Since the Avian Flu or the old-SARS episodes there was awareness that another pandemic event would happen sooner or later. Nonetheless, we were clearly not ready for the challenges Covid-19 entailed and this resulted in an unprecedented shock for the global economy. The Covid pandemic is a cautionary tale, we must enhance our resilience in face of the imminent climate-change shocks. The probability of climate risks materializing is high, even though the timing is uncertain. There is little time to act, to increase resilience and prepare to better manage these risks.
Let me highlight two points:
When we are thinking about how to address the key problems there are two issues:
In terms of the challenges to which we are exposed to, I think that in small/medium open emerging economies like Mexico, we have traditional channels of contagion from external shocks, but now climate change is also increasing the number of risks, in four dimensions:
These factors entail large shocks on key economic sectors, can alter financial conditions, and disrupt asset prices and financial stability. These risks can have significant direct, indirect and contagion effects that need to be addressed promptly.
Actually, there is research currently being done at Banco de Me xico to understand these complex interactions, and in particular, on the interplay between transition risks in different climate scenarios and its impact on financial institutions and financial stability. We have highly granular data that allows this research to move forward. It basically shows that the interconnectedness and common exposures of financial intermediaries are relevant and might significantly increase the size of the initial shock to asset prices. So clearly, we know the amplifying effects of some these shocks.
Now let me go to the second issue. We need to create better international conditions to mobilize and accelerate investments in low carbon activities, especially in emerging markets and less developed countries for the following four reasons:
In this concrete domain I will focus on two issues: on our financial sector and on the international level. In our financial sector we need to:
And in terms of what international fora can do:
Remarks held by Alejandro Díaz de León, Governor of Banco de México, at the BIS-BdF-IMF-NGFS Green Swan Conference, Panel F: What is the true resilience of our financial systems to climate change with the buffers we currently have?, on 2 June 2021.