MNI POLICY: ECB's Lagarde: Climate Could Be a Boon For Finance

By Luke Heighton

     FRANKFURT (MNI) - Climate change could be a significant drag on growth in

coming years, throwing up significant threats and opportunities for the

financial sector, European Central Bank President Christine Lagarde said

Thursday.

     Here are the key points from the speech in London:

     - Total insurance losses for weather-related events reached 0.1% of GDP in

2018, Lagarde said, with total economic losses approximately double that amount,

insurance and economic losses caused by climate-related events likely to start

trending upwards as a share of GDP. "Insurance and reinsurance companies need to

continue to ensure that risk pricing remains appropriate and that reserves are

adequate to cover expected losses."

     - High insurance coverage and deep capital markets will help mitigate the

macroeconomic impact of disasters, while in the absence of insurance, households

will have to rely more on precautionary saving or government transfers.

     - Banks need to consider the risks such events create for their credit

exposures, she continued, since losses can arise from both direct damage and

from the effects that potentially higher maintenance costs, disruption and lower

labour productivity could have on profitability and hence default risk. The

financial sector will be "pivotal in mobilising the necessary financial

resources for the transition and in helping our economies to cope through

adaptation and mitigation," Lagarde said.

     - Achieving the transition to a carbon-neutral world "almost certainly

requires intervention by public authorities through regulation and taxation,"

Lagarde said. "Early and coordinated action can help deliver a smooth transition

for the economy. "But if that intervention is delayed," Lagarde said, "the

reduction in emissions may have to be sharper, resulting in a disorderly,

disjointed and more disruptive transition for the economy. Certain economic

activities may quickly be rendered obsolete, leading to a re-pricing of assets

and the risk that some will become stranded."

     - Financial institutions need to understand the risks on their balance

sheets, Lagarde said, with greater disclosure by companies on their climate

exposure is "a prerequisite, bolstering the ability of market participants and

financial institutions to carry out appropriate risk assessment."

     - ECB Banking Supervision is currently assessing banks' approaches to

climate risks and developing supervisory expectations on those risks.

Preparatory work is also under way, Lagarde said, for a macroprudential stress

test to assess climate-related risks, with the first results expected by the end

of 2020.

     - The stress test framework "aims to assess how climate-related risks

propagate through the real economy and the financial system," and will focus on

90 significant institutions across the euro area. "Importantly, it will also at

some stage model how dynamic interactions can amplify the effects, for example

if banks react to losses by deleveraging."

     - European entities already account for around half of global issuance of

green bonds, Lagarde said, with around 42% of the global market euro-denominated

in euro. Green bonds are now approaching 10% of total euro-denominated bond

issuance.

     - Lagarde called for a "common approach [...] to mobilise global funding

for the transition," but cautioned that it was also necessary to "remain

vigilant" against attempts to green wash."Unnecessary fragmentation in

regulation will impair the sustainable growth of green finance," she added.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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