actively so that we can bring you in. So, let me first start with the report. This is joined work by the SOA Centre for Sustainable Finance, the Asian Development Bank Institute in Tokyo, WWF in Singapore and 427 in Berkeley, California. And the research was sponsored by the Inspire Network, which has been set up to support research that feeds into the work of the Indians, which is the network of central banks and supervisors for greening the financial system. So this work is meant to help central banks and supervisors and everyone working in this space to address this very critical issue. So the report is very comprehensive so it's around 160 pages and will only give you a glimpse of some of the key messages now. I will first talk a bit about the transmission channels of risks. Then John will present on the empirical work that we've done on the link between climate vulnerability and the cost of sovereign capital. I will present to you the main policy recommendations and that will then need a discussion. So, let me first save it about the transmission channels of risks. Here you have a chart from the report which shows several different channels through which the physical and the transition impact of climate change can have an impact on macro financial risk and ultimately sovereign risk. And I won't have time now to go through each of them in detail but just let me highlight a few points on each of them. So, first of all, the first channel is depletion of natural capital and natural services. And basically all economic activities in one way or another are dependent on natural capital, be it freshwater or other natural services. So, we know that climate change is contributing to further depletion of natural capital and undermining natural services. And this can have quite significant impacts for economies at large. Kind of the impact, for example, of erosion of natural capital on sectors such as agriculture is very obvious, but there are many others who can that can be affected. The second risk channel is also very straightforward, the fiscal impacts of climate related disasters. So we've seen a lot of examples where climate disasters basically wiped out entire economies, regions and these amounted often to very large share of GDP. In some cases up to 206% of GDP, where it is tried through one single disaster and you can imagine what this means for public finances. And of course, even if public assets are not directly hit as badly, there are contingent liabilities by the government. The government will have to support reconstruction, will have to support households and businesses to weather disasters. So this can be very, very costly. And there is a rich evidence on that. The next channel is about the fiscal consequences of adaptation and mitigation policies. We do need large scale investment in both adaptation and mitigation. And even though we know that both adaptation and mitigation investments are actually very good because they help to bring and gone down dramatically, but systems to renewables will require large resources and importantly, especially for climate vulnerable countries, there is a very large need of investing in adaptation to boost resilience. So that can also strain public finances. The fourth channel is about macroeconomic impacts of climate change. And there are many ways how the macroeconomy can be affected. Climate change can cause supply shocks, demand shocks. These can be temporary, but they can also be permanent. They can also have a structural impact on many of our economies and public expenses. Then the fifth channel is about climate-related risks and financial sector stability. It is now widely recognized that climate change can have material impact on financial stability, both at the level of individual financial institutions, and also of financial systems at large. And there are indeed risks that climate change can threaten financial stability and that this can translate. For example, during the Euro crisis, how lead to so-called doom loops, so where financial instability can lead to instability of public finances, and this in turn can have negative feedback on the financial sector. And for example, we look at the Southeast Asian region and have a special chapter in our report on Southeast Asia. We can see that there are a lot of linkages between the financial sector and public finances partly through publicly owned banks, pension sensor on and exposure example of the financial system of many related assets, for example coal. So there is a high stranded asset risk, high transition risk in the financial system of Asian countries, but many other countries. And if not addressed properly, mitigated properly, this can be very problematic. The sixth channel is about the impact of climate change on international trade and cattle flows, which again is a very important channel and often overload. And I think we can illustrate nicely in our report with the Southeast Asian trees how trades can be affected by climate change and that can have very significant effects. So for example, around 70% of the region's many is rubbed by disaster and indeed there is a high risk that with increasing incidence of these disasters. The current value chain production chains won't be able to run as they did so that have a big impact. Or if you look at the impact of climate change on agricultural outputs, which can be severe. Around 24% of Indonesia's exports are in agriculture. Around 10% in Thailand Vietnam. If this is impacted, this can severely the balance of payments. Or if you take tourism, more than 20% of Thailand's exports are in tourism. If tourist areas, this can really have detrimental effects on employment and also public finances. The last channel want to highlight or maybe just one more thing on trade. There are some countries which are of course very heavily dependent on fuel exports in Southeast Asia Brunei which has around 85% of its exports in fossil. And if we have China, Japan, and others moving away from coal, then you know, external balance will look dramatic different and then have severe consequences. And last but not least, climate change can also have which we know though. I'm sorry I'm just running said very quickly but but you can get a taste of what we're looking at in the report and for each country it's important have a careful analysis what the specific risk factor and how they may play out and how they can be addressed. As I said we do have a very comprehensive chapter on Southeast Asia. Of course I'm not not going to present now, but I'll hand out to john, who present some of the stuff we've done on nexus between climate vulnerability and cost of soren boring john over to you. Thank you really so yes we also carry out an empirical analysis and to look at the impact of climate risk vulnerability and climate risk resilience on the cost of sovereign borrowing. To do that we employ two different approaches the first one is a panel regression across 40 advanced and emerging markets over the period 2002 to 2018 using quarterly data. The second approach that we use is a structural panel bar, and we use this approach to examine how sovereign bond yields react to shocks imposed on the client risk variables. So you can go to the next slide please. Yeah, so prior to jumping into the results it's important first of all to have a look at the raw data and what that tells us. And plotted here on the left hand side is the sovereign bond yield relative to a measure of climate risk vulnerability taken from ND gain it's actually a refined measure of ND gain. It can be thought of as a broad measure of both physical and transition climate related risks. And what we can see there from our sample of 40 economies is that we have the positive relationship between sovereign bond yields and climate risk vulnerability so in other words as vulnerability to climate risk increases. There's some positive premium on the sovereign bond yield so positive relationship there from the raw data on the right hand chart we can see the plots for the same group of countries of sovereign bond yields relative to resilience to this is resilience to climate risk, which we take from database by footsie Russell. And what we can see here is that we have a negative relationship between sovereign bond yields sorry can you go back a negative relationship between sovereign bond yields and climate risk resilience. So in other words, as resilience goes up. So this is what we want to see of course increase resilience a climate risk, the sovereign bond yield declines so positive, sorry, positive effects on the sovereign bond yield in terms of reducing the cost of sovereign borrow. So can you go to the next slide please. Next slide please. The empirical findings from our first empirical approach are given in this slide plotted are the coefficients for the climate risk variables. So the shaded sorry the blue color refers to the climate risk vulnerability coefficient and the orange refers to the climate risk resilience. These are the results from a regression of sovereign bond yields across different country groupings on our climate risk variables, which also control for a range of domestic and global factors for simplicity we plot here just the climate risk variables of interest. And what we can see here clearly is that as one moves from EMEs to asian to a high risk group that we have a higher premium on sovereign bond yields due to climate risk vulnerability. So, for example, if we focus on the last column this is the high risk group these are countries that are deemed to be in the high risk category for climate risk exposure. So they're in the top quartile relative to our group of economies in our sample. And what we can see here is that for these economies there's a premium attached to sovereign bond yields of around 270 basis points due to climate risk vulnerability. Compared to around half of that for the EME group overall at 110 basis points. The asian group lies somewhere in the middle, whereby the premium on sovereign bond yields amounts to just over 150 basis points as a result of increased exposure to climate risk vulnerability. So that's the blue bar and for the orange bar. This is our coefficient for climate risk resilience. And what we can see here is that across all of the different economy groupings whether it be advanced emerging asian or high risk. We have a very similar magnitude of effect of less than 10 basis points across each of these different economy groupings. Yeah, so I think what's important to note is that although the magnitude is small, it's still statistically significant for resilience. For vulnerability, we don't find any significance for the advanced economy group. So the main message from this part of the analysis is that for a higher risk economies, there's a much greater magnitude of an effect on sovereign bond yields as a result of climate risk resilience. Sorry, climate risk vulnerability. For resilience, although the magnitude is small, it's statistically significant for all economy groups and therefore, you know, it's important that economies continue to ramp up their efforts towards improving resilience in order to get these negative impacts on their sovereign bond yields. Next slide please. Yeah, so the second approach that we look at is impulse response analysis from a structural panel bar. So what we do here is that we impose positive shocks on climate risk vulnerability and climate risk resilience and we assess how sovereign bond yields respond to these shocks. For simplicity, I'll focus on the high risk economies. So that's the bottom two charts on the on the right hand side there. And what we can see is that if we look at so the bottom left chart impulse response to vulnerability shock. What we can see is that we have a positive response in bond yields as a result of a positive shock to climate risk vulnerability. The magnitude of this effect is much greater than that of advanced economies so the higher risk economies are particularly exposed to shocks imposed on climate risk vulnerability and as well as that. These effects do not subside over time so we see permanent effects on bond yields and deriving from shocks imposed on climate risk vulnerability. So this is a positive effect on sovereign bond yields. And if we look at the chart on the right hand side to the very last chart, we see a negative effect. So, in other words, a positive shock to resilience so improved resilience has a dampening effect on yields, which is also in line with what we found in the previous analysis. And importantly, this effect also does not subside over time. So in order to reap permanent effects on bond yields. It's important that economies continue to improve their efforts towards increasing their resilience to climate risk exposure. And that would be the main summary of the empirical analysis. So turn it back to you. So I'll quickly run through the policy recommendations of the report. And we highlight five areas in which climate-related financial risk should be addressed in a coordinated manner. And so let me go through each of them in turn. The first is really to conduct a comprehensive assessment of vulnerability of individual countries and based on that develop a national adaptation plan. It's important that this is really a comprehensive analysis of different systems to really identify and how to develop a national adaptation plan. Climate change involves forwarding to have a systematic synopsis of the different potential sorbility for the macroeconomical system for public finances include both physical and transition risks. And we are suggesting that such an assessment should be conducted by a dedicated national climate risk board that importantly should also include central banks and supervisors, as well as key government departments, especially finance, economics. So we have where they exist involving to work for risk and they need to be brought on board. They need to really assessment that will then flow into. The second to mainstream climate risk is in public. I hope you hear me. I was such it. John, can you hear me? I mean the sound is intermittent. I would say it's not the best I would suggest to go swiftly through it and get to the discussion. Yeah, I'll try to do that. So, so the second recommendation was to mainstream climate risk analysis in public financial management. So this needs to include appropriate disclosure analysis of risk. It needs to include mainstreaming climate in budgetary processes. The finance ministries need to importantly enhance public sector funding and debt management strategy. Look at debt instruments which we have risk share issues, and also importantly look at diversification of government revenue streams away from higher risk sectors. And that is particularly now a point for central banks and supervisors. They need to address climate related risks in their monetary and prudential frameworks and operations. And they need to make sure that the financial sector does take account of these risks and mitigate these risks. So, we need a mainstreaming of climate related financial risk into macro and micro prudential supervision. And the policies of central banks and supervisors need to be aligned with climate and sustainability goals, and also importantly, include address treatment of sovereign exposures in financial regulation for the time being, sovereign debt is typically treated as zero risk, which is obviously not the case. We argue that governments and financial authority should implement financial sector policies that help to scale up investment in adaptation and also help to develop insurance solutions and the monetary and financial authorities really have a lot of leverage and can help support develop financial market solutions, including local currency bond markets. They can help to develop fintech solutions to mobilize domestic savings for financing climate resilient sustainable infrastructure, and they also can play a key role in developing insurance. Broadening insurance is really important because that also not only to resilience of households and businesses, ultimately takes a burden on from pensions. And then finally, we argue that international support is needed to mitigate and manage climate related sovereign risks, especially in poorer countries. The cruel irony is that climate change is hitting those the most that have contributed the least to climate change, and international financial institutions have an important role in supporting these countries to better address climate related sovereign risks and strengthen the adaptive capacity and macro financial resilience, and they can do that in multiple ways they can adaptation and solutions and these also provide emergency financing in case of crisis. So this brings me to an end of the presentation of this report. The report is available will share the link with you in the chat. There's also a technical background paper on the econometric analysis for those who want to know a bit more. And now it's my great pleasure to move to the next part of the session, which really is the core and we have a fantastic lineup. We have five panelists and I call on them so each will make a brief panelist and of course is invited to call. Let me first call Nisha Krishnan, who is Senior Finance Action Track Associate at the Global Commission on adaptation, which has been playing a very important role in highlighting the importance of adaptation. And she's been working on developing national climate finance budget tracking methodologies, helping governments and also civil societies in scaling up adaptation finance. So this is one of the areas that we've touched on in our auditions and Nisha was yours. Thanks very much, Ulrich and Dan and John for that presentation I mean I just wanted to say that this is a really rich 145 pages so kudos to you and the other partners who put this together. I just wanted to say that this is a topic that's very near and dear to the Global Commission on adaptations heart. About a year ago we released our adapt now report that really underlines, and it makes the sort of economic moral and environmental cases for investing in adaptation and resilience. We call for three revolutions right in understanding in understanding how we actually face what risks we face what are the vulnerabilities we have. Second in planning. So, how do we actually integrate all of the information on risk and exposure into our different processes, including in the ministries of finance central banks in agriculture ministries in sector ministries. And third piece is financing right so how does this all translate to actual changes in the financial system and what we prize and and value as as things that we want to see in our society. So I think that this report really hits the nail in the head in terms of making that further making that economic case for investing in adaptation and resilience that it isn't just about investing in our infrastructure or growth but that we need to look at it in low carbon as well as resilient ways. And I think that there are this what this also underlines I believe is that there are real financial consequences to countries around the world for us to not proactively address impacts that are potentially in our immediate horizon but also in our long term horizon. I think this message is even more important given that the current health crisis that we're dealing with showcases the pressures that we're going to see on public purses, and that even now that the the fiscal space and limitations on fiscal space means that we whatever we're investing in currently should also look at climate risks and invest in that future now. One of the things that really struck me was the permanence of this effect, and it only underscores further that earlier investments in adaptation resilience would actually bring greater benefits to us then later investments right because the, the sunk costs of investing and the pathways that we then become that we are then on become unsustainable in the future. And so one of the questions that I have for maybe us to discuss and also for the audience to hopefully coming on is how do we communicate that much more clearly that it is smarter to invest now rather than invest later. And the other piece that I wanted to point out is that the Commission is currently doing some analysis of stimulus responses so far over the last eight or so months. And while a lot of that is focused on emergency response and social safety nets and such but there are also a lot more in longer term investments that are being made. But out of the 50 countries are so that we looked at, and this is a range of developing and developed countries, both these developed countries, small island states and emerging economies, only nine out of those 50 so far have looked at any semblance of adaptation resilience within their plans. And considering that there are possibly waves of response, this is probably something that we need to be sort of making the message much clearer I think to countries as well as supporters right the international financial institutions that this is something that we need to take up much more seriously. Maybe just a couple of one last comment I know that I maybe running against the five minute mark is that I am really excited that you brought up the national adaptation planning process, coming from a vulnerability and adaptation background this is probably the first time that I've heard this explicitly stated in a sort of finance related conversation. And I also really appreciate the fact that this really does need to be somewhat of a whole of economy and government approach to to looking at naps, which generally have been much more in sort of budgeting process in ministries of finance and and obviously the ministry of environment, but the fact that we need to expand this to a macroeconomic and fiscal approach is absolutely right. But I also want to make the point that we need to look at climate and integrating that into other economic development plans. And so this is a two way road and the extent to which international financial institutions like the IMF and others step up to do this I think the better it is for us in the longer run. And with that, I'm going to hand it back to you. Thanks. Thank you. You pointed out the understanding and financing dimensions is really important and let me hand over to Marie. Marie is heading the southern risk group for Asia Pacific the Middle East and Africa at Moody's. And she's been one of the leading persons in the credit rating agency world to work on on climate related risks and looking forward, Marie to your take on these issues. Thank you. Thank you. I'll join Nisha and really thank you for thinking you to put this paper together, which is both an extremely useful reference paper but also the new research then addressing a question that we as rating agencies often get about the extra the additional costs that the sovereigns that are mostly need to invest to adapt to and mitigate climate change of facing so having this this thorough analysis that available to us is extremely useful. I wanted to maybe recall briefly how we at Moody's are looking at this and it is, it is a work in progress but work that has been in progress for now. In earnest for for three years or so. And I will soon come to really, I think a very important milestone in that some of you may have seen we put out a request for comments so it's our announcement to the market that we will publish what we call ESG credit impact schools. And the desire to publish this course is again to address an analytical need that we perceive and it's certainly a demand that we get from investors from issues, including sovereigns to ultimately, systematize formalize and be more transparent about the credit impact of ESG and so here today we're focusing on on climate change as part of that and certainly very relevant there. So we have integrated climate change in in our create analysis in our ratings for a number of years, and you explained that very clearly in the in the paper how we do this in a nutshell, what we find useful is really to first identify exposure. It's driven by by topography by geography driven also by what we call sensitivity, which is really the fabric of the economy, the, the composition maybe of the population the society the location of the population to that can exacerbate or mitigate the impact of climate change in through natural changes of long term trends so we have that that exposure and that sensitivity. And we do look at resilience. And as far as resilience is concerned. There's one aspect of resilience that I think is specific to climate change is really what governments what measures governments taking to, to adapt and to mitigate and here I would echo the point that Nisha has, has just made. In our experience, most governments are very, very early stage, and it is difficult for us as rating agencies rating analysts to really assess the effectiveness of that investment. We are reassured by some sovereigns at least having having an action plan and engaging maybe with multiple different lengths and other partners to invest there but it seems so far. Well to the early days in relation to the size of the challenge. There's one aspect to resilience which is something that as rating agencies we, we certainly familiar with, but that is relevant which is the broad financial and institutional resilience that sovereigns can bring to face any shock. The shock might be a pandemic today, it might be climate change today and tomorrow, but ultimately having financial buffers and having strong governance will probably place some sovereigns much better to face this. Now, when we, we, we look at this we mentioned the shocks and trends and I think that's important and on one point I wanted to make a maybe a call for further research, which is that I think we, we understand increasingly well I think the impact of the natural disasters, partly because we can, we can, we don't observe them, and we rate 145 sovereigns around the world, including small islands including number of South African countries, countries in the, in the Caribbean or the Pacific. And in a given year, unfortunately, there will be a number of them hit by natural disaster, big storm, drought and other natural hazards. So we can observe that and so far observation is that it's a big impact. Sometimes economic losses that you know very well can amount to large proportion sometimes multiples of the country's GDP. But interestingly, in practice, after an initial dip so far, please, we've generally observed a quick rebound. And a quick rebound that tends to be partly at least finance when, in particular when the shock, the natural disaster hits relatively poor country, partly financed by international aid or international financial support. And so, in most cases, we do not take a rating actions with do we do not downgrade result, because one that exposure is already embedded in the rating and because what we observe is an adjustment to relatively quick adjustment. But when a question comes in, and that's my call for further research is, can we get better, more robust estimates about the implications of these shocks becoming increasingly frequent and increasingly severe. It is one thing for a country to face a major storm once every, I don't know, if we talk about something really exceptional once every 10 years. It is potentially very different and potentially very different in a non linear way for that country to face these sort of storms every other year. So what if what are the implications of economies not having the time to rebuild. What are the implications of investment ex ante if companies will now need to factor in that within two or three years within the very early stage of the lifetime of the investment that investment runs a significant risk of being being damaged. I haven't seen research on that on really hardly factor in really this this non linear potentially very significant amplifying factors from the frequency and increase frequency and severity of natural disasters. And that to me is the key question and that to me is the key. What I said that we to the best of our ability integrate climate change in our ratings. I think this is where we could be wrong, where we could be underestimating the impact, because we use the climate science that is available to us. But I would think our capacity to predict this sort of non linear effects is might be might be so fucking strange. So, that is one and maybe again, and very often that Nisha's remarks were very, very well put in terms of communication about why does it make sense to invest now later. It is some of that the costs are only going to rise, but rising in a more than proportional fashion. It's, it's, it's not really a straight line through the frequency of these natural disasters that increase frequency has really very big more than proportional impacts. So, that's that's currently where we are. And maybe just as a last point of course this that climate changes is one aspect we also relatedly increasingly focusing on water, which might be related to climate change but there are really water risks there. And that go beyond beyond climate change. And then this is part of an ESG framework so in all this analysis with my baby environment as the immediate source of shop, but with quite significant social implications that we do factor in and I mentioned that through the resilient aspects, of course the importance of governance. Thank you. Well, thank you very much Marie and so in the report in our chapter on Southeast Asia we actually also look at water risk and and as you say this is indeed a major major issue, along with heat stress in in other regions. And I think that you highlight you had how kind of trying to to prepare to mitigate these risks but that it is not so easy. And I think that that will be a key point going forward you know we we want countries to to invest in resilience do the right things. And stories of course we need to make sure that this is also then being recognized. And also so by rating agencies and also by financial markets so that this also translates into a lowering of the cost of capital, which as we explained is one one of the big problems. Thanks a lot, Marie. I will like now to Leslie love his Leslie EO of the Africa. She's a the that provide trick insurance coverage for African countries against extreme weather events and natural disasters so Leslie is really an expert on on how to deal with these risks down on the ground. And I'm very much looking forward Leslie to your insights. Thank you very much for that. So then I will focus really my remarks on the impact on on agriculture, because agriculture is extremely important to African countries as it contributes about one third of the GDP and provides about two thirds of the employment opportunities. And when you think about natural disasters. They have the greatest and most disproportionate impact on small to medium scale farmers and in Africa currently 80 to 90% of the agricultural output comes from this small holder farmers. From an insurance standpoint, agriculture is important for obviously food security on the one hand, but then there is a very strong transmission mechanism between what is happening in the agricultural sector and what is happening in the economy, as I alluded to, given the very large percentage of agriculture in the economy. So what we observe is that after a drought in a country, we see much lower text revenues and increasing default rate in the financial sector to the extent to which the banks have lent to farmers in the agricultural sector. Furthermore, we also see some other effects such as internal migration, you know, as people try to move within the country to areas that are less severely impacted by a by a drought. And in the way that we we work. I will agree with what was expressed earlier that you know a comprehensive risk assessment is really the starting point. And we encourage countries to have the risk layering approach where for the very high frequency and low severity droughts in particular the recurrent droughts as it were the country meditates this through setting aside money in the annual budget just to deal with these sort of cases as a matter of routine. As the severity of drought increases and the frequency decreases, you have this mid level where this is best dealt with through some contingency fund. And in the years where you don't have a drought, then there is a replacement natural replenishing of the funds that are sitting in the contingency fund. And then at the sort of top layer of the risk spectrum for the droughts that are extremely severe, but very less frequent, you will then integrate insurance, because again insurance doesn't have the magic properties of being able to solve every problem that exists, but insurance works best for the low frequency and high severity droughts. And this is the space that for us as insurance, we're playing. The role of insurance is critically important in building resilience and ensuring that the country is able to bounce back after a natural disaster. You also see the tangential benefit of insurance arising from increasing the sophistication of countries and enabling them to better understand risk, because for you to be in a position where you can figure out which of the risks you want to retain and which of the risks you want to place in the international insurance markets, you need to develop a very sophisticated and nuanced understanding of risk. In a specific case of the African risk capacity, we use a risk pulling approach to put the countries in Africa into a sovereign risk pool, which then allows them to benefit from the solidarity mechanism of insurance. And coming back maybe to address some of the findings in your study and what my core panelists have alluded to. I like the output of the study, because it clearly shows the cost of climate change. In the past, one of the barriers to addressing the challenges of climate change has been that we have been unable to accurately quantify what the cost of climate change is. In your study, you can see that the high risk countries pay the 275 basis points, while the low risk countries are paying only 133 basis points. So if you multiply the differential by the outstanding amount of debt, this starts to express in dollar terms what the cost of climate change is to a particular country. And it will be interesting then as an academic study to see what the cost of mitigation and adaptation is versus the lower cost of borrowing that will arise as a result of that. Also referencing the study that you've done, I completely agree with the point number four on the specific role of insurance. And then maybe coming back to what Marie raised, I'm happy to see that Moody's is taking an interest in this and systematically integrating it into their risk assessment. I think it's through actions like this that countries will be better able to appreciate the risk that they face. And finally maybe just to close on another point that Marie raised regarding the increasing frequency and severity of natural disasters in the insurance industry were obviously paying very close attention to all of this, because ultimately it will result in much higher insurance costs to the countries, unless the increase in frequency and severity can be offset by adaptation and mitigation. So I will stop here and I'm happy to go into more detail when we have the interaction with the panel panelists. Thank you. Thank you very, very much Leslie I think that was a very good illustration of some of the very concrete challenges faced in the agricultural sector but also beyond and the role that insurance can play. And I'm very pleased to call on Daniel, Daniel Clark is the director of the Center for Disaster Protection also in London, and he's been doing tremendous work with governments and international organizations on preparing better for disasters, and reducing the risks and impacts and he's also actually published a very good that I can recommend on dull disasters, how planning ahead will make difference so I think that actually tunes very nicely into kind of what we are trying to to say in our report. And Daniel over to you. Great, thank you much for the introduction and the plug for the book I should say the book is freely available online so as well as being available from all good bookstores. So, most of my work and the Center for Disaster Protection is on disasters and crises that might happen in the next year or tomorrow. I am going to bring in, I'd like to talk about two things from my experience and our experience working on that agenda for this discussion, primarily about macro fiscal risk management. And I come at this as a, you know, unashamedly as more on the sort of micro economist side. So the first question I have is, it relates to what do we do about risks that don't sit on anybody's balance sheet. So there are lots of risks out there that governments hide behind their backs where people will fall fully deceived themselves and each other, where nobody prepares and everybody hopes that somebody else will pay. Everybody hopes that local government will pay local government hopes that central government will pay central government departments hope the finance ministry will pay finance ministry hopes that the international community will pay. And because everybody is too busy looking up when it comes to risks nobody is practically managing those risks and climate risk management is one of those things that can't be done centrally by a central government. It's not sort of one of those sort of classic macro fiscal risks that can, you know, where essentially you need a really well functioning finance ministry and government is something that's the job of everybody in society. So which balance sheet to these risks sit on so you might think of agriculture in India. So who's risks to agricultural risks for farmers in India sit on, do they sit on the balance sheet of rural banks. What what what happens so if government is going to provide relief after, after, after large shocks agricultural production. Or if they are going to provide loan write offs. Does that sit on any balance sheet anywhere and is that properly managed or not. If you look at infrastructure and public assets, say in Philippines. For for public assets that are say owned and maintained and managed by provinces, who who is a responsibility to actually pay to reconstruct if they get hit by cyclone. Is it the province or actually might the national government common with some funding in which case who really is the risk owner who has the incentives to manage that risk. And are they managing those risks. You talked about international organizations and the international system. So, where do risks sit there what risks really are what risks really are the international organizations taking on do we know what those are and why. And I think this this is important because I think a lot of the big risks in in life and a lot of the full between gaps. So, you know, a lot of your recommendations are premised on the idea that risks do sit somewhere so your climate risk board, you know would presumably capture risks that government owns up to. It may be just explicit contingent liabilities not those libraries that everyone else would like to push on government, but the government has not formally acknowledged. If the public sector is useful if the public sector or the private sector admits that they have these risks on the balance sheet, and it may be that neither do, you know, you know, you're only going to find out who's balance sheet the risks are on after the shock, when there's a sort of negotiation through tabloids, and then insurance markets obviously insurance markets take on risks they're paid to but if people, if people think that they can get government to pay when they're when they lose their crop. Why would they buy insurance. So the first point. So I would like to see. I'd be interested to hear the more macro view of this, because it seems to me that when it comes to things like banking crises there. There's a lot of discussion the macro fiscal context around risk ownership and clarifying that but when it comes to natural hazards which are where it's a bit easier. Now this isn't this isn't defense this isn't banking crises. These are risks that are generally modellable where you just need to stop agglomerating the risks at a country level and have them properly managed and this this point around making it clear who owns what risks should be relatively, you know everyone should agree with the principle, even if everyone wants somebody else to own it. And the final point I wanted to make was you mentioned a point about risk contingent loans I would just say be careful what you risk what what you wish for. So when I, you know, if I take out a loan to buy a house. My, my bank doesn't tell me to install a smoke alarm or install locks on my front door my insurer tells me that my bank tells me I need insurance if I want to loan. And I think when it comes to the international system, we have a lot of development banks that have been set up along the lines of a central bank or along the lines of a, you know, a typical national development bank. They do have development in their blood they're trying to promote development but they act as banks. Until recently we haven't had the same with insurers we haven't had insurance companies at the, at the international level, who've, who've helped countries actually invest in smoke alarms and try to make sure they have smoke alarms as well. After Leslie, who leads one of the one of the only development insurers in the world if not the only development insurer in the world in Sub-Saharan Africa, in Africa sorry. I think we need to be thinking more creatively around the kind of international institutions we want and I think we need to think beyond risk contingent loans I think we should be thinking about different kind of institution, along the lines of development insurance, and I think that loans should be attached to insurance products which not only help to protect against shocks but also provide good incentives. And, and closing just to remind you we're obviously in the middle of the largest global crisis since the Second World War, whose balance sheet did that sit on. Thank you much. Well, I don't want to go into the discussion now but but just, I think the point about raising, you know, kind of risk ownership, you know, whose balance sheet is the risk on is a really important question and so I come from, from a macro perspective and so I've been working with central banks and also Ministry of Finance. And from there you often have a rather macro perspective and and you know central banks traditionally would not be looking at these kind of risks you know because ultimately these would be kind of micro risks but what we are arguing in our report is that through these different channels that we've discussed climate related physical and transition risks can ultimately become macro financial risks and macro financial risks have to be dealt with by the central banks supervisors finance ministries, which traditionally haven't really looked much into these issues. And this is changing now I mean we've over the last couple of years we've really made big advances among central bank in looking at this climate related risks and and and this is an attempt to broaden the discussion and and also shed light on on other macro financial risks that may arise and so at the end of the day. So a lot of the micro risks, if things go wrong, can end up at the doorstep of the central government. That doesn't mean that the central government bill will be necessary in the position to really deal with them. But I think it is of utmost importance that there is a proper analysis of what the potential risks are. And indeed then that needs to be a discussion how to to to address them and I fully endorse your point, you know that that we need risk management risk mitigation at all levels at the community level at the regional level but certainly also at the level of the central government. But let's go back to that discussion when when we have the open discussion. Now I would like to introduce last but not least, Natalie Ambrosio Proudhon from four to seven, and Natalie has actually been one of the co-authors of our study. And so Natalie is directive communications for four 27, which is one of the leading providers of data on physical climate and environmental risks and and she's done a lot of work on resilience building and also on data, including the not a global adaptation index which which we also partly use in our analysis. Natalie over to you. Great. Thank you. Thanks to you for the introduction. Thank you for having me. And also thank you for the other panelists for your remarks, you brought up great points and I'm going to touch a little bit on that interplay between the local risk sector and the macroeconomic impacts. Firstly, as we mentioned, I'm director of communications at four 27, and we are an affiliate of Moody's. I will start with a quick disclaimer that unlike Marie, I do not speak on behalf of the credit rating agency Moody's investor service and nothing I say should be construed as ratings information. And so in the next seven, we focus on modeling exposure to physical climate risk, leveraging global climate models and other environmental data sets. This is how we contributed to this report. And firstly, I'll just say how grateful I am to have been able to contribute to this report. And I'll focus my remarks on how I think the report demonstrates progress that has been made. I'm first also showing that there's still much to be done in terms of understanding climate risk exposure, understanding how these risks translate into macroeconomic impacts, and also understanding what should be done about this information. First, the key progress that has been made in terms of understanding the vectors through which climate risks affect sovereign risk, and in terms of modeling this granular forward looking climate risk exposure. On top of providing the new empirical evidence that climate risk exposure increases the cost of capital that John presented. The report underscored this robust understanding that has been developed around the transmission mechanisms from climate change to credit risk, as Uli discussed. Alongside this understanding of how climate change affects sovereign risk comes the need for understanding physical climate risk exposure at a very granular level in order to understand the economic impact and to inform adaptation efforts. So, for example, one of the case studies that we contributed examined infrastructure in the Philippines, finding that 80% of assessed assets had high risk to heat stress. 75% had high risk to hurricanes and around half were highly exposed to floods. This included many ports and airports. So disruption at these assets does increase costs locally, but it also leads to rippling impacts domestically and also internationally, which could affect global supply chains and trade dependencies, if this becomes a recurring problem. Similarly, we looked at physical risk exposure in corporate manufacturing sites, owned or operated by large publicly traded companies. In Vietnam, all of the assessed sites are exposed to heat stress, a third to slides and half to cyclones. This can create shocks, taking facilities offline, but it can also lead to long term stresses, for example, increasing energy costs due to heat stress, and declining labor productivity from heat stress can decrease productivity, both at the firm level, and lead to reduced growth also at the macroeconomic level. Understanding where this exposure is coming from is essential to informing adaptation and preparedness measures that address both these local risk exposures and also the downstream impacts. The report underscored the need for understanding two elements together when striving to understand physical climate risk exposure and what this means. And secondly, there's a need to understand what's happening at the local level, rather that be at a city, a corporate facility at agricultural sites. And secondly, a need to understand the projected climate conditions at this precise location. There have been significant progress on this second piece. The understanding of how to model different dimensions of risk exposure at granular levels does continue to improve. And the next generation of climate models, CMAP6, is starting to roll out and this will help to continue to refine these forward looking climate data analytics. The second element of understanding the location and activity of specific assets is essential because asset location and its activity is what's going to determine how its exposure to climate risk really affects its operations and its costs. But this consists of significant challenges for a financial institution, banks and governments. They continue to struggle to gather information on the precise location of the physical assets that are underlying their loan and investment portfolios. On top of this information on where an asset or activity is located is the layer of understanding preparedness or risk mitigation at the local level, which is of course an essential element to understand alongside this information on physical risk exposure. So, to Marie's point, the other large opportunity for further research is this translation from the detailed understanding of climate risk exposure into a measure of the size of expected financial impacts from that exposure, both at the macroeconomic level, and from an issuer level perspective. This is a key research area for many organizations and is something 427 is working on together with Moody's analytics. Overall, the report highlights that there's a need for a high level macroeconomic view of everything that can be affected by climate change in a country. But also this need for a detailed view on where the specific exposure is centered and the vectors that drive these impacts to inform targeted interventions and adaptation measures. Something 427 is working on now is new sovereign climate risk data that captures how much of a country's GDP population and agriculture is exposed to specific climate hazards. And this can really help connect the dots between granular risk exposure and the ways that this exposure may manifest in macroeconomic risk. The last thing I want to highlight building from Nisha's point is that this report clearly demonstrates the need and the importance of adaptation and resilience. And in addition to the essential risk mitigation benefits of adapting and building resilience. This is also important because it sends the signals to investors that countries are preparing and taking this seriously. So this can help encourage investors to continue to invest in regions, even when they're highly exposed to climate change, because the country itself is also investing in its own future. I'll end there for now. Thank you. Thank you very much. Natalie and now I would like to invite. Now I would like to invite all panelists to switch on their video. And so let's have a have a discussion among ourselves and I would first like to do a quick tour in the same round in the same order of appearance. If everyone could could, you know, just make the lay really to add to the discussion now in response to what others said or you know to clarify something or. Nisha, do you want to. Thanks. And thank you to everyone I think this is going to be a pretty interesting discussion. One of the things that I maybe wanted to pick up on is Marie's point about evaluating the effectiveness of the investments that we're making right and then this is early days. But I think this is touching upon something that's sort of brewing in multiple discussions, not just the public side, but also the private side, which is the need for metrics and the need for metrics on multiple friends, not just in what to invest in and what the quality of investments are, but also how do we know when we are meeting certain standards and certain sort of progress points right how do we know that we are actually getting towards something that is going to be collectively and cohesive cohesively getting us to a more resilient future. And I think that's something that maybe we can talk about and I think that also points to the nuances of what the micro impacts are versus what the macro impacts are. I think one of the other things that's coming up is this issue that within a country you might have micro economic impacts that then relate to or result in social instability or political instability, but that might not be felt outside, but still has an implication on what the public public balance sheet looks like right so Daniel to your point about implicit liabilities. We don't see that until after the fact. And so how do we manage that proactively and what are the instruments at hand that we can do so maybe I'll stop there and hand it off to Marie actually Thank you. Thank you and happy to take some of the questions that come from the audience as well as we go related to all this. Okay, and I refer to Tunisia's points earlier, which that that aspect of governments, the, the, the own actions by the government. How can they, how can we know, and to me that they investing in the right technology and right sort of projects to clearly effectively adapt and mitigate adapt to a mitigate climate change. I think it's is a major question. I was also interested in picking up on some of the point of listening mentioned. Over recent years, it seems to have been nice and signs of various new financial products coming and I'm thinking about insurance in, in that sense, including insurance from for sovereigns. I'm not sure they've really taken off to a significant extent so far. It might be because of the difficulties ultimately to price this risks sense this risk for intrusive investors in general and so going back to the need for more and more comparable I think it's a big part of that. But I was, I was interested in perspectives there as to what are the prospects there for insurance and other types of financial innovation to play a role. Maybe I can take those one question about how we ultimately how we integrate climate change and how we in in our ratings. I think what what we do so we do rely on on data and expertise from 427 others to give us an assess and a forward looking assessment of exposure and especially in of an assessment of really what might be the countries in our case and my team is a sovereign base, what might be the countries exposed to certain really high risk periods. I guess that's what we were looking for there. We don't have at this stage. I don't think there is really they are established models to then translate that exposure into economic social financial metrics in a robust manner. There are increasingly there are a number of macro studies and that do estimate the impact of climate change on macro economic environment. I think what would they do is really look at the the long term trends so the rising temperatures impact that I would have on productivity. These sort of aspects and my and that's why really I mentioned these non-linear points because my read of this so when you look at the estimated impacts. They might be surprisingly small and we're talking here about countries like India or in sub-Saharan Africa where by 2050-2100 even climate change is estimated to maybe lower GDP by 10%. When you when you think about the margin of error around any projections of GDP of these of these intervals 10% is it's within really well within that band. And I think really what what is really difficult to get is beyond these long term friends beyond the impact of rising temperatures, maybe sometimes rising sea levels might be incorporated in terms of forcing relocation of economic activity is that aspect of the repeated shocks and how that affects the macro economy. So in practice what we in the absence of that established knowledge common knowledge, what we do is we observe, we observe what is what is happening. And we do observe big differences. I'll take an example of Fiji was hit by a storm big storm Winston was called in 2016. So this is relatively recent but at the same time will have the benefit of hindsight and quite quickly quite quickly after the storm the government came up with an estimate of the cost very credible 20% of GDP damage to infrastructure damage to economic income loss revenue loss. And so 20% of GDP is very big. During that time GDP growth actually only dipped dipped slowed to about 2.5% that year in 2016 so slowed down by Fiji standards but not not something that is dramatic and interestingly government debt did not increase and that's because aid and financial support was forthcoming to international aid in some part insurance as well. So to buffer the shocks. This is not necessarily the typical natural disaster but it's really through the the work of this experience that we observe. We've observed much more severe natural disasters and there have been some in the Caribbean and St. Martin and I think you'll remember Puerto Rico for instance that has a much more damaging impact so what we do is based on that exposure assessment combined with what would be a typical natural disaster which would be a loss of economic activity of a few percentage points and increasing in government debt that is convincing to that that's our baseline if you want for the exposed countries and if it turns out that the weaker or the capacity to respond to that shock is weaker than we had expected before that is where we start to factor in some some rating implications in that way we didn't have we haven't factored in example. Thanks, thanks Maria and also for the chat you on on what rating agencies overview Leslie aware that we have only 10 minutes left so so we need to be careful on time Leslie over to you. I think I can be quick because most of the points have already been covered by my co panellists. I just wanted to touch on sort of this idea that was raised by Daniel on the ownership of risks. I think it's a very helpful point to to cover because the current covert pandemic is a very good example of of of this, who ultimately bears that risk because we've seen the government ship into some extent. And then maybe the other point that I wanted to talk about is the fact. I think all these issues are quite well known in terms of the cost of this. Climate change, the impact of natural disasters, but we also need to examine the reason why governments don't act. And of course, it's multifaceted. And I think that's a very good point. And then maybe the other point that I wanted to talk about is the fact. I think all these issues are quite well known in terms of the cost of climate change, the impact of natural disasters. The reason why governments don't act. And of course it's multifaceted on the insurance side. You know, one of the issues to address is around premium affordability, because it's quite expensive to ensure against natural disasters and the payment of insurance to meet against other national priorities like education, like defense, like health, and so forth. And the value of insurance is only seen whenever a country has a very large payout, you know, after a natural disaster. And in the absence of a payout, then the money that is spent on insurance is seen as being wasted. So I will stop here to give my fellow panelists an opportunity to chime in as well. Thank you. Thank you, Leslie. And I think it's also clear that insurance has to be part of the solution but but as you say it's not the silver bullet and indeed a lot of risks can't be insured because the premium would be so high and and unless you find someone who's really willing to provide large subsidies but this is not not always so easy. Thank you very much. I'm just going to carry on the insurance theme actually responding to something Marie said so I was so I had a conversation with the finance minister from a large ASEAN country last year. It feels like a very long time ago because it was pre COVID but it was only last year. And we were talking about the role of insurance in infrastructure and his view was he wanted to have all of his public infrastructure knew all his new public infrastructure insured. The reason why he wanted to ensure was not because he needed the payouts if so if a cyclone hit. What he wanted was he wanted the discipline he won he didn't trust his his administration his government officials to build the building's right. Or you know through the procurement process to build them in a way where they would stand up to the wind blowing. And he wanted the insurer there, almost as a warranty on the work that his civil service was doing now. Obviously insurance insurance markets with disaster risks sometimes don't work very well. You can sort of end up paying too much. And it is possible to do some of this through budgetary mechanisms. So there are some countries that have they specifically have a budgetary mechanism where a government department is able to take a contingent liability onto their balance sheet. And then there are some controls around scrutiny and reporting. But it can be difficult to get that right. So I just wanted to flag I think, I think when we think about insurance. It's not just about making sure that countries have the right amount of money and in fact I would even say I would say that's quite a small part of it. I think it's around bringing somebody and who's actually on the hook for the risk, and you can do it with the private sector, or you can do it in the public sector, ultimately somebody pays. Do you have somebody who has those risk controls in place who who sort of feels like they are owning the risk, who are who actually is accountable to somebody. And who has the right job description, you know, particularly in the public sector to have the right job description to do what society needs them to do. I agree and up to add that one really important part is of course to to to mitigate risk. So kind of kind of what are the underlying vulnerabilities and this is why in the report we really highlight the starting point has to be a very comprehensive vulnerability assessment at all levels and I again I fully take your point about the, you know, different ownership of risk. It's in the private sector it's in the public sector, it's at the, you know, local level the regional level the national level. If everything goes wrong, ultimately the buck stops with kind of the central government which may or may not be able to do something depending on how well prepared they are and so on. Also what the international support mechanisms but but I think we are still not having the complete picture and I'm not saying that we're providing that in the report. But what we're trying to do is these are the different shots of risk, and we need to dig deeper the the, it's actually, you know, the data situation is still fairly poor to properly analyze many of these risks and of course and so so even even with kind of present day data. And then of course, given that we're dealing with climate change and it's very much about, you know, forward looking risk, it's becoming even more difficult. So, if you don't have this comprehensive assessment, then everything afterwards it also very difficult and and sorry if I just respond to one more point that Daniel actually raised about, you know, risk contingent loan sensor on. I don't think we were actually calling for, you know, any specific tool to be the silver, you know, there is no silver bullet. It really has to be a very comprehensive efforts. We need all actors to really realize the risks and see what they can do about it and a lot of different things can help insurance can be one part but you know if you're just hoping for insurance to do the trick. You'll do we're doomed or kind of many of the countries will be doomed, but sorry. Natalie, let me hand over to you. Yeah, thank you building on what you were just saying I think a key thing to remember with climate risk vulnerability is that it's so context dependent, both the risk, but also what adaptation is necessary, and bringing back that conversation on metrics and improve data. We need for metrics on quantifying resilience, what resilience investments have taken place and the benefits of those resilience which is inherently challenging because it's at its foundation resilience, an effective adaptation or preparedness. It means that no loss will happen. It's the avoiding of an impact, which is inherently hard to quantify it consistently. That's something that really is important for continuing to incentivize and show the importance of systematic resilience. And then just lastly, on the conversation around these macroeconomic impact that just want to highlight research that we're working on is recalibrating macroeconomic models by looking at historical events, extreme weather events and how they have affected different macroeconomic variables. Doing that systematically in order to then recalibrate forward looking macroeconomic models with this adjusted view of how this more systematic recurrence of climate hazards is likely to affect them. So hopefully this ongoing research will help to shine light on some of these transmission channels in a more systematic forward looking way. Thank you. Thank you, Natalie. And so I was actually hoping to do a closing round, but we have one minute left. So there won't be a closing round but just a mini wrap up from me. I think I think it was a fascinating discussion and it shows that there are still so many issues we haven't really settled yet. I hope that this report will contribute to the discussion. I'm not providing the answers to to all the issues that have been raised but but I think it's very clear that there is much need for further research and collaborative research and I think, you know, having having the different stakeholders we we've had in this discussion, you know that shows, you know, we need all of us to really engage with this and try to bring this forward. Because the stakes are really high. And for for many countries, this is really a matter of life, a matter of life and death. And we need governments to really scale up their ambition, and indeed all active also the private sector to scale up their ambition in in adapting to climate change, building resilience. And, of course, there also needs to be appropriate financial means to do that. And so let me just mention that on Monday we had a report launch of we were proposing debt relief for highly indebted countries that will put them in a position to invest in a green and inclusive recovery. And this investment in adaptation resilience really has to be part of that crisis response. We need to make sure that all countries really have the means to do that. So I would like to thank very, very much all the panelists for for accident contributions and looking forward to continue working with you on this issue and everyone please reach out if you want to discuss any aspects and the team. And I will be very happy to engage with you. Thank you so much. This video, this has been recorded this will be put online and share with everyone who may be interested. Thank you so much and enjoy a lot of excellent further events during the rest of London Climate Action Week. Thank you and bye bye.