Greening Central Banks: Emerging Lessons from the NDC Partnership
Central banks play a key role in climate action. They are crucial to safeguarding financial stability, sending consistent and persistent market signals regarding climate-related risks and opportunities and implementing necessary corrective measures to recalibrate the financial system and protect vulnerable populations. However, central banks in many developing countries lack sufficient capacity and tools to effectively address these challenges.
During COP26, the NDC Partnership launched the Readiness Support for Greening Central Banks (GCB) initiative as a response to developing countries’ requests to equip central banks and financial supervisors with knowledge, institutional capacities and systems to adopt precautionary approaches to climate risk and to safeguard and promote green investments.
As of June 2024, 15 central banks covering 22 countries are receiving coordinated in-country support through the NDC Partnership, from the French Development Agency (AFD), German Federal Ministry for Economic Affairs and Climate Action (BMWK), European Investment Bank (EIB), United Kingdom (UK) and the World Bank as well as through the NDC Partnership Action Fund (PAF).
Emerging Experiences and Recommendations
The GCB initiative has improved the collaboration with donors and central banks to advance climate action. Emerging GCB experiences highlight the following recommendations:
- Advancing climate finance requires comprehensive support and a whole-of-government approach: The NDC Partnership model fosters efficient collaboration among economic and financial institutions, line ministries, the private sector and key policymaking bodies. Achieving systemic and transformative changes in greening the financial sector requires sustained, specialized support. The NDC Partnership leverages its collective strength to ensure ongoing and complementary assistance, enhancing the impact and longevity of climate policies and initiatives.
- Increased expertise within national institutions accelerates action and ensures sustainability: Specialized capacity within central banks and financial supervisors is key to identifying, developing and implementing measures to green the financial sector and translates the recommendations of global initiatives into the local reality, building in-country capabilities and coordinating national action.
- A localized approach is critical for integrating climate risks into financial systems: Translating global and regional models into the national context is important to ensure granularity of the analysis and improve the effectiveness of policies and measures in the national context.
- Raising awareness and visibility: It is crucial that support opportunities and outcomes of the GCB reach key stakeholders in the banking and financial sectors. Government focal points and partners play a critical role in supporting the engagement of central banks and financial supervisors in climate action.
National Bank of Georgia's Experience
Georgia is reducing its greenhouse gas emissions through various measures, including policies aimed to safeguard the financial sector and implementing measures to assess and manage climate-related risks within the financial system.
Supporting Partner: European Investment Bank (EIB)
Leading Government Institution: National Bank of Georgia
As part of the GCB, the National Bank of Georgia with the support from the European Investment Bank, developed a climate risk scenario tool. The tool localizes the scenarios developed by the Network for Greening Financial System (NGFS) to the national context and assesses how climate change can impact the national economy.
Moving forward, the National Bank of Georgia, with support from the EIB, will undertake a stress testing to inform policy and regulatory measures that safeguard the financial sector and promote green investments. In parallel, the project is directly supporting financial institutions to understand climate change risks and opportunities and prepare for national and international supervisory mechanisms.
Aligning national sustainable finance principles and taxonomy with global best practices: While localization is important to account for the national context, it is also important to reflect and consider the interoperability of standards and taxonomies as those are conducive to increasing climate finance flows, creating transparency and facilitating the allocation of capital to climate investments.
Social inclusion through a whole-of-society approach: The GCB initiative benefits developing countries across Africa, the Caribbean and Asia-Pacific including Small Island Developing States (SIDS). It aims to involve all sectors of society, from national stakeholders to vulnerable communities most affected by climate change and financial crises. The stability of the financial sector impacts various aspects of daily life, including individual purchasing power, access to loans, insurance, pension funds and the financial security of retirees.
National Bank of Jamaica's Experience
Jamaica is reducing its greenhouse gas emissions through measures to assess climate-related risks and, most importantly, through strong collaboration among five of the largest banks in the country.
Supporting Partner: Agence Française de Développement (AFD)
The Central Bank of Jamaica is developing a climate risk and stress testing framework to access transmission channels of climate risks aligned using the Taskforce on Climate-Related Financial Disclosures (TCFD) and NGFS guidance.
Immediate outcomes:
- Jamaica’s collaboration with AFD builds on three years of dedicated efforts and is integrated into the Resilience and Sustainability Facility arrangement with the International Monetary Fund (IMF). This integration strengthens cooperation between the Government of Jamaica and international partners, while also attracting private investment and enhancing resilience.
- Data collection has started to facilitate the implementation of climate-related assessment and stress testing.
- The program is engaging with 70 individuals from Jamaica’s financial sector, including the five largest banks.
The Partnership regularly organizes exchanges to take stock on the progress and key development in the central bank support. These exchanges maximize efforts and promote exchanges and coordination in support. For example, the NDC Partnership, jointly with the Economic and Social Commission for Asia and the Pacific (UN-ESCAP), AFD and EIB, organized a Peer Learning Event to bring together regulators, central banks and experts to share their experiences, challenges, lessons learned and best practices in climate scenario analysis and stress testing.
"Greening Central Banks: Learning from Experience" Peer Learning Event
In June 2024, the NDC Partnership in collaboration with ESCAP, AFD and EIB, co-hosted a closed-door virtual event that brought together regulators, central banks and industry experts to share insights, challenges and best practices for Climate Scenario Analysis and Stress Testing.
The event comprised over 80 attendees representing partners and 18 central banks across the globe. Leading experts enriched the discussions with international best practices, while regulators discussed their experiences in assessing climate-related risks. The Bank of Mongolia, the National Bank of Georgia and the Bank of Jamaica as key panelists, also shared their insights on the topic during the event.
Central Bank regulators across the world are undertaking climate risk analysis to assess financial sector risks due to climate change and develop regulations and policies to avert future financial sector risks. Climate risk scenarios in the banking sector are relatively new and banks must learn from each other as to how to most effectively gather data and undertake such modeling.
The event highlighted the significance of collaborative learning and the collective effort required to address climate-related financial risks, aiming to build a more resilient and informed financial system for a sustainable future.
By extending support directly to central banks in developing member countries, the NDC Partnership contributes to resilient and Paris-aligned financial systems across the globe. The leadership of central banks is instrumental in shaping the financial landscape and their proactive actions will play a crucial role in driving a low carbon and resilient future.