Transitioning to a Green Economy: Financial Stability Implications
Friday, Apr 09, 2021

Transitioning to a Green Economy: Financial Stability Implications

This Virtual Executive Panel was held on April 7, 2021 on the margins of the IMF/WB Spring Meetings.


Mark Carney – UN Special Envoy on Climate Action and Finance; and Finance Adviser to UK Prime Minister for COP26

Sri Mulyani Indrawati – Minister of Finance of Indonesia

Moderated By:

Babak Abbaszadeh – CEO and President of Toronto Centre


Read the full transcript:

Babak Abbaszadeh:       

Hello everyone. I am Babak Abbaszadeh, president and CEO of Toronto Centre for Global Leadership in Financial Supervision. Welcome to our discussion on Transitioning to a Green Economy: Financial Stability Implications. I'm delighted that 1,140 participants have registered for this event, representing 110 countries all the way from Afghanistan, Angola to Zimbabwe and Zambia and all the letters of the alphabet in between, developed countries and developing economies.

Since our inception in 1998 in the aftermath of the Asian financial crisis, Toronto Centre has trained more than 14,000 central bankers and supervisors from 190 countries to build more stable, resilient and inclusive financial systems. In 2016, we began incorporating climate change in our programming because of the substantial implications to global financial stability and risk of a crisis from climate change. We did this soon after Governor Carney's seminal speech, Breaking the Tragedy of Horizons, and the ratification of the Paris Agreement. Today, we're at a pivotal point to address this existential threat. We now have unprecedented global consensus of the urgent need to combat climate change, and to transition to a green or net zero economy. This transition presents a tremendous opportunity for countries to build back stronger post COVID-19 and achieve sustainable economic growth and poverty reduction.

It is my honor to welcome our two internationally distinguished speakers, Sri Mulyani Indrawati and Mark Carney. Her excellency, Sri Mulyani is a seasoned, influential G20 Finance Minister for Indonesia. Minister Mulyani was just recently elected as the co-chair of the Coalition of Finance Ministers for Climate Action, a position she is sharing with her counterpart from Finland. Congratulations, Minister. She's also the former Managing Director and COO of the World Bank.

Mark Carney has served as the central bank governor of two G7 countries and as the chair of the Financial Stability Board. He is currently a UN Special Envoy on climate action and finance, and finance advisor to UK Prime Minister for COP26. His herculean efforts and leadership put climate change on the radar of global financial system. I would also like to congratulate him on the publication of his fine, new, thought-provoking book, Value(s): Building a Better World for All, and we have some copies that we will distribute to some of the participants on a draw basis.

Toronto Centre’s mission is supported foremost by Global Affairs Canada, Swedish International Development Cooperation Agency and the IMF but also Jersey Overseas Aid, Comic Relief, the USAID, World Bank and the Schulich School of Business.

In terms of format, we will have three rounds. First, we start with progress and early lessons, then we move to implications for financial stability and inclusion, and then we will conclude with the impact of COVID-19. So Mark, we're doing a bit of the reverse of what you had said, credit, COVID, climate, but we do it in different order.

I will pose three questions alternating between each speaker. They have five minutes to answer each question, then I will take questions from the audience. Please use the Q&A tab to submit your questions. Let's begin. My first question goes to Minister Mulyani. Minister, you're known as a successful reformist. What are the key reforms adopted addressing both the drivers and the impact of climate change? And what are the most important lessons for developing countries that you could share with our viewers? Thank you.

Sri Mulyani Indrawati:  

Well, thank you so much for this invitation, and to have a chance to meet Mark Carney again, as well as to address the issue, which is very important, that is the climate change, especially during this pandemic time. This is really a challenging time, especially for many countries because the pandemic taking a lot of resources. So, from the policy point of view, especially on the fiscal side, we are taking quite a lot of our resource to address this pandemic. And let me share with you about several reforms related to the climate agenda, which is adopted in Indonesia.

I think the most important, and also the most challenging for many developing countries to adopt is usually related to the subsidy on the fuel, because this is going to be one of the most important. When a country really wants to help the poor people, they usually use the subsidy through this commodity. And fuel is the most basic and important for many poor households, so changing the subsidy from commodity base into direct subsidies is going to be very critical. And Indonesia adopted that back in 2014, and also even before that, that was like in 2006. So, we use the amount which is saved from this subsidy into cash transfer directly to the poor. That's definitely have the implication for the CO2 emission, especially on climate related to the fuel.

Many reforms on the fiscal side can be adopted in a very important way that is on the institution of the Ministry of Finance. For example, the Ministry of Finance, we build what we call it a green budgeting or budget tagging. That is, we are identifying how much resources we just allocated related to this kind of climate change agenda. So that will build credibility and accountability, especially when we, at the same time, also have the national commitment on the Paris agreement that we need to develop, to deliver and that's why mechanism to deliver and accountability is going to be very critical.

Second one on the fiscal side, we can also diversify financing instrument by issuing a green bond both domestically and globally. Indonesia is among the emerging country who issued this green bond since 2018. When you issue this kind of financial instrument, especially at the global level, they will ask whether this green bond is credible, because they are going to link to what kind of program or project which is related to this green project or program. So, we have to be able to also have a mechanism to track domestically, linking this instrument to the project as well as the program. On a project site, we can identify is this the category is going to be a dark green, light green, which is going to be also critical.

We also use the instrument for example, like tax facility in order for us to tilt the balance to work more, for example, renewable. The holiday tax allowance is going to be very important for us to be able to then tilt the incentive towards more renewable energy. For Indonesia is a bigger country in which we have more 34 provincial area, we have a transfer to the local government. So, for the Minister of Finance, you also have this instrument in order for you to incentivize local government because when you talk about the climate change, this cannot be done by one institution or by one level of government. It should be actually done holistically by all level of government, or even in this case globally. But within the country, you can really design this fiscal transfer as an incentive for government to incentivize, especially local government. This is especially related to the forests and forest management.

Indonesia has been very successful in reducing the forest fire and deforestation in the past five years. And one of it is actually tried to use this fiscal transfer to incentivize local government in order for them to be able to care as well as taking care of the people who live in the surrounding of the forest so that they are also caring for this forest.

In Indonesia, also, another thing that maybe can be shared by many developing countries is that we are geographically located in the ring of fire. So, when we have this kind of disaster, natural disaster, which frequently happen, then we need to establish a fiscal mechanism, financial mechanism also, that is going to address this disaster risk, financing and insurance. So, Ministry of Finance, in this case, had asked for us to be able to then establish this kind of pooling fund, especially because we are geographically very large. So, we can pool fund from different provincial area. I think this is also going to provide more certainty of support for area which is hit hard or hit frequently by this natural disaster.

Last thing, we established an environment fund agency. This agency is not just the agency, but the agency is going to set up for managing the funding, including one of the most important is the carbon pricing or carbon tax initiative. This is going to be the first time for the Indonesia to introduce this instrument market base, which quantify or value the carbon. And we are going to then design how this is going to be introduced within the economy, market mechanism, who's actually managing this carbon price and carbon market. It's still relatively new. For me, I even in this case, start studying it and try to think about what kind of institutional setting and the price mechanism or price discovery for this kind of carbon. We learn a lot.

You mentioned earlier that now I'm also playing a role as the co-chair of the Coalition of Finance Ministers on this climate change. And to be honest, this coalition, which is now having 60 country join, including the most recent, the United State, which is going to be a very good forum for us, as the finance minister, to learn from each other. What is the experience of others that can then be used and can be adopted?

As the conclusion, when we talk about reform, we cannot talk just in a vacuum environment. As the finance minister, you also deal with the political situation. So, reform sometimes very difficult because in the short term, it can be perceived that this is going to create some implication to the welfare of the people while sometimes the benefit can only be enjoyed in the medium and long term. And this kind of trade off need to be addressed if you are going to be able to push the reform agenda. Climate change is exactly the same.

The benefit maybe is not now, but it's going to be in a medium and long term. Thank you.

Babak Abbaszadeh:       

Thank you, Minister. Thank you very much for that opening and setting the context. Mark, this question's for you, and I want to bring your perspective of what has happened recently. So, the climate change agenda has been advanced by the Paris Agreement. 160 countries have made the Paris Agreement mandatory, and as the minister said, the US has rejoined. What changes have you seen since the Paris Agreement been adopted? In other words, are governments doing enough in your judgment? And is the political willpower sufficient to mitigate the climate catastrophe? Thank you.

Mark Carney:                  

Well, first off, thank you very much to you Babak and the Toronto Centre for organizing this. Sri Mulyani, Minister, for your leadership on this and many issues and I think there's no better news than you're assuming the co-leadership of the Climate Finance Ministers, an important group, and with you, they're a group that will translate into action from concept.

It's an important question. I think we should be objective about this. As people know, when the Paris Agreement was struck, and when country, NDCs, the country plans were objectively assessed, the view was that even if all these plans were put in place, the temperature would still warm by 2.8 degrees. Subsequently, not all those plans were put into place, and we're on track to somewhere between three and a quarter, potentially higher degrees as we meet today.

So, it's exceptionally important that this progress that has been made in clarifying, codifying, legislating those net zero objectives in a number of countries, we're at almost at ... Well, we're actually at 130 countries now who have not just ratified the Paris Agreement, but have set out net zero as an objective. And that that objective is met with the type of policies that the minister just described for Indonesia and these very important adjustments in terms of from fossil fuel subsidies towards pricing carbon, for example. And that will be one of the core tests of the Glasgow COP, is whether we've had this shift in the scale of policies across the world so that we can start to get to our objectives.

We can go into more detail on some of those policies if you wish and people wish. I want to say though, I'll just say a couple of quick words on the financial side because it was only five, a little more than five years ago, obviously, when Paris was struck. And at that point, the TCFD disclosure regime was a concept. We launched it at Paris with Mike Bloomberg, and the work proceeded rapidly. Within 18 months, the standards were proposed to G20 leaders at the Hamburg summit. I attended the Hamburg summit. They were endorsed at the Hamburg summit. But really, we've had two or three rounds of corporate reporting with these standards. The quality has varied a bit, the coverage has varied a bit, but the momentum is very strong.

And now the debate, the discussion, and the action is about making those standards mandatory. In some countries, that will be through national legislation, such as the United Kingdom, that's already announced. In other countries, we would expect that countries would pick up on what the IFRS Foundation is intending to do. It still needs to be formalized, but the setting up of the Sustainable Standards Board, beginning with climate that will promulgate standards for climate disclosure. And of course, as we know and participants know, IFRS standards of disclosure cover about 140 countries. So, we move quickly to global coverage on that.

But again, I said I'd be objective. Let's be frank. In terms of risk management of climate within the financial system, this is becoming a mainstream issue. It is a C suite issue of CEOs and risk managers are now focused firmly on climate risk, as investment risk, as portfolio risk. That is a big change. However, only about 5% of financial market participants think that climate risk is priced correctly at present. So, there's a greater focus but there is a lot of this still to translate into asset prices into actual risk management, and therein lies both the risk and the opportunity that is in place.

And so, what we're looking to do, and maybe I'll finish here, what we're looking to do for COP26 in Glasgow is put in place the information, the tools and the markets so that the market can take into account climate risk, manage it actively. That goes to issues, not just disclosure, but to risk management, supervisory expectations around risk management in some jurisdictions, stress testing of the whole financial system for climate related risks. It also goes to building some new markets, including markets for carbon offsets, voluntary carbon offsets that, and I'll just take the moment to observe that potentially 15% of that market, which is a 50 to $100 billion a year market potentially comes from a major country like Indonesia. So, it's one of the building blocks of potentially very large capital flows that would be associated with properly managing climate related risks.

So, if I can just sum up, I would say that there is real momentum. There's considerable momentum in the financial sector amongst authorities and supervisors, but we have a long way to go still on country policies and we have a long way to go still, and by the way, our intention is to go that long way in a short period of time, in terms of fully integrating climate risk management into the financial system.

Babak Abbaszadeh:       

Thank you and as you highlighted in your book, it's the ultimate intergenerational unfairness question, because this generation is not getting impacted by climate change as much as the future generations. So, they have to deal with it, and they have to really be bearing the brunt. And supervisors, like everybody else, will have to do their part as well. So, thank you for that.

Minister, turning back to you, I'd like to identify the premise of my question. So, we take it as granted, which is developing countries have been hit hardest by the pandemic and are expected to be impacted the most by climate change. So, given the current development priorities to address the economic crisis induced by the pandemic, so you have your hands full, what are the key implications of this green transition for developing economies? And how do they differ for developed economies?

Sri Mulyani Indrawati:  

Thank you, Babak. Well, as you said, the pandemic is really a game changer and becoming the highest priority. I think you call it necessary condition for the recovery of any economy is our ability to manage and control this pandemic, and definitely also taking significant resources from the government. So, when we talk about the green transition, the first is, of course, the benefit from this pandemic is the mobility of the people is becoming then severely reduced, and that's have a positive impact on the CO2 emission. I think one of the measurements showing even in Jakarta or here in Indonesia is that you are getting more a blue sky because of the significant reduction of the traffic.

Now, when you talk about the transition, this is definitely not easy, but it is requiring quite a lot of elements on this transition. And we always talk about adjust transition. First, when you're trying to have the design of the recovery process of the economy, and at the same time, you are going to design it in a green way, then you're going to then identify what kind of activity that you can identify. For Indonesia, there are maybe some other countries have their own uniqueness. For example, if we talk about energy, we have the energy which is based on coal, we also have the fuel based like oil, gas, and also now renewables. So, when we are going to have a more renewable, that means the demand declined because of this pandemic. The question is not today, but if the demand is going to pick up, how we are going to address this increasing energy demand with more renewable increase. And that is exactly what we call it the transition towards nonrenewable into renewable.

That will require a lot of incentives some time on, even in this case, a very detailed contract, because many of the power is actually under a long-term contract. Now, if you talk about forestry in Indonesia, we also have the forestry and also the palm oil. We have the ability to use from fossil fuel into biofuel. And that is something that also can create an incentive for a more renewable and also showing a more responsible forest and palm oil management. So, if we talk about transportation, then you are going to facilitate more infrastructure in order for you to be able to incentivize people using the mass public transit, rather than using your own car or a bike line. That is also another when you can talk about the recovery and transition.

And then for Indonesia, we have a huge area which is related to the mangroves and replanting mangroves is also one. So, for Indonesia, we have a lot of choices when we talk about green transmission and green recovery. The question is, of course, how you are going to use a limited fiscal at this very moment to incentivize and providing a stigma. Mark mentioned about the financial instrument and the financial risk, which is currently when I issue, Mark, in this case, green bonds, the market is definitely not differentiating between green instruments and non-green instrument, whether you talk about the price, the year, they are not really putting additional bonus. So, you're right in this case that the financial sector has not really put this climate agenda within their prevalence of race and then translated into here.

So that is all the area that we could think of for us to be able, at this very moment, redesigning the recovery process, taking into account what area that you actually can push more the agenda of this transition towards a greener. There is more like a transition, which is maybe not significant but more fundamental, for example, like the market pricing, as well as the investment that will tilt the appetite of the risk toward more renewable than nonrenewable or less carbon emission than more carbon emission.

Babak Abbaszadeh:       

Thank you so much. Mark, staying on the theme of financial stability, last year, the network of central banks and supervisors for Greening the Financial System, which I think now has about 80 members, published a set of reference scenarios that tested strategic resilience of the financial sector to different carbon pathways and climate scenarios. I'd like to take it for granted that proper carbon pricing will contribute to greater financial stability. Now, my questions are, what do you expect the climate stress test will show? For example, will firms be able to withstand sudden adjustments? And finally, a subject that's important to Toronto Centre, what do you see as the role of central bankers and supervisors here? Thank you.

Mark Carney:                  

Yeah, thank you. Well, this is incredibly important, and you mentioned, a moment ago, about the tragedy of the horizon and the intergenerational aspect of climate change. And, in effect, what stress testing does, climate stress testing does, is it brings the future to the present and asks firms to assess their strategy, their current strategy. If they were to continue to roll forward over time with their current lending strategy and investment strategy, would that be robust? Would it be resilient to various climate scenarios?

And as you rightly say, the NGFS scenarios which are open source, freely available and expected to be used and tailored and improved as a consequence of that, they look at three scenarios. The first is the first best scenario, which is that we make a smooth, steady, predictable, credible adjustment towards net zero. We do it collectively. Businesses, borrowers, can anticipate those adjustments and adjust their strategies accordingly and there is minimal transition risk. And of course, because we're getting to one and a half degrees, there is physical risks that increase over time, but they're not the extreme physical risks.

The other end of the spectrum is its business as usual. We're headed to that three and a quarter, three-and-a-half-degree world. There's not much transition risk, but physical risks steadily mount over time. And the middle scenario is a possible scenario, which is we do a bit, but we don't do enough and then we do a lot quite late in order to get back on track. And that is a scenario where that one would expect that there were considerable stranded assets on the balance sheets of banks, and accordingly, losses as a result of that.

And really, it's important to have the value of these scenarios is that there were multiple scenarios. Firms, again, they look at their strategy and see if they're robust to different potential climate outcomes, that they have that extended horizon. So, the question is what does the balance sheet of a firm look like if it's frozen and what will it look like in 10 years, in 20 years, in 30 years’ time? And very importantly, that the climate outcomes and the macro and financial outcomes are integrated so they are coherent in, if I can use that and that is a term, a precise term, I can use that at the Toronto Centre and with the participants because they'll understand what I mean by macro financial coherence. So, they all add together. They are coherent in that regard.

The point really is to determine the strategy of a bank and determine the appropriateness of the strategy of the bank over time and to get senior management and boards thinking about what potential adjustments should be made to that strategy if countries make do or live up to their objectives, as expressed in the Paris agreement, as expressed in net zero legislation, as expressed increasingly in the course of policy.

And this process now, final point, there are about 18 central banks and supervisors that are either currently using or about to use these scenarios to conduct climate related stress tests. More will follow. We will be a lot better informed over the course of the next 12, 18 months in terms of the scale of the potential risks. But crucially, this, and last point, is this is an iterative process. This is about building risk management capacity within the financial institutions themselves, and candidly, also within the central banks and the supervisors. So, there's a better understanding of the scale of the risk, and the interconnectivity of the risk and what can be done to mitigate those risks over time.

Babak Abbaszadeh:       

Thank you, Mark. And you might be pleased to know that one of the things that Toronto Centre is well known for is crisis simulations. Since the global financial crisis of 2008, they've conducted over 120 crisis simulation. Standard ones, but also very tailored ones for countries. Canada, Indonesia, where the tailored ones, also one for all the eight Nordic, Baltic countries. So, we are actually developing stress test toolkits for supervisors and regulators on climate risk, and we're hoping to be able to launch it sometime around the COP26, by the time it comes around, and so hopefully, we'll make some progress by then.

Now let's move to the COVID picture. Ontario today is going to enter in a stricter form of a lockdown than before. So COVID has proved to be extremely resilient, although I thought our response to it was being resilient. Minister, this question's for you. In one of your speeches last year, you mentioned that COVID-19 provides the opportunity to transform the Indonesian economy. Can you elaborate on how COVID-19, as a game changer, could have positive implications in boosting global and domestic policies in relation to climate change? Thank you.

Sri Mulyani Indrawati:  

Well, first, as we know, that COVID really changed dramatically and even immediately for all countries. We cannot imagine that suddenly you cannot go to the office. I was thinking that everything will stop at that time, but as a finance minister, that you are responsible in designing what kind of fiscal response, and I work with closely with central bank in designing how we are going to respond on the macro side from fiscal and monetary and financial cycle response on this kind of shock. And that can be done even without via our seeing fiscally, and that's happened overnight.

So, we change totally the way we work. We cannot imagine actually, we have to change one of the articles in our law because in that law, the meeting of the financial sector stability forum, is a brief physical meeting. So, we change that article that it’s also legitimate to have a meeting via this kind of online. So that really game changers. Many of what we call government spending related to the meeting, event, traveling is severely reduced. I actually cut almost 60% last year of all those government budget, and of course, then we use and we focus this money for COVID related directly like social protection. We increase for the vaccination, testing, tracing.

So definitely COVID changed the way we work, and the way we work is more climate friendly, because we are not using more, what we call it, this mobility. But of course, there is a downside to this that is now the activity in the economy has declined very sharply. So, when we are going to change the economy, current and in the future, the thing is how we are going to collaborate globally because like climate, COVID have no jurisdiction. So, this is a global problem. So definitely, there are a level of policy that need to be addressed, that need collaboration. At the national own level, then we can and we should push reform for example, from social safety net up to what I call it earlier, that is redesigning the economic activity which is much more toward environmentally sustainable. So, if you are going to create jobs, then this is a job labor intensive, for example, for mangrove replanting. So how you are going to use all those instruments in order for you to be able to then push the leader toward more sustainability and climate change.

Then at the regional level, you definitely have, or a global level, you have all the collaboration in addressing this issue of recovery, COVID recovery, and climate change. Many countries definitely have resource constraints. So, in this case, multilateral development bank, and many MDBs, they are responding very quick by providing resources. Don't forget when you talk about the Paris Agreement MDC, there is not only just the MDC. There is also a commitment of 100 billion by advanced country annually which is not delivered. But many countries are not going to wait for that. But certainly, without that financing, it is not going to be able to address this issue, because many countries, especially developing country, now even facing a much more fiscal constraint because of the COVID.

And then the third part is, of course, that all this climate change agenda can only be achieved with technology. So, access to the technology is going to be very critical. Again, this kind of collaboration, as well as how you are going to redesign your own recovery process, which you are going to have a more technology access, that can then provide you with the opportunity to continue develop without facing a trade-off of higher emission of the carbon.

And then the third one is of course technical assistance. So, there are a level of, what do you call it, COVID related to the recovery process and climates in which not only one company can do it, because this is definitely a global public bad that needs to be addressed through a policy that can provide a global public good change. And that will require resources, technology, as well as technical assistance for many countries. For each country own your commitment like in Indonesia, our MDC, even if you look at the 2011, 2009 theme, our ability to reduce the emission is still 50% from what we are supposed to be delivered on this MDC of the Paris Agreement. And of course, we have the MDC, using other resources as well as MDC, if we are going to receive support from the international level.

And that's why I think this is really very clearly mentioned by Mark, this cannot be addressed by one country alone. Should be really global, and from standard sector, and I like the idea of really putting this under risk more explicitly at the corporate level, at the national level and at the global level. So, you are going to price the risk properly. It's not skewed like this one, everybody reducing as if the risk can be delayed, and we are not going to see it anyway. It's going to be the next generation. So that is going to be a very dangerous bias of the, what we call it, older generation, if you compare intergenerational conscience in this case. So, we really need to put the right price on this.

Babak Abbaszadeh:       

Thank you very much. As you were talking, it just dawned on me that as tragic as COVID has been, in a diabolical way, it's an interesting warm up for our challenge of climate change, with two exceptions. When it comes to climate change, which is a slow-moving type of a pandemic, we don't have a vaccine and we cannot self-isolate. So, if we thought we have it tough now, let's face what we're going to have later.

Mark, staying on the concept of COVID-19. COVID has exposed a lot of things. Thankfully, as in your words, we've been more Rawlsian than Darwinian in terms of valuing life and knowing the value of things versus price but has exposed the need to invest and to build resilience, especially in emerging markets and developing economies. And as you said, public financing alone will not be enough. Blended or private financing flows will be needed. In January this year, the Taskforce on Scaling Voluntary Carbon Markets published the blueprint for new carbon market. What is the potential scale of this market, and how will this new market infrastructure help capital flow to developing and emerging economies? Thanks.

Mark Carney:                  

Thank you. Two points, if I may. First, I'd just like to reinforce what the minister just, one of the points minister was making around development and blended finance and the importance, just to underscore the importance that we get quickly to a position where the multilateral development banks and development finance institutions are Paris aligned across their operations and at scale, that would unlock the scale of blended finance that's required, not just for mitigation, but also for resilience in emerging and developing economies. And that is an issue of some urgency and we need to make meaningful progress on that between now and Glasgow.

Secondly, to your direct question on voluntary carbon markets, this is a complement to the absolute requirement for companies and countries to reduce absolute emissions. So just to be absolutely clear up front, the first and foremost focus is to reduce absolute emissions, but to put that absolute emission reduction in context, if we're going to stay on track for one and a half degrees, we need to have reduced emissions by 2030, by the end of this decade, by 23 gigatons of CO2 equivalent. The potential within that overall envelope of 23 gigatons for carbon offsets, particularly natural climate solutions, is around one and a half or so gigatons, one and a half to two gigatons. So, in other words, less than 10% of the total reduction.

That said, the scale of that order of magnitude, that scaling up involuntary carbon offset markets could create a market, as I said earlier, of somewhere between 50 and $100 billion per annum. So, we shouldn't confuse that 100-billion-dollar figure with the one that the minister just mentioned, which is public money. This is a separate issue in terms of private capital flows, and quite frankly, and that market today, by the way, is measured in hundreds of millions of dollars a year. So, this is a totally new market, it's a totally different order of magnitude, and it requires the type of plumbing of a properly scaled market. It requires absolute integrity in terms of the offsets themselves.

So, monitoring of those offsets, ensuring that the solutions that are put in place aren't just here today, but they're here tomorrow. It also requires integrity of the demand side for that market. And the demand side for that market will be corporate purchasers. In other words, companies that have net zero plants, companies that are reducing their absolute emissions, but for reasons of timing and technology, need to have some degree of offsetting as part of their reductions. And I'll give you a classic example, which is Microsoft. Microsoft is making up all its historic emissions. The only way it can do that is through offsetting.

Now, bringing these two together can create very sizable flows from the developed economies to the emerging and developing world. We think about 90% of the demand for offsets is going to come from companies and they're headquartered in advanced economies, but three quarters to 90% of the supply of those offsets, those nature-based solutions, are going to come from the emerging and developing economies if this market is going to work. So, this is a very large, complimentary, capital flow that we're looking to scale up. There is a blueprint for this market that has been put in place or been released earlier this year. There are 190 institutions, a mixture of private sector, NGOs, and others, that are working in six different work streams to develop the protocols for this market by Glasgow, and then we would love to have it launched. So, it's an important component, as is blended finance, as is the government, the 100 billion, and as is the core mainstreaming of climate finance into the financial sector, which will also drive very large cross border flows.

Babak Abbaszadeh:       

Thank you. Now at this point, I hope I can have the speakers as my partner. We have 27 questions. Let's try to get to as many of them as we can. This is where I would ask you to please keep your answers quick CNN style, let's go no more than 20, 30 seconds so we can hit as many of them as possible. I see a question from our board member, Barry. Hi, Barry Campbell. In addressing climate, how do we address incompatible timelines, climate impacts, investment returns and election cycles? Mark, would you like to take this one?

Mark Carney:                  

Yeah, it's a great question, and hello, Barry. Part of it is stress testing is one way to pull the future to the present. So, what I described earlier on stress testing. Supervision as well is there, but one of the most important things and this is a point Janet Yellen and I made about six months ago in a paper we authored for the G30, is if you build a credible path of policy, then the market starts to anticipate future policy. So, the minister referenced, at the start of our conversation, fuel subsidies and potential carbon prices. If you have a carbon price that such as in Canada that rises to $170 a ton by 2030, people start to react to that today. They pull forward adjustment and that is another crucial mechanism to smooth that adjustment.

Babak Abbaszadeh:       

Thank you, Mark. You get a gold medal for concision. Minister Mulyani, over to you, a rapid response. How do we ensure net zero is something real and not yet another creative accounting?

Sri Mulyani Indrawati:  

Well, it should be first an agreement regarding how to measure it, the net zero, and then there is an accountability mechanism that needs to be addressed. But of course, in achieving something, you really need resources. So that a causality on that one. So, I think the most important is there is an accountability mechanism that need to be established, and how we are going to match that accountability with resources.

Babak Abbaszadeh:       

Great, and then you and others as government authorities will help standard setters to pay attention to that. Thank you very much again for that concise answer. Very good. This next one is from our friend Peter Rutledge, the head of Canada's Deposit Insurance Corporation, is for Mark. Climate stress testing may and probably should lead to different risk swings for bank assets exposed to transition or physical risks. How long will it take to adjust risk weighing standards for climate risk? And how quickly must that change occur to fuel faster adoption of green technologies investment and adoption?

Mark Carney:                  

So hi, Peter, and a couple things. First is that as you know, the Basel standards are micro prudential, so they are focused on risk. I do think transition risk is going to rise and therefore, will increasingly be embedded in the risk reward weighting of Basel. It will probably take a round or two, or at least a round of stress testing in order to inform those adjustments to risk voiding, as well as work of the prudential supervisors. I do think as well that what is potentially moves in tandem with that is higher risk waiting for brown assets are assets that have a high degree of being stranded.

Babak Abbaszadeh:       

Okay, great. Now this question from the courageous anonymous for Madame Mulyani. Is there concern that after COVID is managed and economy returns to more pre COVID state that organizations will revert to their old ways? And what can we do to mitigate our short-term memory and attention span? I guess what I take from this question is how do we make sure we learn the lessons and stay with the lessons? Please go ahead.

Sri Mulyani Indrawati:  

What do you really have to think and look at the gain that you get from this COVID. For example, in my office as the Minister of Finance, I observed that we changed the way we work. So, while this is still happening, I asked them the way the business process, the KPI measurement, the way we are going to monitor the work of our team is going to be adjusted, and that you'll love the change. So, you are not going to wait until this pandemic change finish and then you are going to then starting to decide what needs to be change. During this change, you can institutionalize it. I think that is the most important, that at the institutional level, at the company level, then you can't really think about the policy.

For example, for me, as the finance minister, I look at the all the budget. So, the traveling budget can be severely reduced because of this COVID. Then I said that well, actually, government can operate with this much of this traveling budget. So, we can change that and use this resource for a much better program or a better priority.

So, this kind of thing that you try to institutionalize. I agree actually the question that people tend to have a very short memory. After we finish, then you're going to go back to the business as usual. As Mark Carney mentioned, all effort to create a standard, a sector, and putting in the risk, in the price or market mechanism is going to have a much better long-lasting result, rather than if we are just discussing it. So now the problem is of course, for all of us, after we are all recognizing that we have pandemic, we have climate change, they are both global problems. So how you are going to identify the solution mechanism in place and a credible step toward that that will look what we call it the gain from this pandemic. So, we can avoid this, what you call it, short memory, when people then go back to the business as usual.

Babak Abbaszadeh:       

Thank you. I hope people will remember that, but thank you very much for that. That's great. Mark, this question's for you. We have a cynic in our fold here. How good are the current risk assessment tools for evaluating climate risks to individual companies? A recent article in Nature Climate Change questioned the suitability of existing climate models for this purpose and also expressed concerns about the black box proprietary nature of these services.

Mark Carney:                  

Well, I haven't read the article referenced so it could refer to just about anything. Certainly, I'll say in general, make a couple comments. One, just in terms of ESG metrics, as sometimes which are index weighted or indices and have element of black box, one has to be cautious in terms of applying them. For example, the correlation across the 17 largest or most frequently used ESG indices is less than point five. So, you can get very different results depending on which ESG index you use.

I think the cynic wasn't listening earlier to the discussion of the NGFS scenarios and the open-source nature of those scenarios. I would say further that the biggest risk in the near term is transition risk, which requires, and so in other words, insuring, and that is an iterative risk between policymakers and financial institutions. And I think the point that is becoming clear and should certainly be clear by the end of the year for financial institutions is you have to look at a scenario where policy makers mean what they say. So that policy is robust enough, it's aggressive enough, it's clear enough to achieve that one-and-a-half-degree objective, which after all, is the objective of the Paris agreement. It's the focus of the G20 countries, and is your strategy resilient to that or your assets? How do your assets look in that scenario? And are you taking advantage of the opportunities that the transition to a more sustainable economy brings?

Babak Abbaszadeh:       

Thank you very much for that. Minister Mulyani, I'm going to integrate a few questions together, because there's a lot of anxiety about the fact that we're not taking climate risk seriously. As you see, a lot of people are looking at how they can invest better. Different people talk about different issues in different countries. Your own country has 7000 islands, and who knows how many of these islands will remain if there's a rapid climate crisis happening. What does it take for governments to bring the same sense of urgency to climate risk as they have been able to successfully do with COVID-19? Essentially, they've been able to shut things down and all that, but climate still seems to be a very slow-moving train. You lose a lot of sleep on that, but what is your basic thought on that to help our audience understand, what is the pressure on you and others like you in making this an urgent issue?

Sri Mulyani Indrawati:  

Let's learn from this pandemic. When the threat of the safety and the security of the people at stake, the government will move. So, the pandemic definitely is a threat. So, no matter what, the government respond to that by doing lockdown, you are looking at your resource for your health spending, for testing, tracing, treatment, as well as vaccine. So that's because we don't have any other choice. So, the question in this case for the climate because we are always saying that this is going to be a long-term problem while it's really in not that long. So how you are going to make this as a real credible threat for the government in this case?

I think my thinking and when I'm with my own experience, you can talk especially with the younger generation better because they are the one who's going to face with this one. And for Indonesia, our demographic composition is dominated by the young generation. They are more in this case informed because they are connected to the internet. They are more aware, they just really care about how our ocean is being become a place for all this waste, especially plastic. Many of the younger generation now initiated that they are no longer using the straw, plastic straw, we are not going to use your plastic bag. It's more coming from the younger generation. So, I will invest a lot on this education as well as information and putting this element of risk within the population, especially those who are going to be faced with this.

The second one, I also firmly believe on the price and market. I think when you put and introduce within the price, and especially when you are going to be able to put it in a global consistent mechanism, then the country has no other choice but to follow. And this is going to be the most challenging. And that's why the UN FCC, the next Glasgow meeting is going to be very critical. Now that the biggest economy joins, and also our country said that they are committed to this, then you are going to be able to have this opportunity to achieve what we call it the global system or mechanism, as well as introducing the real price, carbon price that will be credible and effective in signaling the behavior of government, people as well as corporation, including financial institution. I think that is really the most powerful one.

And again, within that context is of course, establishing this market carbon price is not going to be easy. I must say the more that I learn about this, how can you, at this very moment, talking about the same commodity that is carbon in one jurisdiction is only $2 per term, and then the other one is 40 and the other one is going to be 50? If you are having a one global market, then everything is going to go to the 50 the highest bidding. That is exactly that maybe Mark is going to solve this problem but that is exactly that. You are not going to have this fragmented price and market when we are dealing with one commodity, one earth, one climate change problem. So, this is going to be how you are going to match this one global mechanism for this one global problem. But then, there is a challenge of all this fragmentation and jurisdiction, which is creating a constraint, a real constraint, for all countries to participate in just and fair way.

Babak Abbaszadeh:       

Well, thank you. That was excellent. And Mark, I'd like to end with this question. It's a pretty challenging question, is what is the role of financial supervisors in countries where governments are not doing enough to manage climate risk to the financial system? To give you some context here, without proper carbon pricing, it's very hard to mobilize everybody and all of that, but at the end of the day, supervisors and regulators never get a good press for what they do. They always hold the bag when something goes wrong. So, what is the role in those countries where the state itself is not taking this issue seriously, or just pays lip service? Thank you.

Mark Carney:                  

Yeah. Well, first is to recognize, as I think the question does, the limits of the role of financial supervisors. They're not making climate policy. That is the responsibility of governments, and governments will move at the pace that they ... They will move at their pace. What is the responsibility, though, of the supervisors is to prepare for a scenario, in part to prepare for worst case scenarios? Now, in the case that we just were talking about, the worst-case scenario is that actually there is inaction, inaction, inaction and then there is action. So, then there is a price that's put on carbon, or then there are higher emission standards, or then there is a broader movement towards a more sustainable economy. And the question is, are there a lot of stranded assets that are built up in the period of time between today when there's not action, and tomorrow when there is action?

 So that's the first issue that supervisors have to look at, and whether the system is robust to different climate policies down the road. Are those risks being taken into account? Are they being considered by the private financial institutions, their boards, in their risk management? And if they're considered and put to one side, then well, you judge as the supervisor whether that's prudent accordingly, but they should not be ignored. They should be considered, and the appropriate measures taken. Obviously, if everybody is in that position, then we're potentially in a situation where the physical risks are only going to mountain and that is a direct responsibility of the supervisors in order to ensure that potentially the system is ready for those.

Babak Abbaszadeh:       

Thank you. I just want to thank our speakers. This was a very interesting topic. I enjoyed talking to you. I think your audience did by the questions that we saw. And as stated by them, there are grounds for optimism. Innovation and global cooperation are needed to transition to a net zero economy. So, it's not all doom and gloom. There's actually an opportunity here for us to transition and to really help revive our economies. God knows we need a lot of help paying for all the COVID debt. Toronto Centre will continue offering programs on climate action, and we hope to be able to come back and bring you more programs like this. And one of the promises of our programs are that they start on time and they end on time because we want to bring our speakers back. Thanks again.