Speech

Taking Steps to Ensure Financial Stability in Sub-Saharan Africa in the Face of Climate Change

January 24, 2024

Good morning. It is an honor to join you today at the ATI 10^th Anniversary Conference.

The global economy was confronted by multiple shocks over the past few years and the divergent growth prospects we are seeing since then pose a challenge to returning to pre-pandemic output trends. Climate change also contributes to the divergent growth prospects, threatening macroeconomic as well as financial stability in countries. This speaks to the importance of a well-managed and just green transition—away from fossil fuels and towards renewables.

We have seen the impact of climate physical risk on all five continents. For instance, extreme weather events of higher frequency and intensity cause damage to physical assets, markets, and productivity that in turn can affect the resilience of the banking sector. In some jurisdictions, financial stability risks stemming from climate change occur due to the impact of climate-transition policies.

Understanding the impact of these physical and transition risks on the banking sector and overall financial stability is a priority that requires paying attention to risk assessments. To help accurately assess climate physical and transition risks, central banks and financial sector supervisors need to build capacity to adapt their stress-testing frameworks. These frameworks should incorporate the channels through which climate risks amplify and transmit risks to the financial sector.

Identifying and closing data gaps is a pre-requisite for proper risk assessment. Our experience from the IMF Financial Sector Assessment Program, as well as from our technical assistance work, shows that lack of relevant climate data is common across jurisdictions. Efforts are needed to build comprehensive datasets related to physical risk projections and granular exposure data of the financial sector to both physical and transition risks. So, strengthening the architecture for data, disclosures, and taxonomies is a priority. For instance, more-comprehensive transition taxonomies would help support the growth of sustainable markets and the production of climate data that is useful for financial decision making, as well as climate-risk assessment, regulation, and supervision.

It is important to emphasize that all climate-related initiatives of financial sector supervisory authorities should be consistent with their respective core mandate. Actions of supervisors need to be consistent with their legal mandate. Prudential supervisors should focus on their core mandate of ensuring financial stability and promoting a safe and sound financial system; securities regulators on creating fair and transparent markets with adequate investor protection safeguards. While financial supervisors should play an active role within their respective mandates to support the safe development of climate finance and enhance sound management of climate-related financial risks, regulation and supervision should not be used as substitutes for effective government policy on climate change. Rather, by focusing on their core mandates, supervisors can create a safer environment as an outcome, which will then boost climate investments.

Regulators and supervisors need to focus on building capacity within their organizations. Considering the enormous breadth and depth of the expertise required, the establishment of specialized solutions to build capacity is warranted. The capacity building efforts should be gradual and sustained and continuously evolve to reflect the international standards, methodologies, and practices that are still being developed. They need to connect interdisciplinary knowledge and, given the complex nature of climate-related topics, be able to capture the depth of the issues. These structures need to be inclusive for all functions of organizations, starting from the top.

The IMF is also increasing its capacity building efforts on climate and working together with regulators and supervisors in this context. The focus of IMF’s capacity building is currently primarily on the supervisor’s ability to assess climate risks through both multilateral and bilateral efforts. In 2021, a series of regional webinars were organized to raise awareness on climate-related financial risks, with participation of many authorities from emerging market and developing economies. Virtual workshops on supervision of climate-related financial risk have also taken place in cooperation with the Chinese authorities, and with the IMF’s regional training centers in Africa—with plans to roll out such workshops in other regions. A climate risk module has also been added to the Fund’s online training framework in partnership with BIS’s Financial Stability Institute, which is available to all of the IMF’s membership. On the bilateral front, the Fund also provides climate-risk analysis technical assistance in order to build a framework to assess the risk of climate-related disasters on the banking sector.

This brings me to my last point: the role of the IMF in helping countries mobilize climate finance.

Our lending tool, the Resilience and Sustainability Trust, or “RST,” now provides longer-term affordable financing for our vulnerable low- and middle-income members to reduce balance-of-payments risks associated with challenges such as climate change. Programs supported by the RST cover: (i) policy reforms; (ii) capacity development; and (iii) financing options to catalyze private capital. The RST was implemented in record time with 11 programs being approved within the first year, and twice that number is in the pipeline for next year. By supporting policy reforms, RST programs provide a critical complement to the largely project-based financing from MDBs and other donors. By removing policy barriers, it can also help catalyze additional financing from the private sector.

The IMF is using its convening power to bring together MDBs, IFIs, bilateral donors, private investors to help EMDEs explore new options for crowding in private climate finance—such as policy reforms, capacity development needs, and financing arrangements. In Bangladesh, Barbados, Costa Rica, Jamaica, and Rwanda, the governments have been able to catalyze the RST to crowd-in additional climate finance. And we are now working with additional RST-recipient countries to catalyze climate finance.

Let me conclude by reiterating that we must combine policy reforms, capacity development, and financing arrangements to scale-up climate finance. Financial sector supervisors can contribute to these efforts by closing data gaps and strengthening disclosures, incorporating climate considerations into prudential frameworks, and enhancing their capacity to conduct climate-risk analyses.