christine lagarde : climate change and central banks - analysing, advising and acting speech by ms christine lagarde, president of the european central bank, at the international climate change conference, venice, 11 july 2021. * * * both climate change and the transition to a carbon neutral economy pose substantial challenges for the economy and the financial system, with the potential to affect growth and inflation in the short term, but also over much longer horizons. physical risks, stranded assets and greater firm default risk expose the financial system to losses, which may impair the transmission of monetary policy. and the eurosystem ’ s balance sheet itself is exposed to climate risk from the assets we hold, notably through our asset purchase programmes. in short, climate change has consequences for us as a central bank pursuing our primary mandate of price stability, and our other areas of competence, including financial stability and banking supervision. it is governments, not central banks, who are primarily responsible for facilitating an orderly transition, and who control the main required tools. nonetheless there are several areas where central banks can and will contribute. as a result, climate considerations were an important part of our review of monetary policy strategy, and we have published an action plan setting out our intended progress on this front. broadly speaking, the ecb ’ s contribution comprises three parts : analysing, advising and acting. analysing the ecb has been advancing its analysis quantifying the potential impact of climate on the economy and the financial system. for example, we are conducting an economy - wide climate related stress test of the financial system. the exercise assesses the resilience of banks to various climate scenarios and covers approximately four million companies worldwide and 1, 600 consolidated banks, in other words, almost all euro area banks. the findings demonstrate a clear benefit to acting early and ensuring an orderly transition. while transition costs may be higher in the short term, they are much lower in the long run than the costs of unrestrained climate change. indeed, physical risks are the most significant source of climate - related vulnerability. without further climate policies, the most vulnerable 10 % of banks may see a 30 % increase in the average probability of default of their credit portfolios between now and 2050. we will also accelerate the development of new models and tools to incorporate the impacts of climate change and related policies into our regular monitoring of the economy. we will include carbon prices in our common technical assumptions, regularly evaluate the impact of climate policies and

##s to climate - related physical risks. we will introduce disclosure requirements for private sector assets as a new eligibility criterion or as a basis for a differentiated treatment for collateral and asset purchases. we will start conducting climate stress tests of the eurosystem balance sheet in 2022 to assess the eurosystem ’ s risk exposure to climate change, leveraging on the methodology of the ecb ’ s economy - wide climate stress test. we will also consider relevant climate - change risks when reviewing the valuation and risk control frameworks for assets mobilised as collateral by counterparties for eurosystem credit operations. 2 / 3 bis central bankers'speeches and we will adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria, in line with our mandate. our actions regarding climate change also extend beyond monetary policy operations. the ecb has committed itself to reducing its own carbon footprint in line with the paris agreement. and the ecb banking supervision will ensure that every bank is making swift progress in embedding climate risks into their organisations drawing on the full supervisory toolkit at our disposal where necessary. conclusion let me conclude. the strategy review has provided us with a framework to evaluate how our policy implementation could evolve to further incorporate climate considerations without prejudice to our primary mandate. the ecb will continue in the future to evaluate all options against this framework and as conditions develop more options may become feasible in the future. the challenges the world already faces due to the climate change will only increase over time. therefore, within our mandate, we will continue to analyse climate - related risks, to provide advice to stakeholders, and, importantly, to act. 3 / 3 bis central bankers'speeches