After Paris: How can financial regulators play a role in combating climate change?

By Photo taken by Government of Kiribati employee in the course of their work (Government of Kiribati) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons
Coastal erosion is devastating communities in the pacific
2016-11-15
By Alfred Hannig

After Paris: How can financial regulators play a role in combating climate change?  

Climate change is a global threat that has a negative impact on efforts to sustainably eradicate poverty. Poor countries are particularly vulnerable to this threat as their assets and livelihoods can easily be destroyed as a result of heat waves, floods, reduced rainfalls or droughts. The soaring food prices which often follow extreme weather events make it difficult and in some cases impossible, for poor communities to fully recover.

It is estimated that over 230 million people are currently affected by natural disasters caused by our changing climate. We were reminded of this at the recent AFI Global Policy Forum (GPF) in Fiji where the frequency and strength of tropical storms, like 2016’s Typhoon Winston, presents a significant challenge. Across the region, pacific island economies are losing 2 percent of their GDP annually as a result of natural disasters caused by climate change. And that figure is only expected to grow.

The financial sector has been increasingly called on to respond to the risks of climate change and to support recovery efforts in the wake of climate disasters. But how can the financial sector allocate capital to mitigate these risks, and what can financial policymakers and regulators do to foster environmental-friendly investments?

In a 2015 speech, Mark Carney, Governor of the Bank of England and Chair of the Financial Stability Board, outlined the risks to financial stability from unchecked climate change. He also saw an opportunity to tackle multiple economic development challenges provided by investment in low-carbon technology and adoption of comprehensive climate policy frameworks. Mr. Carney is not alone in this view. The importance of developing green finance has been a long-standing issue of concern for AFI policymakers, many of whom live in the country’s most likely to be impacted by climate change. At the 2015 GPF in Maputo Mr. Allah Malik Kazemi of Bangladesh Bank stated that “If you want longer term stability you need your finance and monetary policy to support long-term goals such as social stability, social equality, and environmental stability”.

It is, therefore no surprise that many AFI members are prominent supporters of the Paris Agreement which came into force on 4th November 2016.  The agreement committed its signatories to take actions to limit the global temperature rise to well below 2 degrees Celsius and to strive for 1.5 degrees Celsius. 85 of the 175 signatories are countries with AFI member institutions.

This remarkable progress should lead us to ask whether AFI members and the global community should make “green financial inclusion” a priority and seek ways to align our strategies to limit the acceleration, and mitigate the impacts, of global climate change. In some areas the linkages are already clearly apparent. For example, financial inclusion will play an important role in helping the most vulnerable communities build resilience and mitigate losses that result from climate change. The complementarity of the agendas of green finance and financial inclusion are also emphasized by the key role envisaged for financial inclusion as an enabler for environmental objectives in the Sustainable Development Goals (SDGs).

As a matter of fact, the task of aligning environmental policies with financial inclusion has already been taken on proactively by several AFI members. Countries such as Bangladesh, Brazil, China, Indonesia and Kenya have made substantial efforts in promoting green financial inclusion and are beginning to provide insightful innovative approaches in advancing sustainable finance through smart policies and regulations. As noted by Deputy Governor Sullivan of the Central Bank of Seychelles at the GPF, “climate adaptation for us is not a matter of choice but a matter of survival”. The Central Bank of Seychelles has played a key role in scaling up and finding innovative solutions such as subsidizing insurance premiums for farmers and fishermen to reduce their vulnerabilities to climate change and incentivizing small businesses to purchase energy efficient equipment.

The importance of green finance strategies was further recognized with the launch of the G20 Green Finance Study Group (GFSG) under China’s Presidency of the G20 this year, co-chaired by the Bank of England and the People’s Bank of China. The study's recommendations included mobilizing G20 support for the expansion of knowledge-based capacity building platforms to cover more countries and catalyze peer learning in this field. And it is encouraging to see that the incoming G20 Presidency of Germany has already indicated a commitment to prioritize climate change mitigation for SMEs as a cross-cutting theme in 2017. This will certainly be a topic to be examined by the AFI SME Finance Working Group meeting in Seychelles next March.

Above all what is clear is that the global agendas for promoting financial inclusion and tackling climate change are beginning to converge. We need good, climate-informed policymaking, regulation and supervision to reduce the impacts of climate change on the poor, and financial regulators and policymakers in the AFI network stand ready to play their part.  In 2017, AFI will proactively invest in the creation of evidence-based and practical financial inclusion policies and regulations which are conducive for sustainable development, and which can be facilitated through our Network’s effective peer learning and knowledge exchange platforms.