4. 2 the second channel : transition risks it should be taken as a fact that the 2 - degree goal under the paris agreement can only be reached if economies across the world are transformed into green, low - carbon economies. achieving this transition will require potentially disruptive technological advances as well as farreaching changes in climate policy. without a doubt, such a transition will prompt markets to reassess the value of a broad range of assets. depending on how quickly and orderly the transition and the associated re - pricing occur, they could become highly relevant for the stability of financial institutions as well. to illustrate one particular transition effect, let ’ s look at the concept of the “ carbon budget ". meeting the target of the paris agreement will require limiting global carbon emissions. the intergovernmental panel on climate change estimates that in order to reach the 2 - degree target with a probability of just 50 per cent, the maximum amount of additional carbon emissions this century must roughly remain below 1, 100 gigatonnes of co2. for higher probabilities of success, lower carbon budgets apply. however, the total amount of carbon embedded in all known global fossil fuel reserves is estimated at roughly 2, 800 gigatonnes. this means that, to reach the 2 - degree target with a reasonably high probability, about two - thirds of all known coal, oil and gas reserves must remain in the ground. but the future exploitation of these reserves is what many companies base a significant share of their value on – especially, but not only, those engaged in extracting and refining them. according to the world wide fund for nature, listed fossil fuel companies currently carry more than half of the total global fossil fuel reserves on their balance sheets as assets. if these reserves cannot be developed, the corresponding assets become worthless – they become what are known as “ stranded assets ". the decision to actually limit emissions would be made by governments, and their tool would be climate - related laws and regulations. and there is a clear trend towards more government intervention. the global climate legislation study found that, since 1997, the number of climate change laws and policies has doubled every 4 - 5 years. while the pace has been levelling off recently, the trend is clear. we have already seen examples of sharp devaluations in the fossil fuel and energy sector. one oft - cited example are the top four us coal producers. their combined market capitalisation has fallen by well over 90 per cent since 2010. listed utility

companies in germany have also seen 3 / 5 bis central bankers'speeches sharp devaluations. these cases are exemplary of the transition risks i am talking about. and they prove that markets can respond well before the fact. what is important to recognise is that transition risks are not confined to companies operating in the production of fossil fuels or in the energy sector. other sectors, such as transportation, logistics, automotive, chemicals and heavy industry, which currently rely on fossil fuels or are energy - intensive, could be hit by transformation costs as well. but these second - and third - round effects are extremely complex and can currently only be quantified using equally complex assumptions. the exposure of the financial sector becomes apparent when, besides the direct investments in the industries in question, we take into account the tendency of insurers, pension funds and other investors to align their portfolios with capital market indices which often contain large portions of the industries that might be affected by the transition. and much like what we discussed in the case of physical risks, lenders are exposed due to reduced collateral values or the risk that their borrowers ’ once - profitable business models are not profitable anymore. to be fair, we also have to factor in the possibility that some green business models might not deliver the benefits and financial returns investors expect. transition risks will be less severe the sooner the transition begins and the more predictable it is. it ’ s a simple matter of fact that the longer governments wait, the more they will have to act later on to meet their targets. 5. the way forward we have identified two risk categories : physical risks that relate directly to climate change, and transition risks that relate to society ’ s response to it. at the beginning of my talk, i asked : are we currently underestimating these risks? i think we do. there is a difference between identifying risks, monitoring risks and managing risks. we may have identified the risks, but we don ’ t know how material they are. this needs to change, and in the remainder of my talk today i want to discuss how that can be done. for many reasons, understanding the risks i have talked about is inherently challenging. first, the developments we are facing stretch over the long term, and their outcome is uncertain ; second, historical data are of little use to predict them ; and, third, the whole process will be heavily influenced by policy decisions, which involves further uncertainty. another problem is that, typically, analysts don ’ t look