and communicating with financial institutions. in addition, the bank has set up an internal network, the climate coordination hub, to enhance bank - wide initiatives on climate change. as i mentioned earlier, various stakeholders across jurisdictions have recently accelerated their efforts concerning climate change. with the intention of furthering its efforts on climate change, on july 16, 2021, the bank released the bank of japan ’ s strategy on climate change and decided to implement a range of measures. i will elaborate on the issues of a central bank ’ s mandate and market neutrality in the context of implementing these measures, and then talk about the measures in detail. responses to climate change and the central bank ’ s mandate from a medium - to long - term perspective, climate change could have an extremely large impact on developments in economic activity and prices as well as financial conditions. from a central bank standpoint, with its mandate of achieving price stability and ensuring the stability of the financial system, supporting the private sector ’ s efforts on climate change will help stabilize the macroeconomy in the long run. now let us look at the effects of climate change in detail, starting from the economic perspective. there has recently been an increase in constraints on economic activity, such as supply chain disruptions caused by natural disasters. in the medium to long run, there is the possibility that a decrease in investment and employment in industries with significant greenhouse gas emissions will exert downward pressure on economy activity. on the other hand, there will be new opportunities, such as an increase in investment related to renewable energy. the future course of economic activity is highly uncertain. prices and wages could be affected by both natural disasters and the various measures introduced for the transition to a carbon - neutral society. on the financial system front, assessment of “ physical risk ” and “ transition risk ” will be important. here, “ physical risks ” refers to the risks that physical phenomena triggered by climate change, such as large - scale disasters and rising sea levels, will have a negative impact on firms and households. “ transition risks ” refers to the risks of an economic impact on firms and households due to changes in policy, technology, or consumer preference as we move toward a carbonneutral society. depending on our responses, both risks could adversely affect the financial system by changing the investment or lending behavior of financial institutions, both qualitatively and quantitatively. responses to climate change and market neutrality let me next look at responses to climate change and the issue of market neutrality.

##agnation in the stock market. the proposals that have emerged from our discussions fit into three categories : ( i ) noting that pension plans have exceeded that fifty percent limit because of the sharp use in equity prices, some stakeholders advocate valuing equities at original cost with a premium adjustment of, say 25 percent. this approach has several practical difficulties in that the valuation basis for the same equity will differ according to the time of purchase. there are also practical difficulties involved in retrieving data on historical costs. perhaps more importantly, however, this proposed valuation procedure goes against the current dominant trend ( best practice ) of market valuation. ( ii ) there is also a proposal for increasing the limit from the current 50 percent to 60 percent. while this has the merit of simplicity, it has serious drawbacks in failing to recognize that a fifty percent equity limit is already too high for pension plans that are underfunded and that lack even rudimentary investment policies and guidelines. ( iii ) the third option which has much support, uses the principles of the investment regime now applicable to insurance companies. the main elements of this option are : ( a ) define a funding threshold of one hundred and fifty ( 150 ) percent of pension liabilities to which the fifty percent equity limit is applicable. put differently, all plans with a surplus of less than fifty percent of pension liabilities will remain subject to the equity limit of fifty percent. ( b ) plans with a funding ratio in excess of one hundred and fifty percent will be allowed to invest in equities beyond the fifty percent limit. put another way, trustees will be able to make additional equity investments with any surplus in excess of fifty percent of pension liabilities ( up to a maximum level, to be determined ). the merit of this option is that it provides the additional room to wellfunded pension plans. the additional equity is really financed out of pension fund ’ s surplus after providing a buffer, equivalent to fifty percent of pension liabilities. as you may know, the investment regime for insurance companies allows for fifty percent of the statutory fund to be held in equities. however, the statutory fund must only be sufficient to cover policy holder ’ s liabilities and thus any excess or surplus assets are not subject any limits, but need to be an examination of thirty - seven pension plans which account for eightyfive percent of total equity investments of pension funds indicate that there are about 10 plans which are way below the 50 percent equity limit, and which