08.04.2022  Sustainability and climate change: measurement and management challenges* “Private capital: investment with an impact” / Annual congress of the Asociación Española de Capital, Crecimiento e Inversión (ASCRI) Pablo Hernández de Cos Governor *iEnglish translation from the original in Spanish. Good morning. I should like to begin by thanking the Asociación Española de Capital, Crecimiento e Inversión (ASCRI) for inviting me to participate in their annual congress. This congress is today going to address environmental sustainability, one of the main challenges facing our society, as we have very recently been reminded by the Intergovernmental Panel on Climate Change (IPCC). As you know, the IPCC has just published the third part of its Sixth Assessment Report, which stresses that we are still in time to limit the temperature increase by the end of the century to 1.5ºC, although immediate and decisive measures are required.1 In particular, the transition to a more sustainable economy (one that generates lower emissions) requires a very significant volume of economic resources. In the European Union alone, according to European Commission estimates,2 complying with the emissions reduction target set for 2030 requires investing approximately an extra € billion per year over the current decade. The financial sector clearly needs to be involved in mobilising this enormous volume of resources. Given our mandate to preserve financial stability, the contribution of supervisors and financial regulators to the achievement of these targets involves ensuring that intermediaries identify, measure, manage and disclose the financial risks associated with climate change.

Put more plainly, we need to think about an environment where those in the position of most influence have the incentive to “poke holes” in myths via robust stress tests, and not the incentives to override their risk managers when the stress-test implications are not to their liking, or risk a near-term loss of clients or market share. Concluding observations New financial myths are regularly created. In closing, I will just speculate on where some may exist that interested parties should be exploring, now.   Potential Myth 1 – Sovereign debt problems will not be disruptive to the world economy. Not long ago, the sovereign debt problems were viewed as manageable and confined to one country. However, as interest rate spreads have widened – as shown in Figure 12 – investors are highlighting that problems in many countries  BIS central bankers’ speeches  5  have yet to be resolved. While I believe the most likely outcome is that there are no serious disruptions, interested parties should diligently consider scenarios that could be disruptive, involving various countries.   Potential Myth 2 – State and local financing problems will not be disruptive to the national economy. While much attention has been given to problems in state and local finances, it is generally assumed that the capacity exists to resolve these problems. While I expect these issues will be resolved without widespread or cascading problems, we should consider what scenarios could emerge if political impasses result in more disruptive outcomes.