klaas knot : on financing the energy transition speech ( virtually ) by mr klaas knot, president of the netherlands bank, at the forum analysis, milan, 8 july 2021. * * * it is a pleasure to be back in milan – even if it is only virtually. about 35 kilometres south of milan lies the city of pavia. twenty years ago, i studied there for a semester – so i have very fond memories of that city. one of the most famous people that ever lived in pavia is alessandro volta. in 1799, he invented the battery. this invention would soon lead to the development of the first electric motor – a machine that, in its current form, plays an important role in the transition to a net - zero society. this transition will be hard to achieve. but it is what we will need to do – because climate change is a major threat to societies and economies all over the world, and to the stability of the entire financial system. currently, however, we are still far from achieving the ambitions set out in the paris climate agreement. if we want to achieve these ambitions, we will need large - scale investments in sustainable energy services, in agriculture, in manufacturing, and so on. and these investments will need to be accompanied by increased efforts to reduce greenhouse gas emissions. the lion ’ s share of these investments will have to come from the private sector. but when we look at financing flows, whether in capital markets or bank finance, we see they are mostly directed towards large and often carbon - intensive companies – companies perceived as having low credit risk. the energy transition, however, hinges on successful technological innovations. according to a recent report by the international energy agency, and i quote : “ most of the global reductions in co2 emissions between now and 2030 in the net zero pathway come from technologies readily available today. but in 2050, almost half the reductions come from technologies that are currently only at the demonstration or prototype phase. ” early on, these innovative technologies are often less competitive than fossil alternatives. this makes banks more hesitant to finance these higher risk activities. and innovative start - ups are often too small to attract capital market financing. so currently, innovation investment is best aligned with the risk appetite of private equity firms. but they do not have a large presence around the world. so this is where governments come in. the bulk of the much needed investments will indeed have to come from the private sector – but there is a loud and clear

, but we do want to step in where liquidity evaporates. as the bank of england recently demonstrated, in a crisis a central bank has extraordinary abilities to stabilise conditions, buying time for markets to better read current conditions and to adjust. strong countries have good emergency response systems, and in a real crisis the south african reserve bank was there to backstop the system and return it to normal functioning. such extraordinary policy actions work best when the underlying financial structure is sound, in particular where the debt structure has a long maturity. this is an important reason why our yield curve is steep : long - term debt is genuinely being held, in volumes, by private investors, and it is priced accordingly. the point is : the news is in the price, and it is an attractive price. it is not an artificially low price, held down by policies that we cannot sustain or that are inconsistent with our economic conditions. there is another reason the prices of south african assets are attractive, and that is the exchange rate. as you know, in south africa we have a free - floating exchange rate, and we are very tolerant of exchange rate fluctuations. this is because we have low levels of foreign exchange debt, and we have inflation expectations that do not react strongly to exchange rate movements. this means the currency is free to adjust to global conditions, and when it depreciates, as it has done recently, it makes south african assets very attractive in foreign currency terms. you could say this is a strategy of attracting the smart money : when the currency moves a lot the smartest people buy, and this helps reverse the outflows. let me conclude with a reminder that appropriate policy targets, as well as policy consistency and complementarity are important characteristics of successful economies. increasing debt levels and high inflation are features of bad policy, imbalance and instability, not of sustainable economic growth. we have moved firmly back into a trajectory focused on sustainable fiscal policy, and with monetary policy capable and willing to reduce inflation, the investment environment in the country will continue to improve. i have spoken recently about adjustments to our inflation target itself, which i believe would be in line with the original planning for our inflation - targeting framework and deliver better economic results. i hold firmly that a better inflation target is like the example of a us $ 100 bill lying on the sidewalk, waiting for us to believe our eyes and pick it up. these steps are not enough to achieve the stronger economic growth rates the