alejandro diaz de leon : remarks - how can central bankers and supervisors support climate risks and green finance and manage risks? remarks by mr alejandro diaz de leon, governor of bank of mexico, at the toronto centre virtual panel session : how can central bankers and supervisors support climate risks and green finance and manage risks?, 14 july 2021. * * * question 1. what is your view regarding the relevance of physical and transition risks associated with climate change for emerging and less developed economies? the world is exposed to risks that even though we know they could materialize, they are so infrequent that they are poorly understood, underappreciated and inadequately managed. for example, we cannot argue that the current pandemic was unforeseen, but still we were not prepared to prevent it or even to mitigate its costs. climate change is a highly complex, infrequent but material risk that affects all countries and sectors. we need to develop more detailed plans and a deeper understanding of its impact to the economy and the financial system. this is not hypothetical ; physical and transition risks are already occurring and are part of the financial authorities ’ agenda. we 1need to upgrade our economies resilience and prepare the financial system to manage these risks. although uncertainty remains about the exact severity and time horizon of some of the climate change consequences, small changes in temperature could have severe non - linear consequences for our well - being, and delayed action is likely to significantly increase risks and costs. climate change can have mayor effects on our economies and financial systems, this involves directly central banks, that have price, output and financial stability mandates. for emerging and less developed economies, climate change will be disruptive, at least in four dimensions : 1. it can induce a significant reallocation of capital flows o the net zero asset managers ’ initiative which was only launched last december has us $ 43 trillion signatories that represent almost half of the assets managed globally. this conveys a significant reallocation capital risk to ems. 2. it can disturb trade, supply chains and fdi o mexico is a very open economy. we have more free trade agreements ( ftas ) than any other country in the world — 12 ftas with 46 countries — including usmca and ftas with the european union, european free trade area, japan, israel, and ten countries in latin america. o we are among the ten largest recipients of foreign direct investment. roughly 50 % of f

asia point to less optimism about global growth. the initial lift from the fiscal stimulus will likely wane over the course of this year. and financial conditions have become less accommodative over the past several months. in addition, we are now seeing some emerging headwinds to growth from the partial government shutdown in the united states and elevated geopolitical uncertainties abroad. other “ data ” confirm that the winds in our sails have calmed. the headlines have been about investors ’ concerns around growth, which have contributed to volatility in markets. this is also showing through in surveys of households and businesses, who say that they are somewhat less confident about future economic prospects. for example, the latest empire state manufacturing survey and new york fed business leaders survey both point to slowing growth in the region. and there is no doubt that my colleagues and i are hearing the same thing directly from our business and financial market contacts, who are more focused on the possibility of a weaker economic outlook this year. 3 but let me be clear : a softer economic outlook doesn ’ t mean we should prepare for doom and gloom. on the contrary, it ’ s likely we ’ ll see gdp growth somewhere between 2 and 2½ percent this year. that ’ s a step down from 2018, but still consistent with a healthy, growing economy. supporting a strong economy so, how should the fed respond to an outlook of slowing growth and one that ’ s less certain than, say, this time last year? in a word : carefully. at the start of 2018, when the economy was growing well above trend and interest rates still were still quite low, gradually raising rates was the obvious and necessary choice. twelve months later, the tailwinds have lost their gust, interest rates are closer to normal levels, and inflation is tame. the approach we need is one of prudence, patience, and good judgment. the motto of “ data dependence ” is more relevant than ever. if growth continues to come in well above sustainable levels, somewhat higher interest rates may well be called for at some point. however, if conditions turn out to be less robust, then i will adjust my policy views accordingly. i assure you that i have my eyes wide open and my ear to the ground when it comes to thinking about how the economic outlook will unfold in the year ahead, and as ever i ’ ll be guided by the data in all its forms. the balance sheet aside from my views on interest rates, the