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Scaling up sustainable finance in Asia
HOW involved should central banks and regulatory authorities be in the climate debate? It is a question that has received increasing amounts of attention over the past few months. The South East Asian Central Banks (SEACEN) Centre, during the second quarter of 2019, surveyed its members to understand their views and issues on climate and the low-carbon transition.
With 18 respondents, from central banks and monetary authorities across the Asia-Pacific region, we have prepared a paper, published in Journal of Sustainable Finance & Investment, that discusses what these institutions are doing already - and what they could do in 2020.
The survey showed that 94 per cent of respondents thought that their institution should be involved in helping encourage low-carbon financing and green initiatives. While only 22 per cent of the respondents had any strategic investment mandates or approaches to scale up private investment in low carbon sectors, 72 per cent were aware of national commitments to help implement green finance initiatives.
Only 29 per cent had already issued financing instruments or implemented regulatory policies to encourage private financing for low carbon investments. Finally, 39 per cent had already trained their staff and external financial services personnel on climate change risks and opportunities. This training included capacity building workshops, stakeholder dialogues, consultation events with financial institutions and inviting relevant experts from multilateral financial institutions to speak at events.
Central banks across Asia have already taken a variety of actions to mitigate climate risk. Bangladesh Bank was among the very first central banks to address environmental challenges. In 2011, it issued an environmental risk management directive which mandated banks to incorporate enterprise risk management policies into their credit risk management.
China has emerged as one of the leading countries in the world when it comes to encouraging the green and low carbon financial sector. The People's Bank of China (PBOC) has set out mandatory disclosures for banks to categorise what is "green", "brown" and "neutral" lending in their portfolios. Banks are able to earn green "points" that contribute to the PBOC's risk assessments.
The PBOC has also launched a green refinancing policy which allows commercial banks to use green loans or bonds as collateral for borrowing from it at discounted rates, funds from which are lent to green businesses.
The Reserve Bank of India (RBI) published a notice to banks (Corporate Social Responsibility, Sustainable Development and Non-Financial Reporting - Role of Banks) in December 2007. In 2015, the RBI added lending to social infrastructure and small renewable energy projects to target sectors, supporting green financing.
Indonesia has also sought to establish itself as a leading player in the green finance market. The Financial Service Authority produced its Sustainable Finance Roadmap in 2015, which laid out a comprehensive plan for promoting sustainable finance. In 2018, Indonesia became the first country to issue a green sovereign sukuk.
The Monetary Authority of Singapore has implemented several schemes to promote sustainable finance in Singapore. One such initiative is the creation of the Asia Sustainable Finance Initiative in January 2019, a multi-stakeholder forum that aims to utilise the power of the financial sector to deliver on the United Nations sustainable development goals and the Paris climate agreement.
During the course of 2020, there will be ongoing capacity building programmes and initiatives to help develop awareness and implement key ideas. These could include amending the current Basel regulatory framework, which is biased to carbon-intensive ventures, with the addition of "brown-penalising" or "green-supporting" factors during capital requirement calculations. This risks leading to a "green bubble".
A better approach could be to introduce
carbon-based capital buffers that would apply to lending to carbon-intensive activities. This would remove some of the inherent biases in the system towards lending to carbon-intensive industries and facilitate low-carbon lending.
A further tool that many supervisors are looking at in addressing climate-related risk is stress testing. Modelling different climate scenarios that reflect a variety of transition paths to a low-carbon economy will help gauge the potential impact of climate change on individual firms and on the world's financial stability.
In the UK, the Bank of England and the Prudential Regulation Authority have already announced that they will include climate stress testing as part of their programme. While this is a complex and challenging area, mandatory climate stress tests will require banks and financial institutions to consider climate risks. It would lead to greater expertise and the development of more robust modelling approaches, as well as pushing banks' lending decisions toward more low-carbon ventures.
The challenge is how such measures should be implemented within each central bank, and this will be part of Seacen Centre's focus during the rest of the year. OMFIF
- The writer is senior financial sector specialist at the Southeast Asian Central Banks Research and Training Centre. This is reproduced from the Official Monetary and Financial Institutions Forum.