, interest rates and asset prices, while altering the underlying structure of our economies. it is therefore essential for central banks to gain a full understanding of these repercussions for the functioning of the economy and the financial system. we need to embed climate - related developments and risks in our analyses and update our analytical and forecasting toolkits accordingly. regarding the impact on the financial system and the economy, climate change entails both physical and transition risks. first, physical risks result from persistent changes in climate and more frequent extreme weather events. goethe himself experienced first - hand the enormous impact extreme weather can have. in his day, this was caused by a volcanic eruption far away on an indonesian island. the year 1816 went down in history as the “ year without a summer ”. people suffered from the cold and from persistent rain ; crops failed and famine broke out. second, transition risks relate to the process of adjustment towards a lower - carbon 1 / 3 bis central bankers'speeches economy. both the physical impact of climate change and the transition to a less carbon - intensive economy can be a source of financial risk. for example, the ecb found in a sample of euro area banks that the exposures to the twenty largest emitters of carbon account for 20 % of total large exposures. clearly, it is in every market participant ’ s interest to properly protect themselves against climaterelated financial risks by adjusting their risk management accordingly. thus, first and foremost, it ’ s up to the financial sector to recognise and take into account such risks. whether and how this is done has a bearing on several of our tasks as a central bank. in banking supervision, we do not regard climate - related financial risks as a new risk category, but as a driver of classic categories such as credit risk and market risk. we already expect banks to incorporate such risks into their risk management framework appropriately and to back them with adequate capital. however, climate - related risks have certain characteristics that hamper their inclusion in ratings and internal risk models. first, historical data do not capture them adequately. second, physical risks are potentially non - linear and expected to primarily materialise in the medium to long term. and third, the future pathway of climate change and climate action is highly uncertain, not least because it heavily depends on political decisions. in this context, scenario analysis is a particularly useful tool. furthermore, it is important that banks take a forward - looking approach and consider a longer than usual time horizon. the

situation appears even more challenging than for climate change, and this calls for further action. another challenge is the fact that there is no single metric capturing the breath and width of biodiversity. the lack of a single metric has been prompting researchers to focus on specific aspects of nature. bundesbank researchers, for example, have been zooming in on the macroeconomic consequences of water stress events – a highly relevant phenomenon that is getting worse. 5 the bundesbank research focusses on water as a transport medium. waterways normally offer a cost - efficient way to transport goods. droughts, however, can seriously disrupt or even halt shipments and, in return, affect supply chains and hence prices and production. our researchers are now assessing the macroeconomic relevance of low water levels of the rhine, europe's most important waterway. looking at 30 years of data, they show that germany's overall producer price index – which encompasses thousands of product lines – tends to rise in the months with low rhine levels. their preliminary results are statistically and economically significant and hence relevant to inflation watchers. 4 conclusion let me sum up. climate change is a reality – so is the loss of biodiversity! they affect our economies, communities and lives. there will be no stable climate without a healthy natural world. central banks and supervisors hence need to consider both – climate change and biodiversity loss. that said, more research on the transmission channels of climate change and biodiversity loss is required. if central banks do not fully understand the channels through which climate change and biodiversity loss affect the real economy [ and thus their mandate ], they will find it hard to do their job properly. that is a key reason why the bundesbank is dedicating this year's conference to climate change and central banks – and is addressing nature - related risks. we aim to encourage networking and knowledge sharing between the academic community and central banks. it will help us to better understand each other's considerations and concerns and underpin the evidence - based foundations of the eurosystem's monetary policy. so, please make the most of the next two days. and enjoy the spring weather. 3 / 4 bis - central bankers'speeches 1spain bakes in summer - like heat, and worries about what comes next - the new york times ( nytimes. com ) 2 https : / / www. munichre. com / en / risks / natural - disasters. html 3 why the crisis engulfing nature matters for business and