5 June 2020

Central banks must unite over climate change & inclusive green finance

By Tarek Hassan Amer, Governor, Central Bank of Egypt & Board Chair, AFI & Dr. Alfred Hannig, Executive Director, AFI

The planet is reeling from unprecedented climate change destruction. High temperatures and lengthy droughts are being blamed for the bush fires that have devastated large tracts of Australia and exacerbated deadly floods in the Indonesian capital of Jakarta, producing urgent reminders that the time for climate action is now.

Financial regulators are offering potentially revolutionary solutions that may not only help mitigate climate change impacts but also promote economic growth and stability. Central banks and other financial institutions in developing and emerging economies are increasingly adopting policies that expand access to green technologies while also including the poor in the transition to a low-carbon economy.

From climate risk insurance to green lending, these influential institutions can play a pivotal role in shaping how their countries respond to and recover from negative climate emergency impacts by driving climate action that reaches communities frequently left behind. This is particularly notable where weak infrastructure and limited resources provide central banks with a celebrated status that offers them the unique position of developing radical policy change.

Among those leading the change  are central banks in Armenia, Bangladesh, Fiji, Philippines, Morocco  and Vanuatu. All are members of the Alliance for Financial Inclusion (AFI) and have been developing monetary mechanisms and policies that preserve financial stability in the face of adverse climate change effects. At the same time, these policies stimulate long-run sustainable economic development and growth within their jurisdictions.

Bangko Sentral ng Pilipinas, the central bank of the Philippines, has made a business case for green lending, viewing  green finance as public good and providing capacity building on green lending for commercial banks. Elsewhere in Asia, Bangladesh Bank has used refinancing facilities to promote low-carbon technologies, providing subsidized credit for solar energy, biogas and waste treatment projects.

Meanwhile, the Central Bank of Armenia has been a part of establishing a program that subsidizes crop insurance for smallholder farmers who would otherwise struggle with the financial losses that accompany sudden and extreme weather shocks.

In the Pacific, the government of Fiji used mobile payments to disburse assistance after tropical cyclone Winston, while the Reserve Bank of Vanuatu made temporary incentives for commercial banks to loan to low-income people following Cyclone Pam.

These innovative approaches fall under AFI’s Inclusive Green Finance workstream, an emerging policy framework that embodies effective financial inclusion policies, regulations and national strategies to mitigate or build resilience to the negative impacts of climate change.

Pioneered by network members, these policies act as markers for regulatory counterparts across AFI’s member base in 89 developing and emerging countries.

For developing and emerging economies, the potential to learn from, share the experiences and adapt those of others – a core principle of the AFI network – is more relevant today than ever as they increasingly experience the destructive force of climate change.

But for these innovative policies to succeed, central banks must first acknowledge that climate change falls within their primary remit as a threat to economic and financial stability. AFI’s 100-member-strong network has accepted this responsibility and come together by endorsing the Sharm El Sheikh Accord in 2017, thereby committing themselves to finding long-term, sustainable solutions that have positive outcomes for the environment and build the resilience of those most vulnerable to climate change.

It is not surprising that within the ranks of central banks there are also institutions in some parts of the world that consider combatting climate change of secondary importance to serving their more traditional mandate of preserving price stability or high levels of employment. As such, it is clearly understood that climate change presents the ultimate challenge between how we balance immediate growth needs with the pressures of long-term sustainability goals.

The enormity of the issue, however, calls for a review of the conventional approach. For many, climate change will be a death sentence. Those countries most endangered by its effects also experience economic, environmental, and social consequences. Threats range from food insecurity to disruption in energy and water supply to adverse health impacts. While such risks have the potential to push an additional 100 million people into poverty by 2030, for many that stark reality is already here.

Nearly a year after cyclones Idai and Kenneth devastated large swathes of Mozambique, Malawi and Zimbabwe, aid shortages have left hundreds of thousands of people struggling to rebuild their livelihoods. In coastal megacities across South East Asia, climate change is pushing air pollution to dangerous levels, while rising sea levels threaten clean water supplies. In the Middle East, predictions of unusually long periods of extreme heat will likely put even more pressure on agriculture and already-scarce water supplies.

Climate change can be pervasive but not equal, hitting hardest those most vulnerable. To tackle it effectively, central banks and financial regulators must do their part, act together now and develop unified policy approaches with real impact on the ground before it is too late.

AFI’s Inclusive Green Finance (IGF) workstream is part of the International Climate Initiative (IKI)  supported by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU), based on a decision of the German Bundestag.

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