frank elderson : all the way to zero - guiding banks towards a carbon - neutral europe keynote speech by mr frank elderson, vice - chair of the supervisory board and member of the executive board of the european central bank, at the conference on “ the role of banks in greening our economies ” organized by the european bank for reconstruction and development and hrvatska narodna banka, frankfurt am main, 29 april 2021. * * * it is a great honour for me to be with you today to discuss the role of banks in greening the economy. and i am very happy to delve into the topic of climate change at an event co - organised by the european bank for reconstruction and development ( ebrd ) – an institution whose own work remarkably exemplifies what international cooperation can achieve in supporting the greening of the economy. your commitment to meeting the goals set under the paris agreement is outstanding. it offers great inspiration to all of us in european institutions who are just as adamant about doing the same. as many of you know, climate change considerations feature prominently in the ecb ’ s ongoing monetary policy strategy review. but today i will focus on how they will be taken into account by ecb banking supervision. the challenge of climate change is daunting. this is certainly true for the consequences if climate change continues unabated, such as increased natural disasters and the loss of habitats and biodiversity. and it is also true for the transformation necessary to avoid these dire consequences. the oecd1 estimates that global investments of usd 6. 9 trillion every year are required until 2030. and that is just to keep us on track to limit global warming to 2 degrees celsius above pre - industrial levels. investment will need to be considerably higher than this usd 6. 9 trillion figure if we are to live up to our commitment under the paris agreement of limiting the increase in global temperatures to 1. 5 degrees. to put this number into perspective : we are talking somewhere around 8 % percent of global gdp each year. europe ’ s financial system is largely bank - based, so banks are playing a pivotal role in greening the economy. but what is the supervisor ’ s role in this process? the ecb aims to ensure the safety and soundness of the banks we supervise. climate change creates material risks for banks, so it is our job to ensure that the banks under our supervision address these risks adequately and proactively. regarding the risks emana

addiction to alcohol, they are treated as taking rational decisions. we know one reason why people below poverty line never move up the ladder is that often they spend large portion of their meagre incomes on wasteful habits of consuming alcohol / tobacco or spending on social events although they know such habits would only aggravate their current economic problems. behavioural economics explains why such addictions happen. it is thus possible that people underestimate the effect of current consumption on future consumption and may under appreciate the formation of a habit. 16. behavioral economics also throws useful insights for policy makers. researchers at the federal reserve bank of boston are engaged in studying the implications of behavioral economics for economic policy. papers presented at the 2007 conference on behavioral economics at the boston fed shed light on the role of emotions and the idea of fairness on economic decisions. evidence on how emotions like anger and regret affect the price setting decision of firms and the purchasing decisions of firms. the idea of fairness also has implications for labour market outcomes. evidence also suggested that it was difficult for us consumers to formulate and executive saving plans. this obviously has immense implications for policy makers and policy making. many commentators were of the opinion that complex sub - prime assets were sold to unsophisticated borrowers who did not understand the contracts fully. findings presented at the conference also suggested that less than fully rational investors could affect housing prices. if prices are always expected to continue their past trend among the irrational investors then house price bubbles were more likely to form and macroeconomic stabilization could be more difficult. this in fact actually happened in the us. insights were given on how behavioral economics could help central banks communicate economic policies. another important aspect from the point of view of central banks is that expectations, not rational but adaptive, play an important role in influencing the actual inflation path. for instance, if workers believe that inflation will be higher in the future period then they may demand higher wages which could in turn feed into the headline inflation through wage push effect. this has been evident in india in recent years as not only inflation expectations have been high in double digits, even the extent of increases in wages in both rural and urban areas has been higher than the actual inflation levels. generally, in a weak growth environment or a condition of moderating demand, wage push spiral may not be sustained for long. antiinflationary monetary policy, that remains committed to containment of inflation till the impact of moderating demand on inflation and wage demand becomes visible, could