some time ago by the governing council and, taken together, are an appropriate and proportional response to the worsening macroeconomic outlook for the euro area. in previous meetings, there was already broad agreement that the outlook for economic activity and prices was disappointing. in july, we reiterated our determination to intervene decisively if the medium - term inflation outlook failed to improve. over the last few months, the signs of economic slowdown and weakening inflation have instead intensified. geopolitical tensions, including those relating to trade tariffs, and the sharp decline in international trade recorded in the last few quarters have continued to weigh on firms ’ confidence, on investment and on industrial production. the assessments of those who, one year ago, expected that the weakening in economic activity would prove temporary and would eventually subside have been shown to be increasingly optimistic. the slowdown was substantial for german and, though less so, italian industrial production, but it would be naive to underestimate its scope by considering it an asymmetric shock. if the worsening in the manufacturing sector proves to be persistent, it will inevitably reverberate across the other sectors of the economy. this is confirmed by the most recent data, which point to an area - wide slowdown in activity in the service sector, especially in germany. in a slowing economy, it is no surprise that inflation has remained very moderate and well below the objective of a close to 2 per cent annual increase in consumer prices in the euro area ; even with all the margins of uncertainty, the forecasts indicate that inflation is expected to remain weak over the next two years. we must counter the significant risk that the economic slowdown and the low level of inflation translate into a permanent reduction in inflation expectations or a re - emergence of the threat of deflation. the analyses conducted by the bank of italy clearly demonstrate this risk, regardless of the measure of expected inflation used : similar trends have been observed in the expectations derived from the financial markets, which may be affected by excessive reactivity on the part of investors, and in those obtained from surveys of professional forecasters, firms and households. a very recent study by bank of italy economists finds that the medium - and longterm inflation expectations in the ecb ’ s survey of professional forecasters are now much more susceptible to negative surprises to current inflation than they were in the past. this is a finding that confirms the one that our researchers had already obtained based on inflation expectations derived from inflation swaps. by all measures,

, guides our investment strategy. the decision to account for esg factors has been taken to fulfil our duties in terms of social responsibility and to lead investors by example without hampering our price stability mandate. this change has not undermined the financial performance of our portfolio. a backward test over a ten - year horizon run before we implemented the new strategy showed that the new portfolio would have beaten the previous portfolio and the market benchmark in terms of both higher return and lower volatility. since we have implemented it, the new portfolio has continued to perform better than the old one both in return and volatility. the fact that constraining the portfolio to fulfil esg criteria does not penalise its financial performance is not necessarily surprising. several studies confirm that sustainable investment leads to risk - adjusted returns that are often higher than those achieved using traditional financial models. these findings may be due to a number of reasons. – first, investors may have underestimated environmental and social risks in the past and may not have anticipated the higher returns due to the faster - thanaverage growth of the green sector. – second, in its practical implementation, the traditional risk - return approach uses historical time series, which make it backward - looking. the sustainability assessment, instead, implies a forward - looking long - term view, which could help to mitigate the “ short - termism ” that often drives financial investments. – third, good esg practices seem to provide firms with a competitive advantage stemming from innovation. they also contribute to reducing operational, legal and reputational risks and lead to a more efficient resource allocation, as resources can be shifted from risk management to productive activities. this lowers the cost of capital and improves market performance. the second issue concerns the problems related to esg scores. today, there are neither globally accepted rules for esg data disclosure by individual firms, nor agreed auditing standards to verify the reported data. moreover, there are intrinsic difficulties in deciding which indicators are relevant in assigning an esg score ( how we should evaluate, for example, the “ social ” component of the score ), especially when compared to financial aggregates, where the most important indicators, such as revenues, costs, earnings and cash flows, are all widely available auditable items. esg - score providers rely heavily on voluntary disclosure by firms and on subjective methodologies to select, assess and weight single indicators. this adds to the arbitrary nature of the scores. as a result