introductory speech by prof. edward scicluna governor of the central bank of malta the institute of financial services annual ’ s seminar : “ the esg journey : a pulse check for the maltese economy ”. st julian ’ s, malta 11 november 2022 ladies and gentlemen, good morning i would like to thank the institute of financial services and in particular its president kenneth micallef, for their kind invitation to address this distinguished audience. it is becoming increasing apparent that climate change is one of the greatest, and most immediate, threats faced by mankind. so i do not need many explanations why today i shall put the emphasis on the “ e ” of esg, namely on the environment and on the fundamental transformations that lie in front of us. this is not to underestimate the role of the social and the governance elements : matters of inclusiveness, labour relations, equality and the conduct of public and private institutions are proof that sustainability extends well beyond the environmental question. but global temperatures are rising – 2010s was the warmest decade on record and extreme weather events have doubled compared to forty years ago. decades of scientific research have established that greenhouse emissions associated with human activity are behind climate change. only a coordinated international endeavour can deliver the necessary shift away from fossil fuels. this urgency led 196 parties to sign the 2015 paris agreement to limit the increase in global temperatures. the agreement committed signatories to keep the increase in the global average temperature to well below 2 degrees centigrade over pre - industrial levels, and to pursue efforts to limit this increase to 1. 5 degrees centigrade. to meet this target, net carbon emissions need to fall to zero by around the middle of this century. six years after the paris agreement came into force, 1. 5 degrees centigrade is the minimum rise in temperatures expected by the scientific community. however, we are not making progress at the desired speed. news coming from cop27 this week attest to this. the secretary - general of the united nations, antonio guterres said it clearly : " we are in the fight of our lives. and we are losing. ” there is no need to emphasise that malta as a mediterranean island would be deeply affected. these are facts we have to come to terms with. while the primary responsibilities for tackling climate change rests on governments and legislators, central banks are called to play their part. the questions which many ask is why should central banks be involved? is not their mandate merely price stability? let

supporting economic growth using its interest rate policy – now at near zero levels – and policies designed to influence credit provisioning and risk reduction. the ecb has also reaffirmed that, if necessary, further measures will be taken to counter the risk of a prolonged period of low or negative inflation and to bring inflation to its medium term target of under but close to 2 %. the possibility of a deflationary situation materializing in the euro area is of concern as its dynamics would raise real interest rates. it would penalize investors and increase the burden of holding business inventories. it would also discourage consumption, as buyers await lower prices by delaying spending. a de - anchoring of inflation expectations carries a risk of the euro area becoming stuck in a stagnant environment for a prolonged period of time. basically, a deflationary scenario would be inconsistent with what is needed to support an economic recovery in europe. the effectiveness of monetary policy in the euro area depends on a properly functioning banking sector, since the transmission of monetary stimulus operates at least partly through the bank lending channel. in the euro area, the debt overhang in the private sector and the balance sheet position of the banks have been hampering the transmission and effectiveness of the ecb ’ s accommodative policy measures. turning to chart 3, the solid line shows that in spite of the various measures adopted by the ecb, whether those operating through the interest rate channel or through credit volumes, the net injection of liquidity remains relatively low. the upper part of the chart, in blue, shows the liquidity injected by the ecb into the euro area economies. the lower part, in red, shows the balances deposited with the eurosystem by euro area banks. the chart also shows how a large part of new liquidity was deposited back at the ecb by banks. the objective of the current targeted long term refinancing operations ( tltros ) is to inject more liquidity at a low rate that is fixed for four years while the negative deposit rate is to discourage funds going back to the ecb. there are indications that the contraction in credit supply is bottoming out. this signals a potential turnaround in credit dynamics in the euro area. also, the latest ecb ’ s bank lending survey saw banks report a further easing of overall credit standards. the various announced measures are expected to inject liquidity into the system in two different ways, namely through direct asset purchases and