17. 03. 2021 the role of central banks and banking supervisors in climate action opening remarks. resilience of the financial system to natural disasters, iese online conference pablo hernandez de cos governor ladies and gentlemen, let me first thank professor xavier vives for inviting me to this conference on the “ resilience of the financial system to natural disasters ”, organised by the iese. it is a pleasure for me to open the conference. i am sure the final version of your forthcoming report1 will benefit from the views of such distinguished members of academia that are today with us. and i am certain they will provide us with much food for thought, ultimately benefiting the joint efforts to address the risks associated with climate change. this topic has, in recent years, come to the fore of the concerns of the overall financial sector, including firms, supervisors and central banks. let me offer some brief remarks on this topic, starting with the impact of climate - related risk on the financial sector and the role of regulators and supervisors, and followed by the connection between climate change and the conduct of monetary policy. climate - related risk for the financial sector and the role of regulators and supervisors across the studies measuring the impact of the various industries and sectors on climate change, the financial sector is usually classified among the environmentally friendly branches of activity. this is because greenhouse gas emissions stemming from the financial sector are very low and also because the activities it engages in do not significantly affect the environment. while this is true, the financial sector is actually highly exposed to risks associated with climate change by funding other sectors including those that are exposed to extreme weather events or those that will be affected by the transition to a more sustainable economy. therefore, climate change poses two types of risks for the financial sector : physical risks and transition risks. first, physical risks are those that would materialise as permanent alterations of the climate, if we do not act to prevent global warming. natural disasters would then become more frequent and their economic damage probably greater. in fact, there is evidence that such risks are already materialising to some extent : according to the fsb, 2 global economic losses associated with catastrophes related to weather events have doubled since the 1990s, up to usd1. 6 trillion over the last ten years. and while it ’ s true that financial markets and instruments covering these risks have been developed, these developments are unlikely to fully tackle the challenges of climate change due to : ( i ) the sheer magnitude of climate risks ;

, and does not disappear when other factors, such as stage of development or female labour force participation, are taken into account. thus, we should be prepared to witness significant changes in the sectoral and occupational composition of economic activity as demographic changes ( and the associated technological transformations ) accelerate in the coming decades. let me now turn to the implications of demographic changes for the balance of savings and investment and, thus, for the so - called natural rate of interest, something that for obvious reasons is very closely followed by central banks. savings are likely to increase with population ageing, as people need to devote more resources to retirement. moreover, the demand for investment is likely to be lower as the population ages, a trend that will also be made more acute by the nature of the technological changes we are witnessing and that seem to require more intangibles and fewer traditional capital goods. no wonder that most estimates point to a significant decrease in the natural rate of interest in recent decades, one closely associated to demographics : among the main factors potentially behind the course of the natural rate ( which also include technological growth and changes in risk premia ), it is clearly the demographic component that accounts for its low - frequency changes. this decline in the natural real of interest has significant implications for monetary policy. a low natural real interest rate, together with the deflationary pressures associated with the same demographic and technological factors behind low interest rates, imply a higher probability of nominal policy rates hitting their effective lower bound, or alternatively the socalled reversal rate ( i. e. the level below which further rate cuts may become contractionary ), thus hampering the ability of conventional monetary policy to stabilise the economy. the strategy review exercises currently taking place at major central banks, and the associated in - depth analyses of the effectiveness of non - conventional measures in this macroeconomic environment, partly reflect the fact that the optimal policy mix for macroeconomic stabilisation might have changed following the decline in equilibrium interest rates. there are also good reasons to presume that, in this new optimal policy mix, fiscal and macroprudential policies ought to play a bigger role. with lower interest rates and for a given growth rate, the fiscal space is larger, as a given primary deficit leads to a lower public debt ratio in the steady state. there are also arguments supporting the idea that fiscal multipliers might be larger when monetary policy is constrained by the effective lower bound. nevertheless, for this debate, some notes