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

right incentives and policies, emes could make a substantial contribution to mitigation efforts. also, given the current initial conditions, any amount invested in climate change mitigation in ems and ldc can have a larger decarbonization impact and thus a larger positive externality than in developed countries. a dollar invested in emerging markets and ldcs can have a higher mitigation potential, thus it makes sense to create the conditions for such investments to be made. it would be unfortunate if investments are not done for cost of funding reasons. according to a recent imf paper many of the world ’ s lowest - cost mitigation opportunities exist in emerging and developing economies. thus, it is in the global interest to make sure that these are pursued. however, the cost of capital facing emerging and developing economies is significantly higher than in advanced economies. 3 / 5 bis central bankers'speeches it is essential to move from a bad equilibrium with high financing costs and insufficient green investment, to climate friendly funding sources at scale for these countries at genuinely low financing costs. also, we need to acknowledge that emerging countries and ldcs have less space to spend on climate friendly projects than they had before the covid 19 pandemic, hence it is necessary to unlock attractive international funding from advanced economies at low interest rates in exchange for credible ghg mitigation. this will also increase the resilience of global financial system to climate risks. also, we need to develop innovative structures to diversify risk, through for instance, pooling a large set of projects in many jurisdictions backed with guarantee schemes or other de - risking solutions. blended finance structures can unlock private sector financing of the transition to a low carbon economy. also, aes ex - im banks could design new programs to unlock green investments in emerging and developing economies by offering long term loans with very attractive interest rates that could incentivize the adoption of state - of - the - art green technologies. this would allow emerging markets to leapfrog to modern green technologies, accelerating the mitigation of ghg. again, these efforts could be leveraged through mdbs loan guarantees. the imf has suggested the introduction of a minimum carbon price system, but adopting a onesize - fit all approach can face several challenges. in this regard, adjusting these minimum price for income per capita and carbon intensity could improve policy coordination and convergence. question 4. what role could be played by the imf and other multilateral development banks to foster