marja nykanen : problems in embedding climate risks into the traditional financial risk framework speech by ms marja nykanen, deputy governor of the bank of finland, at the bank of finland and the finnish ministry of finance conference " greener finance for sustainable future ", helsinki, 31 october 2019. * * * ladies and gentlemen, welcome to the second day of the conference. i am glad to see such a broad spectrum of expertise here. i am marja nykanen, deputy governor of the bank of finland. in recent years, the bank of finland has become active in climate - related issues. for example, we participate in the work of the network for greening the financial system ’ s work streams and plenary. the intergovernmental panel on climate change ( ipcc ) publishes reports on scenarios that will happen if we fail to lower our emissions. from the most recent special report, we learned that the arctic and polar areas will experience considerable transformations as glaciers melt at an increasingly faster rate. the melting creates a massive amount of meltwater, which will have significant impact on rising sea levels. but the report shows that polar areas also face other consequences. let ’ s take, for example, the arctic ocean. it provides a habitat for many species. by 2100, it will freeze later in the year with thinner ice and leave those species without a sufficient habitat. also by 2100, up to 80 % of scandinavian and central european mountain glaciers might have vanished. for me, such future prospects are unsettling. even though the scenarios seem worrying, it is not too late to act. we, as finance professionals, play an important role in this fight against climate change. as we heard yesterday, a significant amount of investment is required to transform our economies into sustainable ones. to facilitate investment, we need a well - functioning financial market with availability of green funding instruments. and, in order to ensure a well - functioning financial system, we must keep an eye on the system - level climate risks that might threaten the stable functioning of the financial system and smooth flows of funding for sustainable investments. in the discussion of climate change risks to the financial sector, two types of systemic risks have been identified. firstly, there are physical risks, namely damage caused by extreme weather events or climate - related natural disasters. these include hurricanes, floods, storms, heat waves etc. in addition to potential risks to life, such events generate great financial damage. for example, such

events may damage properties. if the property is insured, insurance companies will carry the loss. if the property is not insured, the owner of the property will have to pay for the damage. in the event that the property owner becomes insolvent or the collateral value of that property is lowered, credit institutions may also be at risk. the extent of physical risks is difficult to estimate in advance, but in extreme cases the potential losses may be significant. in addition, as the risk horizon is long, the frequency and severity of extreme weather events will change over decades. this makes it even harder to model physical risks in the traditional financial risk framework. 1 / 3 bis central bankers'speeches the second recognised risk type is transition risk. transition risk arises when carbon - intensive companies need to adjust their business models to become less carbon - intensive. the adjustments may be a consequence of changes in climate policy or consumer preferences, but they may result in rapid changes in company valuations. and, in extreme instances, in the valuations of entire industries. for companies that confront transition risk, the adjustment requires investments and the replacement of old technologies and production capacity. the big question is whether this transformation can be done smoothly or whether it becomes extremely costly and burdensome. transition risk may then manifest itself in investor portfolios, where such revaluations may force investors to book losses. transition risk is an outcome of a complex process, which makes it even harder to estimate. comparing physical and transition risks, it makes me wonder whether the actual climate or the climate policy is more difficult to predict. the more we delay effective climate policies, however, the quicker and the more powerful the policies will need to be in the future. every financial institution needs to assess these climate - based risks and incorporate them into their risk management frameworks. a related question is how financial supervisors and regulators should approach climate - based financial risks. what should we expect from financial institutions and how can we help them figure out what to do? firstly, it is important to identify best practices and to share experiences between supervisors and within the whole financial industry. the network for greening the financial system ( ngfs ) offers a platform for considering the best practices to fight climate change in the financial sector. the network is global and it was founded in december 2017. nowadays, the ngfs has 46 members and 9 observers. the observers include, for example, the imf, the world bank and the oecd. last april, the