The decline in natural rates has shrunk the space for interest rate policy owing to the existence of a lower bound on nominal interest rates, thus making it harder for central banks to achieve our inflation aims. Climate change will likely affect the natural interest rate, but it is not obvious in which direction. On the one hand, it could (further) depress natural rates through negative effects on productivity, such as the impact of higher temperatures on labour supply and the destruction of capital stemming from natural disasters. However, the transition towards a more sustainable economy will require substantial investment in green technologies, which may push real rates up. Clearly, more analysis will be needed before we have better answers for the implications of climate change on the economy and on monetary policy. And, in this regard, we have to step up our efforts, at both the Banco de España and the Eurosystem, to develop the tools and models needed for such an analysis. In addition, climate change will affect the risks of the assets held on our balance sheets. Monetary policy implementation exposes us to such risks directly through holdings of assets and indirectly through collateral pledged by counterparties. In this regard, and very much related to my previous comments on the implications of climate change for the financial sector, central banks also have to step up their efforts to incorporate climate change into their risk management models and frameworks.

Over the last two years, we have taken important steps forward within the financial sector in Malaysia. The establishment of the JC3 in 2019 by Bank Negara and the Securities Commission in partnership with the industry, has served as a key focal point for collective climate actions in the financial sector and across multiple stakeholders. The JC3 continues to coordinate and lead efforts in five priority areas. First, we are introducing frameworks for the identification and classification of economic activities that meet climate objectives and are environmentally sustainable. A principles-based taxonomy has been issued to encourage financial flows to activities that support the transition to a lowcarbon and climate resilient economy. With the taxonomy in place, our focus will be to support its consistent and credible implementation within the financial sector. These efforts are being complemented by the issuance of sectoral guides under the Value-based Intermediation Assessment Framework (VBIAF) to help financial institutions conduct ESG risk assessments at a more granular level. Such guides have been issued for three economic subsectors, with three more to be published for consultation by the end of this year. And today, we will be launching the VBI Takaful Framework (VBITF) which outlines the implementation approach for activities in the takaful industry that is aligned with sustainability considerations. Second, we are strengthening practices in the treatment and disclosures of climate risks by financial intermediaries. As part of our supervisory approach, Bank Negara expects financial institutions to consider and integrate climate risks in their business strategies, risk management framework and practices.