Speech

Opening Remarks for Toronto Centre Executive Panel: “Climate Change and the Sustainability Agenda”

October 16, 2020

It’s a pleasure to join you today for this timely discussion, on a policy area that’s increasingly important for central banks, financial regulators and supervisors worldwide — and that’s increasingly important on the IMF’s agenda.

Climate change is already having an economic impact on countries. To reduce the risk of future macroeconomic disruptions, countries will need to transition to low carbon systems and build resilience. This crisis presents an opportunity to shift gears toward a climate-resilient future by directing investments towards green growth.

Fortunately, the COVID-19 crisis has not led to a sustained decline in green financing. Corporate green bond issuance has returned to 2019 levels. In fact, broader sustainable debt issuance this year has been boosted by a surge in social bond issuance, as the pandemic appears to have raised awareness for the need to finance more social projects. Although the sustainable finance sector has grown substantially, it will need to expand further to meet such large-scale financing needs.

In three successive editions of the IMF’s Global Financial Stability Report — including the latest one, which we will issue next week— we’ve documented and analyzed howsustainable finance, climate change physical risk, and corporates’ environmental performance are linked to the stability of the global macrofinancial system. Each of these reports underscores the important role of better disclosure standards to support the growth of the sustainable finance sector and to preserve financial stability.

In economic policy terms, climate change is macro-critical. We cannot have macro financial stability if we are hit by repeated climate shocks. Central Banks and Finance Ministries have a critical role to play in addressing the challenges of putting in place policies aimed to help mobilize green investments and alleviate firms’ financial constraints. Monetary and financial sector policies are also needed to support the management of climate risk and help cushion climate impacts on output and inflation.

The International Monetary Fund (IMF) is helping countries better understand the macro-financial transmission of climate risks. There are four main areas that we particularly focus on.

First, integrating climate risk into financial stability analysis and stress-testing, including in the IMF Financial Sector Assessment Programs (or “FSAPs”)

Over the past decade, one in five FSAP assessments considered climate-related risks. Our earlier stress tests focused on the impact of physical risks, such as insurance losses and nonperforming loans associated with natural disasters. It has become clear that we need to consider bothphysical risks arising from damage to property, and transition risks — that is those arising from changes in policies and technologies affecting the transition to a low-carbon economy — as part of our analysis and stress testing.

Going forward, FSAPs will expand their coverage of climate-related risks to assess their financial stability implications in countries most affected by climate change. We are developing techniques to map climate shocks to macro-financial channels and stress test the country’s financial system.

Second, building awareness and capacity in our membership, by introducing an assessment of climate-risk supervisory frameworks.

We will support the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) in its work on regulation and supervision and actively engage in discussions of other international fora. Our assessment of supervisory frameworks in FSAPs would also appropriately consider climate risk, drawing on the recently published NGFS supervisory principles, and ongoing work by standard-setting bodies.

Third, supporting climate-related mandatory financial disclosure in collaboration with international bodies.

We, at the IMF, are working closely with our global partners toharmonize existing frameworks and facilitate mandatory adoption of global climate-related disclosure standards. To this end, the IMF is also c0-chairing a workstream in the NGFS on bridging data gaps and facilitating this process through support and advocacy at the Standard Setting Bodies including International Financial Reporting Standards (IFRS), Financial Stability Board (FSB) and other relevant international organizations and partners. We also favor the development of ‘green taxonomies’, as an important complement to climate-related disclosures.

Fourth, developing advice to member countries on how to incorporate climate change considerations into monetary policy and central bank operations.

There is ongoing work on policy development on adaptation of monetary policies to address risks of lower productivity growth, increased volatility of supply shocks, and higher inflation due to climate change. We are also assessing, within the mandate of central banks, how environmental sustainability objectives should influence central bank operations and the use of monetary policy tools, as well as integrating sustainability considerations into central banks’ own forex portfolios. We are contributing to analytical work on climate issues through participation in the NGFS.

The COVID-19 pandemic reminds us that crisis preparedness and resilience are essential to manage risks from complex events that can have extreme economic and human costs. Taking action to address climate change demands the mobilization of both public and private finance.

Financial firms, central banks, and financial regulators and supervisors have essential roles to play in this endeavor.

And organizations like the Toronto Centre have a constructive role to play, as well — by pursuing rigorous analysis, by developing capacity, and by keeping financial institutions focused on the challenge ahead.

We are pleased to continue our support for the work of the Toronto Center in its capacity development and leadership training, and to partner with it in events on matters of common interest, like the one today. Let me now hand back to Babak Abbaszadeh to take the proceedings forward.

Thank you very much.