The Intergovernmental Panel on Climate Change (IPCC) notes that the Earth is about 1.1 degrees Celsius (°C) warmer than pre-industrial times due to heat-trapping greenhouse gases, primarily carbon dioxide, emitted by human activities (IPCC, 2021). The global investments required to tackle climate change will be huge and far exceed current flows. Climate change can adversely affect macroeconomic conditions in several ways, such as asset prices, fiscal positions and trade flows.
The physical manifestation of climate change and emission-limiting policies can cause large and sudden revaluations of the assets of financial and non-financial firms and reduce profitability, undermining financial stability in the absence of appropriate prudential policies. 8 See for example Cevic and Jalles (2020) who examine the impact of climate vulnerability on sovereign bond spreads and Klusak et al. 2021) which looks at how climate change may affect sovereign ratings. The potential for climate change to affect macroeconomic and financial stability brings the issue to the heart of RFAs' missions to prevent and resolve crises.
Sources: IMF Climate Change Dashboard, which uses data from the Food and Agriculture Organization, authors' calculations. Notes: Both graphs cover only the six types of climate-related disasters reported by the IMF's Climate Change Panel. Sources: IMF Climate Change Dashboard, which uses adjusted data from the INFORM Risk Index, authors' calculations.
Sources: IMF Climate Change Panel, using data from the World Bank's Global Financial Development Database, authors' calculations.
RFA efforts to address climate change within a wider context: selective climate action initiatives
The United Nations (UN) Framework Convention on Climate Change provides an umbrella for global climate action, setting global targets for mitigation, adaptation and climate finance. The UN's climate change agenda is supported by, among others, two specialized agencies: the World Meteorological Organization and the UN Environment Programme. Both inform the work of the IPCC, an intergovernmental body that provides policymakers with regular scientific assessments on climate change.
The Group of Seven (G7) and the Group of Twenty (G20) provide a platform for informal political coordination and to promote debate on climate change issues and related country commitments. The overviews are not exhaustive in relation to the activities that these actors carry out in the climate area. Recognizing that climate change can lead to macro-critical challenges, the IMF has stepped up its efforts on climate issues over the past few years.
In July 2021, the IMF's executive board approved a strategy to help members deal with climate change-related political challenges.28 The strategy lays the groundwork for a more systematic inclusion of climate issues in the IMF's activities in accordance with its mandate. In April 2021, and in collaboration with other international organizations, the IMF launched its Climate Change Indicators Dashboard, recognizing the central role of reliable data for macroeconomic and financial climate analysis. In its 2021 Climate Change Action Plan, the World Bank Group committed to increasing its climate finance target to 35% from 26% of total commitments, while aligning all funding streams to the targets of the Paris Agreement by July 2023.
In addition, the World Bank hosts the Climate Change Knowledge Portal, which provides global data on historical and future climate, vulnerabilities and impacts. As the regions seek to decarbonize, the Asian Development Bank will commit at least 75% of its operations to climate change mitigation and adaptation by 2030, while the Asian Infrastructure Investment Bank aims to reach or exceed 50% by 2025. The Coalition of Finance Ministers for Climate Action, established in 2019, aims to demonstrate leadership from fiscal and economic policy makers in response to climate change.
The European Commission is also presenting fiscal sustainability risks due to climate change in the EU fiscal sustainability framework. Confronting climate change in the Southeast Asian region requires ASEAN policymakers to collaborate on climate risks and responses despite varying levels of socio-economic development and vulnerability to climate issues across economies. The ASEAN Community also releases its State of Climate Change Report, which provides an overview of the state of climate change in the region and outlines opportunities for cooperation towards the 2050 climate targets.
RFA institutional responses to climate change
As climate change-related risks may affect financial stability in the region, the euro area RFA is reviewing its tools to better assess the effects of climate risks, understand how they may impair countries' financing capabilities, and identify potential amplifiers and mitigators of such risks. . AMF researches and develops guidelines for members within climate risk and financial stability. In this context, it makes a comprehensive assessment of the role of ESG factors in investment decisions of Arab pension funds to help deepen their integration and more closely link the decisions to the goals of sustainable development in the region.
In the lending context, LFIs can support members by, among other actions, providing emergency financing or buffers against climate shocks, including climate-related elements in program design, and supporting green investments, depending on mandates. of RFAs. Due to its dual mandate of macroeconomic stabilization and long-term development, the EFSD can address the negative effects of climate change through its existing toolkit.34 Financial loans have been used flexibly in the past to help countries facing short-term shocks. , which may include adverse economic impacts of natural disasters. The ESM is conducting a review of its instruments in the evolving economic and political landscape, including climate change.
In the case of AMRO/CMIM and FLAR, climate change issues have yet to be discussed in relation to the RFA's future lending programs. Chile, the newest member of FLAR, has been a pioneer in green bond issuance in the region, while Uruguay is working on green bonds linked to environmental performance indicators, regardless of the subsequent destination of the funds. The rescue fund for the eurozone, like FLAR and AMRO, has become an observer in the NGFS.
The ESM demonstrates its commitment to ESG initiatives and participates as an observer in the European Commission's Sustainable Finance Platform, which helps the European Commission to further develop the EU taxonomy. The institution also intends to use the knowledge of other partners, such as the IMF, to improve its analysis of the impact of climate-related risks on economic developments and financial stability in the euro area. The ESM is also an active member of the association's Social Bond Working Group, contributing to the subgroups' work on climate transition finance and research and promotion.
As these companies may be subject to more tail risks, the expectation is that their exclusion may lead to lower risks in the investment portfolio. One prominent example is the InvestEU program which offers risk sharing to financial institutions when financing investments in the EU. The AMF invests in the green bond market regionally and globally, and has defined a framework for identifying, monitoring and reporting the sustainability and ESG profile of its internal investments using a positive screening approach.
Conclusions and considerations
Consideration 1: RFAs should continue leveraging on multilateral cooperation to address climate change
RFAs should also stay abreast of policy discussions in the Financial Stability Board and the G20, which may lead to common approaches on climate issues between jurisdictions. In addition, RFAs could work with MDBs to help countries meet climate goals and deliver a more sustainable low-carbon economy. For example, MDBs are leading the way in helping low- and middle-income countries make the necessary structural adjustments through investment projects, while mobilizing additional private capital for this purpose, and can be an important source of countercyclical lending after a climate-related shock.
Consideration 2: RFAs could review their lending toolboxes to help in addressing climate- related risks
Consideration 3: RFAs could become important regional centres of information for their members on macrofinancial aspects of climate change
There are opportunities for mutual learning as institutions at the global and regional levels of the global financial safety net continue to gradually strengthen their capacities. Regular dialogues between the RFA and with the IMF will remain an important platform for mutual exchange of insights, which, as during the Covid-19 pandemic, will once again highlight the value of the IMF-RFA network. IMF Strategy to Help Members Address Climate Change-Related Policy Challenges - Priorities, Implementation Pathways, and Budgetary Implications.
IMF Managing Director Kristalina Georgieva Announces Operationalization of the Resilience and Sustainability Trust (RST) to Help Vulnerable Countries Face Long-Term Challenges [Press Release]. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change.
Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change. Global Insured Catastrophe Losses to Rise to USD 112 Billion in 2021, Fourth Highest Ever [Press Release]. https://www.swissre.com/media/press-release/nr-20211214-sigma-full-year-2021-preliminary-natcat-loss-estimates.html. 2019). IMF World Economic Outlook Database (April 2022): https://www.imf.org/en/Publications/WEO/weo-database/2022/April.
Chile became a member of FLAR in 2022 and has therefore been added to the group of countries that are part of the FLAR region in the current study. Notes: The ratio compares uncorrected economic damage to nominal GDP in the year the reported natural disaster started. Notes: The ratio compares total unadjusted economic damages to the region's nominal GDP in each decade.
Only events corresponding to the six types of climate-related disasters reported in Figure 2 are considered. Climate-related hazard and exposure (→ increased risk of exposure) AMF region ASEAN+3 Euro area EFSD region FLAR region MFA beneficiaries.
