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

MNI (London)
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
     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
     - 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:
--MNI London Bureau; +44 203 865 3829; email:
--MNI London Bureau; tel: +44 203-586-2225; email:
[TOPICS: M$E$$$,M$X$$$,MT$$$$,M$$EC$]
MNI London Bureau | +44 203-865-3812 |

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