More importantly, this has moved beyond negative screening, to more impactful approaches involving the adoption of environmental, social and corporate governance (ESG) considerations in investment and business practices. These have served to align risk and reward in a more sustainable manner. Indeed, some global banks and insurers have begun to incorporate sustainability considerations, including environmental concerns in their lending and investment decision-making processes via the adoption of international risk management frameworks such as the Equator Principles and the UNEPFI Principles for Sustainable Insurance. These positive forms of finance are increasingly becoming powerful market forces, driving focus into the kind of productive activities needed for long-term growth. BIS central bankers’ speeches  1  Islamic finance, a well-established component of responsible finance, is similarly gaining significant growth and prominence in the global financial system due to its inherent orientation towards promoting societal welfare. This includes the propagation of strong ethical values that engenders accountability and trust in its intermediation function, as well as the promotion of risk sharing that fosters entrepreneurship and equitable distribution of wealth. By virtue of its requirement for financial transactions to be supported by genuine productive activities, Islamic finance is also deeply rooted to the real economy. All these are hallmarks of Islamic finance that underpin greater market discipline and stronger focus towards building sustainable and long term value in capital allocation. Collectively, these characteristics enable Islamic finance to also serve as an effective model for responsible finance.

However, we should not forget that the real economy and the financial economy are largely two sides of the same coin. Without one, the other would not exist. Financing is a key element for economic activity, and channelling such financing is precisely where we need the banking sector. We have once again been able to witness this owing to COVID-19. As you will recall, the financial sector was declared an essential service during the lockdown. And, for example, without banks’ active participation, it would not have been possible to successfully structure the ICO guarantees programme. Naturally, mobilising the resources needed for this transformation, which the law estimates at around € billion, will necessarily involve public-private investment formulas in which banks will no doubt play a key role. As you can imagine, financing these public-private investment needs is reason enough for the banking system to become involved. But initiatives such as the climate agreement signed on the occasion of the COP25 and the launch of FinResp (Centre for Responsible and Sustainable Finances) show that the sector is clearly committed. How can the financial economy contribute to switching the real economy towards full decarbonisation? The response is straightforward: through correct risk measurement. When banks manage their risks properly, they are promoting the effective allocation of available economic resources, by distinguishing between those projects more likely to succeed and those not viable in the medium term.