olli rehn : climate change and green finance keynote speech by mr olli rehn governor of the bank of finland ( at time of speaking deputy governor of the bank of finland ), at the finnish climate summit, helsinki, 13 june 2018. * * * ladies and gentlemen, many thanks for the invitation to this important event, the finnish climate summit. helsinki is in fact today fully tuned to the music of the future, i. e. key future policy issues, since the bank of finland is right now running a three - day conference on the subject “ money in the digital age ” on the other side of the town. i am glad to “ change the club ” for a moment, not least as sitra is originally a spin - off of the bank of finland, some half a century ago. already in 1987, the report of the world commission on environment and development – known as the brundtland commission – defined the need for economic growth to be socially and environmentally sustainable. i am a proud owner of the first edition of that report. already back then, key questions of sustainable development were much the same as today : how to balance its three pillars, i. e. economic, social and ecological development. today, it is widely recognized that climate change is a significant risk to economic growth and financial stability – and to the future of our planet. for instance, the world economic forum concluded in its annual top - 10 list of the biggest risks in terms of impact, that no less than eight of those risks are linked to climate change, one way or another. that should not have been big news. the fundamental problem with climate change was described thus in the stern review in 2006 : “ climate change is the greatest and widest - ranging market failure ever seen. ” this is because climate change is an economic externality, meaning that whoever causes the emission does not pay the full costs of the damage. despite the significant political achievements, like the paris agreement and the kyoto protocol, global policy action still falls short of what is required. the withdrawal of the usa from climate action is of course detrimental. the eu is leading the global effort also in this field. mark carney, governor of the bank of england, has referred to “ the tragedy of the horizon ” : the impact of climate change is felt far in the future, while the costs are immediate, and thus we lack the right incentives to fix the problem. economists might talk about ‘ time inconsistency ’.

environmental hazards ) are needed, both for sustainable economic development and for a wellfunctioning financial system. the central banks in europe support the ongoing work in various international fora for removing the obstacles holding back green finance, for better disclosure of climate - related risks, and for better integration of risk management and regulatory frameworks to environmental assessments. in concrete terms, sustainability considerations should be better reflected in the key tools for decision - making by market actors and policymakers, such as benchmarks and credit ratings. at the same time, we must take care that changes to regulatory frameworks are justified from a prudential perspective and do not undermine their own original purpose. in financial regulation, environmental risks are increasingly relevant. insurance is a case in point. insurers have already started paying for climate change. insurers ’ risk models need to adjust to the increasing frequency and severity of the extreme weather events. thus, the insurance industry clearly has incentives to be part of thesolution. but exactly the same applies for the banking industry as well, and in financial regulation and management we should take into account not just the risks that the investment projects themselves are vulnerable to, but also the risks which any ‘ brown ’ or unsustainable projects may cause to the economy. talking about environmental finance, the most direct way to influence the flow of funds is to use semi - public institutions, like the european investment bank, multilateral development banks, and other similar organizations for the purpose. with them, the right incentive structure for private money can be created without overburdening the public finances. after all, such institutions are already active in the field, and further involvement could be encouraged. the european fund for strategic investments ( efsi ) is a prime example. its extended version, efsi 2. 0, has a mandate to invest at least 40 % of its 500 billion euros capacity in green investments. such investments can be leveraged with private capital for an even bigger impact. private money, and more importantly private investment decisions made by private companies, need to be aligned with the sustainability targets. economic theory suggests that the first consideration of policy should be to remove wrong incentives and replace them with better ones, which would take into account the environmental 2 / 3 bis central bankers'speeches externalities of different economic activities. no longer should the polluting companies freeride on the backs of others – we need to move towards the principle of ‘ the polluter pays ’. the international energy agency