22 April 2018: During the months of March and April 2018, finance experts addressed global financial and economic risks, including from climate change, and signaled the need for preparatory action. Several state and non-state actors undertook initiatives to promote sustainable finance.

EU Calls for Disaster Risk-proofed Investments, Outlines Action Plan on Sustainable Finance

Europe’s losses from weather-related events have almost doubled from an average of €7.5 billion in 1980-1989 to an average of €13.3 billion in 2010-2016. Examining these costs, policy and decision makers met in Brussels, Belgium, on 6 March to discuss preparation for and resilience to disasters at an event organized by the UN Office for Disaster Risk Reduction (UNISDR) and the Italian Banking Insurance and Finance Federation.

The European Investment Bank (EIB) highlighted disaster risk reduction (DRR) as important finance issue and drew attention to the global plan for reducing disaster losses, the Sendai Framework for DRR and the SDGs. EU Directorate-General for Financial Stability, Financial Services and Capital Markets outlined work undertaken to ensure financial stability of the financial sector. [UNISDR Press Release]

Following the event, on 8 March, the European Commission presented an action plan on sustainable finance as part of the Capital Markets Union’s efforts to connect finance with the specific needs of the European economy. The action plan also helps implement the Paris Agreement on climate change and the EU’s agenda for sustainable development. [European Commission Action Plan: Financing Sustainable Growth] [EU Press Release]

Investors Partner with UN to Boost Climate Transparency

On 15 March, nine leading pension funds, insurers and asset management firms formed a leadership group to work with UN Environment Programme Finance Initiative (UNEP FI) on guidelines towards a first set of climate-related investor disclosures in alignment with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

Established by the G20’s Financial Stability Board in response to the need for a framework to improve the ability to assess and price climate-related risk and opportunities, the TCFD provided recommendations for voluntary disclosures of climate-related financial risks. It called for: disclosure of governance and risk management arrangements; establishment of consistent and comparable metrics applicable across all sectors, as well as specific metrics for the most carbon-intensive sectors; and use of scenario analysis so as to consider the potential impact of risks and opportunities associated with the transition to a low-carbon economy.

The group piloting the recommendations will coordinate with other networks, including: the Principles for Responsible Investment and the Institutional Investors Group on Climate Change whose Investor Practices Programme is structured around the TCFD recommendations. It will also support and inform the global Investor Agenda through which, in 2018, the global investor community will showcase its ambition and determination to act on climate change. [UNEP Press Release]

Bank of England Warns about Financial Stability Risks from Disorderly Transition to a Low-Carbon Economy

On 6 April, central bankers and financial supervisors that together account for over a third of both global financial assets and carbon emissions met during the first International Climate Risk Conference for Supervisors held in Amsterdam, the Netherlands, organized by DNB, the Banque de France/ACPR and the Bank of England, under the auspices of the Central Banks and Supervisor Network for Greening the Financial System (NGFS).

In his speech, Mark Carney, Governor of the Bank of England, highlighted trends in addressing financial stability risks from climate change, including physical, liability and transition risks. Suggesting that a sudden and disorderly adjustment to a low-carbon economy could materially damage financial stability, he stressed the need to prepare for a destabilization of markets, which he described as the “climate Minsky moment.”

The Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries agreed a US$13 billion paid-in capital increase for the IBRD and IFC.

Hyman Minsky hypothesized financial behavior that matched the housing bubble of 2001-2007, proposing different stages that would inevitably lead to a collapse of the financial structure, throwing the economy in general into disarray. This is known as the “Minsky moment.”

Carney noted that government climate policy actions will need to tighten further if the Paris commitments are to be achieved, and reported that the private sector is beginning to allocate capital accordingly. He stressed the key role of information, and supported the work of the TCFD.

On the role of insurers and banks, he called for improvements in insurers’ risk modelling, and stressed the need to consider the longer-term impacts on their business models. Carney noted that inflation-adjusted insurance losses have increased from an annual average of around US$10 billion in the 1980s, to around US$55 billion over the past decade. He encouraged banks to treat climate-related risks like other financial risks, and to identify and measure climate-related risks more comprehensively. [DNB Conference Announcement] [Speech by Governor of Bank of England Mark Carney]

Leading Financial Centers Gather to Boost Sustainable Finance

The UN Environment Programme (UNEP, or UN Environment) convened a meeting of the International Network of Financial Centres for Sustainability seeking to accelerate green and sustainable finance to “make the transition to a low-carbon, green economy cheaper, faster and smoother.” The inaugural meeting took place from 12-13 April in Milan, Italy, bringing together its 18 members from leading financial centers. Cooperation among the members on capital flows, including activities in the banking, capital markets, insurance and investment sectors, as well as on strategies and regulations, is expected to help achieve the SDGs by enabling transitions to low-carbon and green economies.

Besides promoting market expansion, the Network aims to raise awareness, strengthen market practice, share experiences on financial innovation, build capacity and engage in dialogue with policymakers. [UNEP Press Release] [SDG Knowledge Hub Story on International Network of Financial Centres for Sustainability]

IMF, World Bank Spring Meetings Highlight Climate Risks, Intellectual Property Protection

Marked by expressed concerns about record-high global debt levels, a potential rise in global trade disputes and consequent impacts on the global economy and the multilateral system, a series of meetings of the International Monetary Fund (IMF) and the World Bank took place from 16-22 April in Washington DC, US. The meetings addressed a range of issues relating to financial stability, development, technology diffusion, economic diversification and various threats to the global economy, including climate change impacts.

The IMF Executive Board’s consideration of a series of reports, including ‘IMF Fiscal Monitor: Capitalizing on Good Times,’ ‘Global Financial Stability Report: A Bumpy Road Ahead,’ and ‘World Economic Outlook: Cyclical Upswing, Structural Change,’ addressed global debt, geopolitical tensions and climate events threatening global growth prospects. The Board called for multilateral cooperation to address shared challenges including refugees, security threats, cyber risks and climate change.

The Global Financial Stability Report outlines common priorities for: promoting economic diversification and employment; increasing access to credit; and improving the quality of infrastructure. The report recognizes that commodity exporters and those vulnerable to climate-related events face additional complex challenges of diversifying their economies.

The World Economic Outlook (WEO) stresses the need to improve convergence prospects for low-income developing countries and their capacity to cope with climate shocks, including through policies that strengthen their fiscal positions. The report emphasizes cross-border cooperation as vital for mitigating greenhouse gas (GHG) emissions and for containing the associated detrimental consequences of rising global average temperatures and devastating climate events.

On international technology diffusion, the WEO notes that foreign aid combined with technical cooperation has had a substantial and significant long-term effect on the renewable energy capacity of recipients, whereas foreign aid without technical cooperation brought immediate but short-term effects. Noting that globalization has intensified the global diffusion of technology, the report supports intellectual property rights protection to ensure that new knowledge supports global growth.

Speaking at a press conference, IMF Director Christine Lagarde underscored the importance of ensuring that the issues of trade protectionism and adequate protection of intellectual property are resolved “before they escalate to a point where it would hamper growth stability.” [IMF Press Release]

International Monetary and Financial Committee Promotes Sustainable Growth and Investment

During its 37th meeting, held from 20-21 April, the International Monetary and Financial Committee, the advisory body to the IMF Board of Governors, reflected on the IMF global outlook and policy priorities. Referring to “central bank mandates and mindful of financial stability risks,” the Committee made several monetary and fiscal policy recommendations.

On structural reforms, the Committee stressed the need to finalize the financial sector reform agenda. It called for policies that enhance the sharing of the gains from technology and economic integration, and manage associated risks.

Emphasizing “sustainable growth and investment,” the Committee stated its support for: IMF’s work to help countries achieve the SDGs; efforts towards enhancing debt transparency and sustainable financing practices by both debtors and creditors; addressing debt vulnerabilities in low-income countries; and addressing vulnerabilities of countries dealing with the macroeconomic consequences of pandemics, cyber risks, climate change and natural disasters, energy scarcity, conflicts, migration, and refugee and other humanitarian crises. [Communique of the International Monetary and Financial Committee]

Development Committee Agrees US$13 Billion Paid-in Capital Increase

On 21 April, the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries reached agreement on the financial and policy package contained in the Sustainable Financing for Sustainable Development Proposal.

The financial package includes a US$13 billion paid-in capital increase, consisting of US$7.5 billion for the International Bank for Reconstruction and Development (IBRD) and US$5.5 billion for the International Finance Corporation (IFC), via general and selective capital increases. A callable capital increase of US$52.6 billion for the IBRD was also agreed.

The Development Committee notes in its outcome document that the selective capital increase for the IBRD will result in rebalanced shareholding, and reduce extreme under-representation while continuing to deliver voice reform in manageable steps. For the IFC, the capital increase will mean more closely aligned voting power between the institutions of the World Bank Group. The Committee also notes that the Shareholding Review in 2020 will provide an opportunity to review under-representation relative to updated calculated shareholding from the IBRD Dynamic Formula. Though the agreement will increase China’s shareholding in the IBRD and in the IFC, the US will keep its veto power over both IBRD and IFC decisions.

The Proposal suggests that the policy package will enable a substantial scale up of the World Bank’s financing to tackle climate change by increasing climate co-benefit targets for the IBRD, and increasing climate investments, including mitigation and adaptation projects for the IFC. [SDG Knowledge Hub Story on World Bank Group, IMF Spring Meetings]

QIAO Plan on Climate Change and Nature Conservation Invites Expressions of Interest, Green Bond Pledge Initiative Launched

The UN QIAO Plan on Climate Change and Nature Conservation, established by the UN Office for South-South Cooperation (UNOSSC), hosted by the UN Development Programme (UNDP), and the Beijing Qiaonyu Foundation in January 2018, is calling for expressions of interests for its 2018-2019 project cycle.

The Plan will make available an initial amount of US$13.5 million for projects between 2018 and 2023 to support five small-scale and large-scale multi-year climate adaptation and mitigation projects annually in developing countries and regions, particularly the Least Developed Countries (LDCs) and small island developing States (SIDS). The Plan’s goal is to strengthen long-term strategies on low-carbon and climate-resilient economic transitions. Its other objectives include: to enhance the sharing of Southern climate action experiences; to improve regulatory frameworks on climate action; to disseminate tested financial and business models on climate action; and to build capacity of the global South to address climate change. [UNOSSC Press Release] [UNOSSC Call for Expression of Interest] [UNFCCC Press Release]

On 20 March, a group of government and non-government actors launched the Green Bond Pledge initiative with the aim to increase the use of green bond finance in order to accelerate transformation of economies by 2020. The initiative seeks to ensure that public and private sector bonds that are financing long-term infrastructure and capital projects address and incorporate climate risk and impacts. [UNFCCC Press Release]

18 global research universities joined the Global Research Alliance for Sustainable Finance and Investment to promote multi-disciplinary research on sustainable finance and investment. The Alliance aims to develop academic collaborations, nurture expertise and help align the financial system with global environmental sustainability. [Climate Action Press Release]

April 2018 Reading List

Suggested climate finance-related readings from the month of April 2018 include:

  • Sustainable Financing for Sustainable Development Proposal by the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries. The document outlines policy proposals on, among others: fragility, conflict and violence; climate change; gender; creation and mobilization of markets; and improving effectiveness. It also includes the financing package proposals for the IBRD and the IFC. [Sustainable Financing for Sustainable Development Proposal]

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The SDG Knowledge Hub publishes monthly climate finance updates, which largely focus on multilateral financing and cover, inter alia, mitigation and adaptation project financing news and lessons, institutional events and news, and latest developments in carbon markets and pricing. Past IISD climate finance updates can be found under the tags: Finance Update: Climate Change; and Finance Update: Sustainable Energy.