Let me start by thanking the Bayes Business School and City University of London for their invitation to give this annual Mais lecture.
It is a great honour to follow in the footsteps of a distinguished array of Chancellors, Central Bank governors, great economists, two Prime Ministers and a President of my own country - France.
I also note that I am only the second woman to give this lecture, following Annelise Dodds in 2021.
I am delighted to play my part in increasing the diversity of the series.
Last year’s Mais lecture was given by the then Chancellor, now Prime Minister, Rishi Sunak, on the 24th of February 2022.
He, like all of us, had woken up that morning to the terrible news of Russia’s illegal, unjustifiable and unprovoked war of aggression against Ukraine.
The Chancellor said then, “when the sovereign freedom of one democratic nation is threatened… democracy everywhere is challenged.”
Ukraine sits deep in the heart of the EBRD. So, I want to start today by acknowledging the suffering and courage of the Ukrainian people and reaffirming the EBRD’s absolute solidarity with them.
Ukraine is at the core of the EBRD’s work and our solidarity takes tangible form: helping the real economy in wartime and in the reconstruction to come. Since the Russian invasion, we have significantly increased our investment there, with the generous support of our shareholders and donors.
Thanks in large part to this support, including from the UK, we have committed to investing at least 3 billion euros in Ukraine in 2022-2023, of which 1.7 billion was already deployed in 2022.
The first Mais lecture was given in February 1978, by the then Governor of the Bank of England, Sir Gordon Richardson. His topic was the conduct of monetary policy, rather far from my topic this evening.
But in his opening words there is a passage that captures well the situation we are in now:
“We are now at a historical juncture when the conventional methods of economic policy are being tested. The principles on which we have conducted economic policy since the war are having to be reassessed, because, with changing conditions, we are no longer so certain of being able to achieve what once seemed possible.”
My lecture this evening is an attempt to examine the twin nature and climate emergencies – a far bigger challenge than the slump of the Seventies – to outline why the current economic system is failing, how it must change, and what each of us must do to make that change happen.
Let me first then set out the crisis we face and its underlying causes.
2: Science does not lie
We live in an era in which the dominant influence on the planet is human activity. Let me give you some numbers to illustrate its scale:
Of all the mammals in the world, humans and our livestock represent more than 95 per cent.
The mass of all the world’s biomass - every mammal, insect, animal, bacterium, fungus and plant - is more than 1,100 billion tonnes. That is a vast number.
But it is exceeded by the mass of things humans have made in just the last 120 years, which is nearly 1,200 billion tonnes. We have made more than 500 billion tonnes of concrete and 8 billion tonnes of plastic, double the mass of the entire animal kingdom.
The scale of our intervention on our planet is unprecedented, growing and catastrophic.
What are the consequences of this?
Let me start with the climate. The average global temperature has increased by around 1.2 degrees Celsius since the pre-industrial era. But remember that the average conceals the extremes. The temperature increase in Europe has been 2.2 degrees. In the Arctic, it has been 3 degrees.
What has caused temperatures to rise?
Above all, we have consumed vastly more energy in the last 120 years than ever before.
In the year 1800, the world consumed a bit over 5,000 terawatt hours of energy, almost all from cutting down and burning trees.
Those facts had been stable for many hundreds of years and stayed broadly constant until the beginning of the industrial revolution.
But by 1900, the world had more than doubled its energy consumption to over 12,000 terawatt hours, of which nearly half was coming from burning coal.
By 1950, global energy consumption had more than doubled again, to nearly 28,000 terawatt hours, and in 2021 the world consumed 159,000 terawatt hours, more than 80% from burning coal, oil and gas.
This fossil fuel-powered energy consumption has resulted in a dramatic increase in greenhouse gas emissions – mainly carbon dioxide, methane, and nitrous oxide – gases that cause our climate to heat.
The concentration of carbon dioxide in the atmosphere in 1750 was about 280 parts per million. It had been around that level for tens of thousands of years. In April this year it reached 423 parts per million. Similar upwards trends can be observed in methane concentration.
This rate of change is unprecedented over millennia; its impacts are visible and dramatic.
Global temperatures and carbon dioxide concentrations have changed over our planet’s history.
But they have never changed as fast as they are now. And they are doing so far quicker than nature can adapt.
Globally, glaciers have lost more than 6 thousand gigatonnes of ice between 1993 and 2019. This equals a water volume of 75 lakes the size of Lake Geneva, the largest lake in Western Europe.
The global mean sea level has risen by an average of 3.3 millimetres per year since 1993 – a total increase of almost ten centimetres over the past 30 years.
In addition, extreme weather events like hurricanes have become more frequent and intense. This has devastating impacts for communities living in coastal areas – that is, 40 per cent of the global population.
Scientists warn us that this global warming can trigger tipping points. These are thresholds leading to abrupt, irreversible, and dangerous impacts with catastrophic implications for humanity. In fact, recent science indicates that we may have passed some tipping points already.
Where are we in our efforts to limit global temperature rise?
We are still far from reaching the objectives of the Paris Agreement – the most important global climate agreement that set the goal of limiting the global temperature rise to well below 2 degrees, and pursuing efforts to keep that rise to only 1.5 degrees. Current policies point to a 2.8-degree temperature rise by the end of the century.
Greenhouse gas emissions are a stock problem, as well as a flow problem, because the gases stay in the atmosphere. That means we have, in effect, a carbon budget – a finite amount of CO2 that we can emit before reaching a temperature rise of 1.5 degrees.
That budget is about 3,000 gigatonnes. To date we have used about four-fifths of it, or 2,400 gigatonnes. So, we have a bit over 500 gigatonnes left, which we will exhaust by no later than 2030 if emissions remain at 2019 levels.
Achieving the 1.5 degree goal therefore requires global greenhouse gas emissions to peak by 2025 and rapidly decline to reach net-zero by mid-century.
The climate crisis is just part of a broader crisis that humans have caused. Our planet’s ecosystems are becoming increasingly vulnerable to biodiversity loss, environmental pollution and land use change and degradation.
Deforestation, habitat destruction, plastic pollution in the oceans, overfishing and unsustainable farming practices threaten the ecosystems that sustain life on earth.
One million species are currently at risk of extinction. Entire ecosystems, including the Amazon rainforest, the world’s coral reefs and boreal forests, are all fast approaching tipping points.
The nature crisis is creating a humanitarian crisis that is increasingly driving the displacement of people into other regions. It affects crop productivity, food security and the livelihood and wellbeing of indigenous communities.
It also has a significant economic impact – in fact, the cost of ecosystem degradation is estimated at trillions of dollars per year.
3: Why are we in this state?
How have we arrived at this state?
In 2000, the late Rabbi Jonathan Sacks delivered the Mais Lecture, on the subject of “Markets, governments and virtues”.
He acknowledged that the market economy had delivered, at least for the developed economies, “a range of choices that would have been, only a century ago, beyond the dreams of kings. [We] can travel the world and communicate globally at speeds unimaginable then. We have better health, longer life expectancy, more access to education and information, than any generation since life first stirred on earth.”
Those are the achievements of a globalised market economy. But that same market has also delivered an economic system which is clearly unsustainable; which is causing impacts on our planet that will in a matter of years - not centuries - destabilise that very system.
How can a system deliver on the one hand enormous benefits and on the other be the cause of its own demise?
Nicholas Stern, whose many achievements include his 5-year period as Chief Economist at the EBRD, gave us the deceptively simple and perceptive answer in 2006: “climate change is the result of the greatest market failure that the world has seen”.
15 years later Sir Partha Dasgupta, another great British economist, wrote about the biodiversity crisis:
“It is not merely a case of market failure. It is also a sign of the failure of contemporary conceptions of economic possibilities to acknowledge that we are embedded in Nature, we are not external to it”.
Thirty-four distinguished guests have stood here before me and talked about market rules and prices; and how to use the power of those tools to deliver the best social outcomes.
This is the first Mais lecture to focus on the climate and nature crises. But the same fundamental principle holds true.
The EBRD was established in 1991 to foster the transition of the countries in Central and Eastern Europe to “open, market-oriented economies”. Our founding premise is that well-regulated, well-functioning markets, with high social and environmental standards, are the best way to deliver public goods.
That is why promoting a green transition is at the heart of our strategy. Lord Stern is right: our sustainability crisis is a market failure. Correcting it requires not abandoning the market but changing it.
4: What is to be done?
We must change the rules the market works by.
If we put values on biodiversity and ecosystem services, and impose costs on pollution and consumption, the market will deliver and facilitate the transition to a zero-carbon world.
Let me outline what this means in physical changes.
Broadly speaking, there are four “known knowns”.
One, we must transition the energy system out of fossil fuels. Our use of coal, oil and gas is a recent innovation; it must also be a brief one.
That means two things: first, shifting to use electricity whenever and wherever we can, to drive our cars, heat our homes, run our industry and to produce synthetic fuels for the activities we cannot directly electrify. In the International Energy Agency's authoritative Net Zero Roadmap, global electricity generation more than doubles between now and 2050.
Second, generating that electricity from zero-carbon sources, overwhelmingly from the wind and the sun. In the same IEA scenario, renewables as a share of electricity production rise from 30% to 88%, with almost all of that increase coming from wind and solar. At the same time coal and gas fall from their current position producing more than half the world’s electricity to near zero.
Two, we must reverse the tide of deforestation. Between 1990 and 2020 we destroyed 420 million hectares of forests – about the size of the European Union. We must reverse this trend by preserving and protecting the remaining intact wild forests, including those in the Amazon and Congo basins.
We can do this by recognising their value for climate change in international law, providing financial resources to help monitor illegal logging, and offering alternative income opportunities to local communities.
We must also adopt sustainable management practices for commercial forests and accelerate the rate of reforestation of degraded land.
Three, we must reshape agriculture. Food production is responsible for approximately a quarter of global greenhouse gas emissions, and most of humanity’s impact on biodiversity.
To feed a growing global population in 2050, we must produce 50 per cent more food output with no increase in land use and, at the same time, reduce the sector’s emissions by two thirds. This requires decarbonising inputs, for example by:
- rapidly converting the nitrogen fertiliser industry to green ammonia,
- eating significantly less meat,
- transforming farming through sustainable intensification practices and precision agriculture, and
- addressing food loss and waste across the entire value chain, from farming to transformation, distribution, and consumption.
Four, we must manage carbon. Even if we are successful in reducing emissions, we will still emit some CO2 and we will still have too much in the atmosphere.
Therefore, we will need to remove over 600 gigatonnes from the atmosphere from 2020 till 2100 - in other words, go beyond net zero to negative. This will entail large-scale planting of trees and other plants and large-scale technical removals and underground storage.
What does addressing these priorities entail in terms of investment and money?
According to the Climate Policy Initiative’s Global Landscape of Climate Finance, global climate investment needs will range between 4.3 to 9.3 trillion dollars annually by 2030.
Yet, in 2021, climate finance flows amounted to between 850 and 940 billion dollars.
While this is an all-time high, it is very far from what is needed.
5: Who must do what?
So, who must do what? Where do the costs and the opportunities fall? Can we afford this extraordinary and unprecedented transformation?
It is important to recall that the climate challenge contains two quite separate elements: moving to an economic and social model that is BOTH low carbon AND resilient.
The burden of the first, mitigation, looks quite different in the developed and developing worlds.
On average across the world each person is responsible for just under seven tonnes of carbon dioxide equivalent each year. But in high income countries that figure is 12.5 and in low income countries it is 2.8.
Over time both those numbers need to reduce to zero. But clearly for rich countries the priority is urgently to reduce the emissions per person. For poor countries the challenge is far more to find a model for low carbon growth, to increase wealth without increasing emissions.
By contrast low income countries are disproportionately affected by climate change. They have less robust infrastructure and institutions and they lie in geographic locations that are more acutely vulnerable to climate extremes.
What does this shift mean in economic terms? Changing our model in the manner I have described affects every aspect of our lives and economies.
But at a first order of approximation the sustainable transition is essentially an energy transition: a shift from overwhelming reliance on hydrocarbons to an overwhelming reliance on renewable energy.
That shift entails major investment. Estimates vary but there is a consensus that globally this means incremental investment of at least 3 trillion US dollars every year in the coming decade.
Those are enormous sums, but ultimately manageable in the context of a world with a savings glut. The Glasgow Financial Alliance for Net Zero identified over 130 trillion dollars of capital available for investment, for example.
That scale of investment will create economic benefits and opportunities. The IEA and the IMF looked at this together and concluded that globally a net zero transition results in higher economic growth than business as usual.
Of course, alongside that economic growth comes a host of co-benefits: less dependence on energy imports, cleaner air, more stable prices. And above all, the avoidance of the huge costs of catastrophic climate change.
But that big picture of an era of investment that is both affordable and plausible conceals a number of important caveats:
The first is understanding that this transition is a change not simply in the sources of energy but in its characteristics too. It means moving from sources that have relatively low upfront costs and high running costs to sources which have high upfront costs and near zero running costs; and from sources that are concentrated in a few places to sources that are widely distributed.
Second, the change is front-loaded. The cost of a sustainable transition is not evenly distributed over the next 30 years. It falls most immediately in the next decade; first because of the urgency of reducing emissions now and second because of the feature I just described – the infrastructure for a low carbon resilient world has to be paid for up front.
Third, the distribution of costs and benefits is uneven, both between nations, and within nations between sectors and regions. Most obviously hydrocarbon producing nations and regions will see very significant falls in income. In the decade 2011 to 2020, oil and gas producer economies earned nearly 2,000 dollars per capita; that will fall to under 400 dollars by the 2040s.
More starkly the costs of transition fall disproportionately on poorer countries. World Bank estimates show that by 2030 emerging market economies will need to spend 7 per cent of their GDP annually on meeting their development and climate goals, compared to only 1.1 per cent for upper-income countries.
Fourth, the shape and plausibility of transition is very uncertain in the long-term. In the medium term the costs and the technologies are now clear. We know we can at least halve emissions affordably. How we get beyond that to zero, and into negative emissions is much less clear.
So two things can be true at the same time – on the one hand the sustainable transition can be afforded, at least as far ahead as we can see with some clarity.
On the other hand it creates very high levels of disruption and transitional costs.
For example McKinsey estimate that 185 million jobs will be lost in the course of the transition. They also estimate that 200 million will be created. In other words, net growth in employment but a great deal of disruption along the way.
Who then must do what?
It starts with governments. The fundamental role of government is to set the economic signals correctly. That will drive the most efficient transition, the fastest and most effective allocation of capital.
Governments must price negative environmental externalities wherever possible. This includes pricing carbon dioxide emissions.
We have empirical evidence from the UK and the EU that a proper price for carbon dioxide drives investment and innovation.
Where pricing is too difficult or ineffective, governments must regulate. They must prohibit damaging behaviour, mandate minimum standards, embed sustainability in their own purchasing decisions and foster new industries.
Put simply, they must reward private actions which help the planet and penalise those which damage it.
And they must do this in all parts of the economy, including the financial sector. Increasingly central banks and regulators are setting the right green policies to influence financial flows.
Without such regulations, we cannot hope to see the investment and changes we need.
Government must also ease the frictional costs and disruption. And as part of doing so they must calibrate where the costs fall both between sectors in an economy and between generations.
How much of the frontloaded investment I described should be paid through taxation, how much through consumer prices and how much through borrowing?
Right now we see different responses to those choices playing out in the major economic blocs. In the US the Inflation Reduction Act will channel 360 billion dollars of tax credits in incentives for green investments.
In the European Union the Commission is introducing mandates to drive demand, while extending an already meaningful carbon price to more and more sections of the economy.
Those are fundamental political economy choices. As a former director general of the French Treasury, I vividly recall some minor difficulties in trying to impose the costs of a transition in France... But these choices need to be made.
And speaking now as the head of development bank, choices also need to be made about transfers from developed to developing countries.
We know that donor finance cannot solve the problem on its own; we understand the political context in which it must be raised.
But a problem that is disproportionately caused by one part of the world, and disproportionately affects another part, cannot be solved without adequate flows from the former to the latter.
The private sector must also respond and its role will be vital.
After all, the investment volumes needed far exceed the capacity of available public sources.
The innovation required is pervasive and spans the entire economy.
And at the heart of the sustainability crisis lies a market failure. Addressing that failure will inevitably drive changes in private behaviour and flows of private money.
Both Rishi Sunak speaking here last year and Jonathan Sacks speaking here in 2000 invoked Adam Smith – noting the power of the invisible hand to achieve efficiency and effectiveness that no central planner can.
Private actors must act on the signals and be responsible actors in this transformation. More concretely, they should:
Disclose – tell their customers, employees, and shareholders about the climate-related risks they run and the impacts they cause. This will empower their stakeholders to be informed, whether as consumers or investors.
Avoid – step away from unsustainable actions. Do not continue with practices or investments that are not consistent with a sustainable future. First, because that is the right thing to do and second because doing otherwise is bad business.
Step up – invest and promote sustainable business activities. And again, do so both because it is the right thing to do and because this is where the business and growth opportunities of the future lie.
Campaign – more than most, businesses have an interest in a well-functioning market; it is business that should be first to argue for a carbon price and for regulation of unsustainable practices.
Lastly, what should we do? We as private individuals, global citizens, we as taxpayers, consumers, voters and investors.
You may think, not a lot, because individuals alone are not able to make emission cuts that come close to limiting climate change to an acceptable level.
Yet, I believe that personal action is essential to raise the importance of climate change in society.
Ultimately the impact of humanity on the environment is the sum of all our individual actions. So, we each need to look at the different areas in our lives and see where we can make the right choices.
These choices can range from switching transport modes to changing dietary habits and opting for investments funds that focus on green investments.
The list goes on: reducing waste, choosing sustainable fashion, avoiding excessive travel and overconsumption.
As Jean-Paul Sartre said: “We are our choices.”
6: Multilateral development banks and the EBRD
I have talked so far about the overall picture; the lessons that apply to the global economy and all countries.
But of course, I am the President of the EBRD, and you might want to hear a little about what all this means for development, and for the developing countries where we work.
The EBRD’s regions of operations – spanning from Central Asia to Eastern Europe and the Mediterranean – face particular sustainability challenges.
Many are still living with the legacy of decades of a command economy that placed no value on environmental externalities.
These countries are marked by over-industrialisation, polluted landscapes and a heavy reliance on coal, oil and gas. As a consequence, the carbon intensity of the economies we work in is nearly double that of the EU.
The vulnerability to climate change of many of our countries becomes more apparent every year, whether it is wildfires in Turkiye, floods in the Balkans or water shortages in North Africa and Central Asia.
All these economies need to accelerate reductions of their carbon emissions and build resilience to climate change. They need to do this to play their part in addressing the climate crisis but also to ensure their global competitiveness, and protect their economies against adverse consequences of climate change.
In the last fifty years, access to carbon-intensive energy has been a source of competitive advantage.
In the next 20 years that proposition will reverse – carbon intensity will make an economy uncompetitive.
I noted earlier how large the investment needs are in developing countries, as a proportion of their GDP. That illustrates the importance for developing economies of attracting cross-border capital flows. However, we still see barriers preventing climate investments at scale:
One is the limited supply of investable projects. Insufficient political commitment to the green transition, onerous administrative and legal processes, and the lack of enabling regulations like carbon pricing do not allow potential returns on investments to materialise.
To return to my earlier theme, in the absence of proper market signals, capital has limited incentives to move to the right investments.
Secondly, there are project types that require upfront public financing. Yet, we often see that governments’ fiscal capacity to borrow is limited.
And finally, the uptake of investable projects is limited by uncertainties, risk perception and macro-economic vulnerabilities. There is a vast pool of capital in developed markets, some of it perhaps represented in this room. But regulation and investment guidelines make it highly risk adverse. That in turn leads to an unwillingness to grasp the many sustainable and remunerative investment opportunities in developing economies.
We often hear that, given the unfavourable context for climate investments in our regions, we - as MDBs - should be more innovative and “derisk” investments for others.
I agree with this; a critical role for MDBs is to catalyse the flow of private capital to investments it might not otherwise go to.
But we need to be rigorous in what we mean by “derisking”. If we simply take a risk ourselves and protect an investor from it, we have done nothing to change the underlying problem; we have done nothing to address the market failure that lies at its heart; we have only transferred the risk from the market to a public balance-sheet.
This brings me to the role of the MDBs as a group:
Above all our role is to catalyse systemic change by using our investments and our policy dialogue to promote regulatory and market reforms that make climate investments economically viable.
Central to that role is our commitment that all our activities should be aligned with the goals of the Paris Agreement. For the EBRD that commitment took effect from the beginning of this year and it is transformative.
It forces us to look at every activity and every investment through the sustainability lens: is this consistent with a transition to a low carbon, resilient future.
At times this constrains what we can do. But the much more fundamental effect is to enable us to work in the hard sectors, to engage with high emitting sectors and help our countries make the difficult changes, not just the obvious ones.
We also channel concessional finance from donors and climate funds to early movers in nascent markets to help overcome incremental costs and barriers.
And finally, we make crucial investments that kick-start new markets.
Overall, green investments made up half the EBRD’s business last year; 6.7 billion dollars of climate finance. And alongside our investment we mobilised a further 10 billion dollars of private capital.
Each dollar of EBRD finance mobilised 1.5 dollars of private finance – the highest amongst the MDBs.
Yet we, and other MDBs, recognise the need to do more.
Many of you will be familiar with the global debate about what else MDBs can, and should, be doing, to bridge the gap between what our countries of operation need in terms of sustainable investment and what they currently deliver.
I have set out to show that the best and most complete answer is a restructuring of all our economies, to ensure that the power of the market works to deliver the ends we desire.
MDBs have an important role to play in that effort but others, above all governments and their electorates, need to take the lead.
But we are very far from that ideal end state. Even in sophisticated economies, carbon is underpriced, while damaging subsidies and nature externalities persist. And we need to deliver change in the world as we find it, not as we wish it to be.
MDBs are of course used to working in imperfect environments and to delivering change in that context. How then will we respond to an ever more urgent crisis and the ever-growing needs of our countries?
The answers will vary for different contexts and different MDBs. But I will identify two overarching themes:
First, as I mentioned above, the mobilisation of private capital. The money and resources required are simply too large for any public balance sheet. We must persistently identify what holds back investors from sustainable investment and use our skills, our knowledge and our money to break down those barriers.
Second, the systemic reform of the economic systems we operate in, creating the enabling environment that channels not just finance but entrepreneurial, technical and managerial resources to address the sustainability challenges.
To do these things, the MDBs need support from the developed world.
We need donor and concessional finance that funds our reform efforts, unlocks bottlenecks and, especially, funds investments that do not have an obvious commercial return, such as in adaptation or biodiversity restoration.
MDBs can leverage those flows and maximise their impact; we cannot be the source of them.
We also need the developed world to create flows of funds along other routes.
Crucially, supply chains can be an important transmission mechanism for both climate ambition and funding.
Consumers who are willing to pay a green premium, whether for sustainably farmed coffee, or a car made of green steel, represent both pressure on developing countries to meet those demands, and a revenue source to pay for them.
Similarly, developed-world commitments to purchase high-quality carbon offsets can create vital revenue streams for sustainable investments in emerging markets.
And finally, developed-world investors and financiers have a vital role to play - firstly, by getting their own houses in order.
Then, still more importantly, much of the capital accumulated in the developed world must find its way to finance the developing world’s sustainable transition.
Our request to developed-world investors is that they should look hard at the risks inherent in these investments, and not simply look for a public or MDB balance sheet to absorb them.
Some of those risks are overstated, and we and other MDBs are committed to greater transparency about our track record in order to help investors get a better picture of this.
Other risks are real – in countries across the globe, regulations are imperfect and there is genuine commercial risk.
But there are also matching returns.
And a refusal to engage seriously with those challenges, and to work with countries and their development partners to address them, is both a failure to engage with the sustainability crisis and a missed commercial opportunity.
I noted earlier that two previous Mais lecturers – Rishi Sunak and Jonathan Sacks – had cited Adam Smith.
Both referred not just to “The Wealth of Nations” but also to Smith’s first major work, “The Theory of Moral Sentiments” – which cites the power of sympathy for others as a driver for human action.
We need a market, and financiers, that are efficient allocators of capital - but ones that also engage with the seriousness of the crisis unfolding around us, and the human cost it exacts.
Ladies and gentlemen, addressing climate change and restoring nature are the defining challenges of our time.
They are market failures of epic proportions that demand urgent and collective action.
Addressing them requires changing the rules of the game. The responsibility lies with all actors – governments, businesses, and individuals.
I stand here today as the President of the EBRD.
I am also a consumer, an investor, a voter, and a parent.
Each of these roles entails a responsibility and offers the opportunity to influence climate action.
We must seize these opportunities across all our roles because this is good business, because this is the right thing to do, and because we want a liveable planet for our children.