Central Banks Driving Adoption of Financial Systems
Climate change is the ultimate systemic risk for financial markets, significantly impacting market health and socioeconomic stability. Central banks, as market regulators and supervisors, are uniquely positioned to tackle the financial and economic risks associated with climate change.
During COP26, the NDC Partnership launched the Readiness Support for Greening Central Banks, with the objective to equip developing countries with the appropriate knowledge, institutional capacities, processes and systems to adopt precautionary approaches to climate risks, safeguard and promote green investments and strengthen a whole-of-society approach to climate action.
To date, the NDC Partnership has witnessed engagement from 17 central banks, reflecting 24 countries. Coordinated support is being provided to 13 of these central banks through support from the French Development Agency (AFD), German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU), European Investment Bank (EIB), United Kingdom (UK) and the World Bank. There is still a need for support commitments for the remaining four countries.
With significant progress made under this initiative, notable themes have emerged, particularly under the four key areas of: Climate Risk Frameworks and Stress Testing, Roadmaps, Taxonomy and Disclosure and Sustainable Investment.
Climate Risk Frameworks and Stress testing
Climate change impacts such as increased floods, droughts, storms and temperatures will have significant economic repercussions, with direct implications for the financial sector. Central banks have already experienced climate-related challenges such as declining productivity and growth, often caused by health and infrastructure issues along with heightened uncertainty and inflation volatility.
Requests related to climate risk frameworks and stress testing are among the most common from Partnership members. 20 countries, represented through 13 central banks have requested support in this area, specifically on precautionary risk protection policies to integrate climate risk into financial systems, data collection, economic impact analysis and monetary policy reviews. There are 17 countries including Armenia and Georgia, as well as eight countries within the Eastern Caribbean Community, now benefiting from this effort.
Furthermore, with support from the EIB, the National Bank of Georgia (NBG) developed a localized scenario analysis aligned with the Network for Greening the Financial System guidelines. Moving forward, the NBG is planning to organize a conference by the end of 2023 and announce the outcomes of this support and enhance its visibility.
Roadmaps for Greening the Financial Sector
Roadmaps and national financial strategies are crucial for financial systems as they provide a clear agenda and outline, supporting the definition of priorities and sequencing actions to advance national climate finance trajectories.
The central banks of six countries – Eswatini, Fiji, Liberia, Malawi, Sudan and Zambia – have requested support to develop roadmaps to integrate climate change risks and opportunities into their financial sectors.
The World Bank, for example, is providing support to the Central Bank of Liberia by embedding an economic advisor within the institution to provide climate-related technical inputs, training and opportunities. The roadmap outlines strategies for capacity building, risk assessment and monitoring, setting the stage for Liberia to proactively address climate-related financial risks.
Taxonomies and Disclosures
Clear classifications, common definitions of environmentally friendly economic activities and disclosure frameworks have emerged as essential tools to address greenwashing and improve transparency, ultimately facilitating capital mobilization and empowering market participants to identify and invest in sustainable assets.
Ten central banks submitted requests related to the development or upgrade of green taxonomies and improving climate change-related risk disclosures, with all of them currently supported by the Partnership.
The Central Bank of Nigeria (CBN) notably received technical assistance from the UK’s Partnering for Accelerated Climate Transitions (UK PACT) in the update of their Sustainable Banking Principles to be better aligned with global best practices. Nine recommendations were provided by UK PACT, leading to a longer-term collaborative partnership between CBN, UK PACT and NDC Partnership to ensure their implementation.
Mobilizing capital on a large scale is key to achieving climate objectives, with central banks playing a crucial role in facilitating this process within the financial sector.
Six central banks in Armenia, Dominican Republic, Eastern Caribbean Community, Malawi, Rwanda and Zambia are developing and implementing sustainable investment mechanisms. These include the design of regulations to boost environmentally friendly economic activities, the deployment of financial instruments for climate-sensitive projects and the development of green bond issuance and innovative tools to attract private capital for renewable energy projects and green job creation. Currently, five central banks have benefited from technical assistance.
In one example, the UNDP is assisting the Central Bank of Zambia in developing guidelines for green finance and green loans. This support also includes the creation of regulatory and supervisory instruments to implement guidelines, capacity-building programs and peer-to-peer exchange, including provisions to integrate green loans and finance into the Biodiversity Finance Initiative.
Leaving No Country Behind
The Partnership’s Readiness Support for Greening Central Banks initiative stands ready to support central banks and financial regulators to address climate-related financial risks. By extending support directly to central banks in developing country members, the NDC Partnership strives to build climate-resilient financial systems across the globe. Central banks’ leadership is instrumental in shaping the financial landscape, and their proactive actions will play a crucial role in driving our low carbon and resilient future.