BACKGROUND
The climate investment and SDG financing gap in Asia is enormous. Based on ADB estimates, $1.7 trillion a year is needed for climate-adjusted infrastructure investments in developing Asian economies.
MDBs have risen to the challenge. ADB in particular is committed to ensuring that at least 75% of its operations (on a 3-year rolling average) will support climate change mitigation and/or adaptation by 2030 and climate finance from ADB’s own resources to reach its ambition of $100 billion cumulatively by 2030.
To achieve the needed mobilization of public and private financial capital at scale, however, a multi-pronged approach is necessary. A key plank is the greening of financial systems, and what financial regulators and supervisors should and can do to take the necessary measures to foster a greener financial system.
A well-functioning and vibrant financial system that is resilient to climate-related risks and able and willing to play its part in scaling up climate finance is a pre-condition to achieving low-carbon and climate-resilient development in developing countries in this region, in line with the Paris Agreement.
Four themes are key in this regard and will be covered in the ADB conference. These are (in the order they will be covered during the two-day event):
BACKGROUND
The climate investment and SDG financing gap in Asia is enormous. Based on ADB estimates, $1.7 trillion a year is needed for climate-adjusted infrastructure investments in developing Asian economies.
MDBs have risen to the challenge. ADB in particular is committed to ensuring that at least 75% of its operations (on a 3-year rolling average) will support climate change mitigation and/or adaptation by 2030 and climate finance from ADB’s own resources to reach its ambition of $100 billion cumulatively by 2030.
To achieve the needed mobilization of public and private financial capital at scale, however, a multi-pronged approach is necessary. A key plank is the greening of financial systems, and what financial regulators and supervisors should and can do to take the necessary measures to foster a greener financial system.
A well-functioning and vibrant financial system that is resilient to climate-related risks and able and willing to play its part in scaling up climate finance is a pre-condition to achieving low-carbon and climate-resilient development in developing countries in this region, in line with the Paris Agreement.
Four themes are key in this regard and will be covered in the ADB conference. These are (in the order they will be covered during the two-day event):
What role could play dedicated public green and climate banks —the so-called Green Investment Banks (GIBs) in this process;
How to manage climate risks in the financial system;
How to scale up climate finance and the transition to a low-carbon and resilient economy for its own good and also as a mitigant of climate risk; and
How MDBs can support all these efforts, and more specifically support financial supervisors and regulators in the management of climate risks, catalyse private climate finance and unleash their support for the creation of GIBs or help national financial institutions lead scaling up green investment in the region.
The case for Green Investment Banks (special opening session)
Commercial financial institutions are limited in providing affordable finance especially for activities with uncertain returns and positive externalities. As such, recognition is growing that public financial institutions need to play a greater role in scaling up investment in climate action and the Sustainable Development Goals (SDGs). Green investment banks (GIBs) are public or nonprofit financial institutions mandated and sometimes purpose-built to develop, facilitate, and scale investment in greenhouse-gas-reducing (and potentially other green) projects.
Newly established GIBs can help scale up green investment in Asia and Pacific developing countries. GIBs can be powerful and cost-effective vehicles to overcome investment barriers and leverage the impact of available public and private resources. They can catalyze private operations and capital, scale up climate financing, and localize the SDGs and green operations. GIBs can leverage public funds while maximizing total investment by partnering with private resources. Importantly, they can showcase the viability of innovative green investments. GIBs can help transform the financial sector by mainstreaming environmental, social, and governance principles and establishing best practice. They can act as local partners and investors in low-carbon, climate-resilient projects, driving project developers and investors to adopt impact metrics in tracking progress toward national climate and sustainability targets. GIBs are in a good position to assist policymakers in creating better enabling environments for low-carbon, climate-resilient projects and the formulation and achievement of their nationally determined contributions.
There are two broad possible options for the creation of GIBs: (i) increasing the capital of existing (national) development banks and broadening their mandate to include an explicit goal of supporting low-carbon and resilient development; (ii) creating new institutions, exploring capitalization sourced from governments, MDBs, or global funds.
Manage climate-related financial risks in the financial system
Climate risks are financial risks and thus fall squarely under supervisors’ mandates. It is then expected from all supervisors to take the supervisory, regulatory, and disclosure-related measures to assess, measure, and mitigate climate financial risks for the financial sector. For that, the Basel Committee on Banking Supervision (BCBS) recommends taking a holistic approach across the three pillars of prudential regulation for banks and insurance companies (regulatory capital requirements, risk management and supervisory review, and market discipline and disclosure).
International supervisory bodies have issued several recommendations for supervisors to address climate risks in the financial sector, and these go in four directions:
The case for Green Investment Banks (special opening session)
Commercial financial institutions are limited in providing affordable finance especially for activities with uncertain returns and positive externalities. As such, recognition is growing that public financial institutions need to play a greater role in scaling up investment in climate action and the Sustainable Development Goals (SDGs). Green investment banks (GIBs) are public or nonprofit financial institutions mandated and sometimes purpose-built to develop, facilitate, and scale investment in greenhouse-gas-reducing (and potentially other green) projects.
Manage climate-related financial risks in the financial system
Climate risks are financial risks and thus fall squarely under supervisors’ mandates. It is then expected from all supervisors to take the supervisory, regulatory, and disclosure-related measures to assess, measure, and mitigate climate financial risks for the financial sector. For that, the Basel Committee on Banking Supervision (BCBS) recommends taking a holistic approach across the three pillars of prudential regulation for banks and insurance companies (regulatory capital requirements, risk management and supervisory review, and market discipline and disclosure).
International supervisory bodies have issued several recommendations for supervisors to address climate risks in the financial sector, and these go in four directions:
1. Assess and identify climate risks for domestic financial institutions as well as for the financial system.
Assessing climate risks for financial institutions and the financial system is a complex task but, as for any other source of risk, is required from supervisors both by the BCBS and the International Association of Insurance Supervisors (IAIS). Two dimensions are important in this process: (i) determining how climate risks transmit to the economies and financial sectors and identifying how these risks are material for financial institutions, and (ii) identifying the exposures of financial institutions and assessing the potential losses. Jurisdictions are at different stages of this process.
2. Develop and implement climate risk management expectations for supervised financial institutions.
Financial institutions’ ability to manage climate financial risk is paramount to their resilience to those risks. Yet, initial surveys of risk management practices highlight that financial institutions are not prepared to manage climate risks.
Against this background, international supervisors’ bodies recommend setting supervisory expectations for financial institutions. The recommended expectations cover key aspects of governance, business strategy, risk management, scenario analysis and stress testing, and disclosure in financial institutions when it comes to climate risks. International supervisors’ bodies also recommend engaging supervised entities in the implementation of the supervisory expectations and, when needed, taking necessary mitigation measures.
3. Support and implement climate risk disclosure framework for firms.
Public disclosure by financial institutions of information related to their climate and environmental risks greatly contributes to market efficiency by ensuring that market participants have adequate insight into the risk exposures, risk assessment processes, and capital adequacy of financial institutions. From that perspective, several supervisors expect financial institutions to disclose information and metrics on the climate and environmental risks they are exposed to, their potential impact on the safety and soundness of the institution, and how they manage those risks. Against this background, a crucial action that supervisors can take is giving guidelines to companies around the world on how to disclose climate financial risks and opportunities, which will allow financial markets to price them correctly (see below). It will also help companies that face a rocky transition to a low-carbon economy, with sudden value shifts or cost surges, should they have to adjust rapidly to the new landscape.
A key hurdle for the disclosure of meaningful climate information by firms is the proliferation of disclosure frameworks and guidance which adopt different definitions for materiality and address the needs of different stakeholders.
4. Implement climate risk-mitigating actions where appropriate.
When financial institutions do not adequately manage climate risk, then supervisors must take mitigating measures. So far, supervisors have not taken such steps. Several options are being assessed to mitigate climate risks in financial institutions and in the financial system. At the micro-prudential level, given the impact of climate change on traditional risk categories, a case can be made to reflect climate risk in Pillar 1 capital requirements. Climate risk mitigation measures can also be part of macroprudential policies. With some adaptation, the current macroprudential framework provides instruments to address the systemic risks associated with climate risks. Two instruments stand out in the macroprudential toolbox available to central banks for addressing climate risks: systemic risk buffers and concentration limits.
Scaling up climate finance
In addition to the actions described above, supervisors acknowledge that an early and orderly transition to a low-carbon and climate-resilient economy is the option that lowers climate risk the most for the financial sector. Supervisors thus have an interest in supporting such a transition. They can do this in several ways.
One of their key contributions in this direction is to implement a regulatory and supervisory environment that supports financial institutions in providing the funding that is necessary for this transition. One option different circles are looking at is to reduce the capital requirements for loans that fund projects aligned with the transition to a net zero economy—i.e., the so-called “green supporting factor”. The Green Preferential Capital Requirement Programme” implemented since early 2020 by the Magyar Nemzeti Bank (MNB)—the Hungarian central bank is an interesting example of this approach.
Ensuring that climate risks are well managed and considered by financial institutions and in the supervisory framework is also a crucial element (see above).
Supervisors can take additional measures to mobilize private capital toward the transition to a low-carbon and climate-resilient economy, in particular by supporting disclosure frameworks and sustainability reporting standards.
In this regard, the NGFS highlights four developments important to increase the mobilization of private finance in the transition. First, supervisors should support global disclosure frameworks and efforts to establish a comprehensive corporate disclosure standard, as well as the development of a global set of sustainability reporting standards. Second, multinational financial institutions should adopt and promote global sustainability standards and disclosure frameworks in the different jurisdictions they operate in. Third, credit and environment, social, and governance rating providers must enhance transparency on how they build their assessments. Fourth, the NGFS emphasizes a need for national and MDBs to strengthen their support to mobilize capital towards green investment projects, particularly in developing and emerging markets.
Role of MDBs and specifically of ADB
Owing to their mandate and toolbox of instruments, MDBs are uniquely positioned to support financial supervisors and regulators and policy-makers in designing and implementing actions that will facilitate the above developments. In particular, ADB’s effort is essential to support DMCs transitioning to a net zero economy. The conference will also discuss how to support institutional development, policy frameworks, and feasible modalities for ambitious climate action in DMCs in the region.
OBJECTIVES OF THE CONFERENCE
The hybrid conference aims to:
Scaling up climate finance
In addition to the actions described above, supervisors acknowledge that an early and orderly transition to a low-carbon and climate-resilient economy is the option that lowers climate risk the most for the financial sector. Supervisors thus have an interest in supporting such a transition. They can do this in several ways.
One of their key contributions in this direction is to implement a regulatory and supervisory environment that supports financial institutions in providing the funding that is necessary for this transition. One option different circles are looking at is to reduce the capital requirements for loans that fund projects aligned with the transition to a net zero economy—i.e., the so-called “green supporting factor”. The Green Preferential Capital Requirement Programme” implemented since early 2020 by the Magyar Nemzeti Bank (MNB)—the Hungarian central bank is an interesting example of this approach.
Ensuring that climate risks are well managed and considered by financial institutions and in the supervisory framework is also a crucial element (see above).
Supervisors can take additional measures to mobilize private capital toward the transition to a low-carbon and climate-resilient economy, in particular by supporting disclosure frameworks and sustainability reporting standards.
In this regard, the NGFS highlights four developments important to increase the mobilization of private finance in the transition. First, supervisors should support global disclosure frameworks and efforts to establish a comprehensive corporate disclosure standard, as well as the development of a global set of sustainability reporting standards. Second, multinational financial institutions should adopt and promote global sustainability standards and disclosure frameworks in the different jurisdictions they operate in. Third, credit and environment, social, and governance rating providers must enhance transparency on how they build their assessments. Fourth, the NGFS emphasizes a need for national and MDBs to strengthen their support to mobilize capital towards green investment projects, particularly in developing and emerging markets.
Role of MDBs and specifically of ADB
Owing to their mandate and toolbox of instruments, MDBs are uniquely positioned to support financial supervisors and regulators and policy-makers in designing and implementing actions that will facilitate the above developments. In particular, ADB’s effort is essential to support DMCs transitioning to a net zero economy. The conference will also discuss how to support institutional development, policy frameworks, and feasible modalities for ambitious climate action in DMCs in the region.
OBJECTIVES OF THE CONFERENCE
The hybrid conference aims to:
Provide understanding of Green Investment Banks, their benefits, and challenges, and identify the key success and sustainability factors of green banks from green bank cases.
Present the international experience on assessing, monitoring, and addressing climate-related risks in the finance sector.
Discuss the way forward for financial supervisors and regulators in Asia, and how they can support green financial markets.
Discuss the role of multilateral development banks in the transition to more resilient and greener financial systems, and to catalyze private sector finance and establish GIBs.