Klaus PROCHASKA introduced the session with a survey of the audience. He asked the audience how important the role of financial regulators was in strengthening resilience to climate change. 50% of the attendees answered that financial regulators have a very important role to play while 33% indicated that they have a small role to play. This showed that the majority of the audience believes that financial regulators can strengthen resilience to climate change.
Earlier this year, Prochaska attended a meeting of the Network for Greening the Financial System (NGFS), where central banks from different countries launched a platform for mobilising green finance and stated that combating climate change was within their mandates. The inclusion of climate change in their mandates is illustrative for the mainstreaming of green financing which has happened in a relatively short time. Most of the green finance initiatives come from developed countries and have a focus on climate mitigation. However, developing countries are also taking action and as many people in those countries are at the bottom of the pyramid and sensitive to climate change impact, these countries often focus much more on climate adaptation.
Johanna NYMAN shared some of the findings by the Alliance for Financial Inclusion. Climate change causes conflicts and displacement of people. It destroys assets and livelihoods and increases health risks, such as infectious diseases. Some of the climate change effects have fast onsets, such as natural disasters, and others have slow onsets, such as rising sea levels and salinisation. Nyman confirmed Prochaska’s observation that strengthening resilience has gained the attention of regulators and that there is currently momentum and willingness to cooperate with other organisations to address this challenge.
Nyman affirmed that policies and regulations for inclusive green finance aim to increase resilience and promote climate mitigation through financial inclusion. Since 2015, when AFI members recognised the importance of financial inclusion for building resilience, AFI built a policy framework for inclusive green finance on the intersection between financial inclusion and green finance. This is a constantly evolving policy area, as scientists and peers within the learning network of AFI are frequently providing new insights. The policy framework consists of 4 P’s: Provision, Promotion, Protection and Prevention. Provision policies ensure financial services to qualified beneficiaries by setting lending quotas and also facilitate green lending and recovery lending. Promotion policies foster dialogue with the private sector, create different incentives and enhance cooperation between regulators in developed countries and developing countries. Protection policies aim to socialise losses through services such as climate-risk insurance, credit guarantees and mobile money for government-to-person (G2P) payments. Prevention policies comprise Environmental and Social Risk Management guidelines.
Ghita TAHIRI JOUTEI provided the perspective of the central bank in Morocco. She explained that different countries are affected differently by climate change and also have different competences to deal with climate change. In the case of Morocco, its long coastline makes the country vulnerable to rising sea levels. Its agricultural sector, employing many people, faces many drought cycles and finally, it used to import 95% of its energy. As a result, combating climate change has become part of the DNA of Morocco. Already in 2008, the country launched the Green Morocco plan to modernise its agricultural sector and promote climate adaptation. Large commitments were made to build clean and sustainable energy sources, such as the world’s biggest solar plant (Nore). Morocco needs at least USD 85 billion up to 2030, which is 70% of the country’s GDP, to realise its plans. It is clear that the government’s financial resources and foreign aid are not enough to finance all planned investments. For this reason, a committee led by the central bank of Morocco established a roadmap to include the banking sector in the financing of the planned investments.
The roadmap consists of 5 pillars. The first pillar is the integration of climate change in financial strategies. The second pillar is setting up financial instruments. The third pillar is capacity building for improvement of understanding of climate risks. The fourth pillar is communication and transparency. The fifth pillar is financial inclusion, which actually supports the achievement of many Sustainable Development Goals. The central bank is still working on regulation to support the roadmap and will launch a nation-wide assessment for impacts of climate change.
Prochaska asked Tahiri Joutei how the central bank aims to build capacity in the financial sector for climate finance. She responded that capacity building through sharing knowledge and communication between players in the financial sector is crucial, because climate risks are complex. Even though we know that climate change is happening, we do not know how fast related developments will take place and what impact it will have on the finance sector. On the level of central banks, the Network for Greening the Financial System (NGFS) provides an international platform for knowledge exchange. Prochaska observed that besides NGFS and AFI, there seem to be several other initiatives for knowledge exchange about green inclusive finance. He asked if there are not too many of them. Nyman responded that there is a lot of space for collaboration on this topic. In terms of potential overlap between NGFS and AFI, she explained that NGFS focuses on green finance at macro-level, whereas AFI focuses on financial inclusion at micro-level. The two platforms are complementary. Tahiri Joutei later added that capacity building is not only needed by regulators and economic operators. There is also a need to build capacity on the demand side of the financial market for entrepreneurs and development programmes.
Tahiri Joutei reiterated that different countries have different priorities when it comes to green finance. In the case of Morocco, adaptation is more important than it is for other countries, while mitigation is less relevant, as Africa is responsible for only 4% of global greenhouse gas emissions. Nyman confirmed the importance of climate change adaptation for many countries and predicted a much stronger focus on adaptation in the coming years as the effects of climate change are becoming more apparent. She added that adaptation must be tailored to local circumstances.
A person from the audience asked if there is a need for taxonomies on global level or if every country should have its own taxonomies. Tahiri Joutei explained that taxonomies are criteria to qualify projects as ‘green’ before finance is provided. Without taxonomies, applicants for green finance may be green washing their projects to obtain the financing. Green washing can lead to reputational damage for financial institutions when the projects appear not to be green and could damage relationships with donors and investors. Tahiri Joutei argued that country should have its own taxonomies that are adapted to their local contexts. Nyman confirmed that it would be too complicated to make taxonomies at global level. Besides differences in local realities, a complicating factor is that taxonomies cover a wide variety of sustainability issues going beyond adaptation and mitigation.
A final question concerned the monitoring by central banks of performance by financial institutions in the area of green financing. Tahiri Joutei answered that central banks and financial institutions are still in the process of developing strategies and policies. After these are put in place, they will need to identify suitable Key Performance Indicators to measure performance.