Christine Lagarde: The contribution of finance to combating climate change

Speech by Ms Christine Lagarde, President of the European Central Bank, at the Finance at Countdown event, Frankfurt am Main, 12 October 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

We have seen this summer what climate change can do in terms of disasters. We had floods in Europe, heatwaves in North America and elsewhere; there have been ample examples this year of what the world may look like in the future. And it might be worse. The prominence of climate change in the public debate shows that people are now sitting up and taking notice. To quote Honoré de Balzac, "It is easy to sit up and take notice. What is difficult is getting up and taking action". This is now what we are seeing, and I take the view that everybody must take action, whatever their role, mission and position.

What we did at the ECB is conduct an economy-wide climate stress test, which provides evidence that there is a need for urgent action. We conducted an exercise that combined the financial information and climate exposures of four million companies and some 1,600 consolidated euro area banks, and we mapped this to data in order to understand, on the basis of the scenarios of the Network for Greening the Financial System, what the climate change consequences could be. Let me give you one number: the default probabilities of the corporate loan portfolios of the most vulnerable banks could increase by 30% in a scenario of no further climate policies. And we also found out that the risks would be concentrated in certain areas and in certain banks.

An orderly transition to carbon neutral entails greater costs in the near term, but these are far outweighed over the longer term by lower physical risks and higher output. It is a no-brainer option. We need to take action. Even a disorderly transition, where policies are enacted in a haphazard way or before green technologies are fully mature, is still less costly than sitting down and watching and there being no transition at all. The long-run benefits from acting early on climate are clear.