IGF opportunities provide competitive advantage for financial regulators

Central banks are currently increasing their efforts to transition to a more sustainable financial system as part of their work on inclusive green finance (IGF), said Sally Abdel Kader from the Central Bank of Egypt and chair of the Global Standards and Proportionality Working Group (GSPWG)

“While new risks are emerging, so are opportunities. Financial institutions which manage to understand this, and act early will be at a competitive advantage,” noted Kader in her opening remarks at a webinar on climate change, financial stability and IGF on 6 August 2020. Held by AFI’s GSP and IGF working groups, the technical webinar explored the linkages between the three areas, as well the opportunities for AFI members to contribute to relevant standard setting and international processes.

Economic and financial losses brought about by climate change pose a significant threat to financial stability, with severe socioeconomic impacts that have the potential to reverse years of gains in financial inclusion in developing countries.

“Climate change is a complex subject and it is important that all of its dimensions are highlighted,” said Walid Ali from the Central Bank of Egypt and chair of the Inclusive Green Finance Working Group (IGFWG).

Sharing their extensive experience, Bank Al-Maghrib explained that recognizing the significance of climate and environment related risks for both banking supervision and financial stability resulted in integrating green finance into its strategic plan. They have also conducted several exchanges with the Ministry of Environment and Ministry of Finance on the promotion of green finance.

“Bank Al-Maghrib has taken efforts to engage with targets at the national, regional and international level in enhancing our commitment to green finance,” said Najwa Mouhaouri, Head of Green Finance Unit at Bank Al-Maghrib.

According to Mouhaouri, Morocco’s National Roadmap for Aligning the Financial Sector on Sustainable Development centers around five main areas which are the governance of environmental and social risks, products and financial instruments, promotion of financial inclusion as a driver for sustainable development, capacity building in the field of sustainable finance, and transparency and market discipline.

In accordance with the five-point roadmap, the banking sector players in Morocco has undertaken several measures to scale-up green finance.

“The most important measures include voluntary adoption of excluding policies, development of climate risk impact screening by major banks, green bond issuance, the development of green finance products, as well as progress in financial inclusion with the adoption of gender sensitive policies and extension of financing solutions for SMEs and low-income households,” said Mouhaouri.

While Bank Al-Maghrib and many other AFI member institution have been front runners in integrating IGF to build financial stability and resilience against climate change, there remains no set standards or international processes to measure progress in this area which in turn has created an investment gap for green financing worldwide. This concern is shared not only among AFI member institutions but also economists and research bodies around the world including Bank for International Settlements (BIS), the Financial Stability Board (FSB), and the SOAS Centre for Sustainable Finance who shared their thoughts and findings in the webinar.

Torsten Ehlers, Senior Economist at the Bank for International Settlements said that  climate scenarios and its economic and financial variables need to be translated, and while this is not easy to do, there is a clear momentum moving in this direction.

“We need to think about green standards and incentives more seriously and in an outcome-based way,” said Ehlers, emphasizing that central banks and supervisors should not underestimate the role that green finance can play.

“Refinance instruments are a very powerful tool to greening the economy, and central banks and supervisors can define what these refinance instruments are and what they do,” said Ehlers.

“The financial crisis of 2008 taught us that losses faced by financial institutions can cause them to restrict their lending. This can also happen as a result of climate related risks,” said Joseph Noss, Member of Secretariat of the Financial Stability Board (FSB).

Noss explains that regions which are already in potentially dire economic states as a result of the climate crisis and extreme weather events could face this “double whammy” in credit.

Professor Ulrich Volz, Founding Director of the SOAS Centre for Sustainable Finance stressed the need for the financial sector to help scale up climate resilient investments.

“In many developing countries, the agricultural sector plays a very important role both in terms of output and in terms of employment. The agricultural sector is one of the sectors most exposed to climate change,” says Professor Volz who also pointed out that developing countries tend to have less climate resilient infrastructure and at the same time are in geographical zones that are most exposed to these risks.

By adopting the Sharm El Sheikh Accord in 2017, Nadi Action Agenda in 2018, and the 4P Framework for Inclusive Green Finance, the AFI membership has advanced national commitments to mitigate the adverse impacts of climate change and build community resilience through financial inclusion and inclusive green finance. A total of 46 participants from 24 AFI member institutions attended the technical webinar.

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. ​