Unit 8: Central and Development Banks PDF

325 |Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks INTRODUCTION LEARNING OBJECTIVES In Chapter 6, we distinguished between four types of On completion of this chapter, you will be able to: banks:...

325 |Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks INTRODUCTION LEARNING OBJECTIVES In Chapter 6, we distinguished between four types of On completion of this chapter, you will be able to: banks: retail banks, wholesale and investment banks, central banks, and development banks, the last two explain the role of central banks and development being public rather than private institutions. Central banks (multilateral and national) in relation to green banks play key roles in ensuring financial stability and and sustainable finance; shaping the financial services regulatory landscape; in describe how central banks can support the transition Chapter 5 we examined how central banks and financial to a low-carbon economy through their monetary regulators are increasingly coordinating regulatory policy and other banking operations (their role as approaches to climate risk. In this Chapter, we focus on financial regulators, and in relation to identifying, how central banks can address climate, environmental measuring and disclosing climate risk, is covered in and sustainability risks and promote the growth of green Chapter 5); and sustainable finance through their monetary policy describe how development banks play a key role in and other banking operations. promoting sustainable economic development and Development banks – including international financial unlocking private finance, and the products and institutions such as the World Bank, as well as regional services they provide in order to do this; and and national development banks - are major promoters cite examples and case studies of central and of economic development. Given the very significant development banks supporting green and sustainable risks to the financial system posed by climate change finance. and the transition to a low-carbon economy, along with the need to support sustainable economic development in many parts of the world, development banks have a keen interest in seeing green and sustainable finance contribute to the achievement of their public policy and development objectives. 326 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks 8.1 THE ROLE OF CENTRAL BANKS In some, but not all, countries, the central bank also acts as the financial regulator, either directly or through Central banks (sometimes referred to as reserve banks) a subsidiary organisation. In Chapter 5, we examined are institutions that oversee the financial system and how financial regulators, including central banks, are monetary regime of a country. In many countries, central increasingly coordinating approaches to regulation in banks are publicly owned, but institutionally independent order to identify, measure and disclose climate risk, and from the government. Examples of central banks include promote the growth of green and sustainable finance. In the US Federal Reserve, the Bank of England, the this Chapter, we focus on central banks’ other roles and European Central Bank, and the People’s Bank of China. responsibilities, especially in relation to monetary policy, although there is necessarily overlap between the two. A central bank is not a commercial bank – it is usually not possible for a member of the public to open an account at a central bank or ask for a loan. The role of central banks has varied widely throughout history, but modern central banks typically have two key roles: Monetary policy: They issue of banknotes and coins, and set monetary policy to ensure stable prices and confidence in the currency. Many countries have an inflation target, often set by the Government, that the central bank should achieve. Setting base interest rates is the main action central banks take to conduct monetary policy. Financial stability: They supervise the financial system, using their supervisory and regulatory powers to ensure the solvency of financial institutions, avoid bank runs, and prevent reckless or fraudulent behaviour by banks and other regulated bodies. They also act as ‘lender of last resort’ to the banking sector during times of financial crisis. 327 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks 8.1.1 Central Banks and Climate Change In some countries, central banks have wider economic QUICK QUESTION: IN WHAT WAYS DO YOU THINK THE objectives beyond monetary and financial stability, such ACTIVITIES OF CENTRAL BANKS COULD AFFECT THE as supporting full employment or promoting economic growth. Some believe that central banks’ mandates NATURAL ENVIRONMENT? should also include tackling climate change, both in Write your answer here before reading on. terms of climate change as a systemic, global issue in its own right, and because of the impacts of climate change on monetary policy and – in particular - financial stability. A small number of countries’ central banks – 15 out of 135 studied by Dikau and Volz (2020) have an explicit mandate to support sustainable economic growth, and a further 54 have a broader objective to support their government’s policy objectives, which may include sustainability goals1. Central banks with an explicit sustainability mandate include those of Malaysia, Singapore, the Russian Federation and South Africa, though the majority do not represent major economies and/or emitters of greenhouse gases. The first G7 country to include sustainability in its central bank’s mandate is the UK. In March 2021, the UK Chancellor of the Exchequer (Minister of Finance) announced that the Bank of England’s mandate would be revised to reflect the importance of climate change and the transition to net zero “ … with a view to building the resilience of the UK financial system to the risks from climate change and support the government’s ambition of a greener industry, using innovation and finance to protect our environment and tackle climate change.” 2 328 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks 8.1.2 Monetary Policy and Sustainability Since the 2007/2008 global financial crisis, and QUICK QUESTION: WHAT DOES THE MANDATE OF THE subsequently in response to the economic challenges CENTRAL BANK IN THE COUNTRY WHERE YOU LIVE AND of the COVID-19 pandemic, central banks have expanded their range of tools for supporting their WORK STATE ABOUT ITS RESPONSIBILITIES (IF ANY) TO monetary, financial stability and other objectives, PURSUE SUSTAINABILITY? and have played a more interventionist role in many economies This includes the use of quantitative easing Write your answer here before reading on. to achieve monetary policy objectives and a range of macroprudential and microprudential policies and tools to achieve financial stability objectives: Quantitative easing (QE): An unconventional form of monetary policy where a central bank creates new money electronically to buy financial assets, such as government bonds, aiming to directly increase private sector spending in the economy and return inflation to target. Macroprudential policy: Seeks to prevent an excessive build-up of systemic risk in the financial system resulting from factors such as asset price bubbles or excessive risk-taking by banks. Examples of macroprudential policies include restrictions on certain types of lending, or increased capital requirements for certain types of assets. Microprudential policy: Oversight of financial institutions that seeks to ensure their solvency and prevent financial contagion in the event of failure. This is often referred to as “supervision”; the role of central banks as financial regulators and supervisors in the context of climate risk and sustainable finance was discussed in Chapter 5. 329 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks With responsibility for overseeing financial stability, central banks have a particularly important impact on READING: PRINTING MONEY, BURNING According to the report, 62.1 per cent of the the way in which commercial banks and other financial CARBON? WHY QE MAY BE STIMULATING MORE ECB’s corporate bond purchases under its €82bn institutions respond to the physical and transition THAN JUST THE MONEY MARKETS corporate bond purchase programme have been risks associated with climate change. Even where in the manufacturing and utilities sectors, despite environmental objectives are not part of a central bank’s New research suggests corporate bond purchases by the fact that they only make up 18 per cent of the explicit mandate, the incorporation of environmental central banks may be inadvertently backing carbon- Eurozone economy. These sectors produce 58.5 per sustainability factors may be relevant to ensure that intensive sectors cent of greenhouse gas emissions in the Eurozone. material risks facing the financial system are identified, Meanwhile, under the BoE £10bn corporate bond disclosed and managed, to achieve price stability, and/ Central banks may be inadvertently prolonging programme, 49.2 per cent of purchases have been or to safeguard financial stability. As we have seen in the life of the high-carbon economy, according made in utilities and manufacturing, where they earlier chapters, central banks are working together in an to new research that suggests measures used make up 11.8 per cent of the UK economy and increasingly co-ordinated manner in this area, through by such bodies to stimulate growth may work in produce 52 per cent of the country’s greenhouse bodies such as the Bank for International Settlements favour of market incumbents that pollute. Research gas emissions. (BIS), the Financial Stability Board (FSB) and the Network published by the Grantham Research Institute on for Greening the Financial System (NGFS). Climate Change and the Environment at the LSE, Neither of the central banks has purchased any suggests that quantitative easing (QE) – where a bonds representing renewable energy companies, Moreover, with responsibility for overseeing and central bank creates new money to buy assets and whereas oil and gas companies make up 8.4 per regulating the creation and allocation of money and drive wider spending in the economy – may be cent of ECB corporate bond purchases and 1.8 per credit, central banks can have a particularly important supporting high-carbon sectors at the expense of cent of BoE corporate bond purchases. impact on the speed at which the greening of the greener alternatives. financial system takes place, by incentivising or directing The findings are at odds with the public stance resources from traditional, carbon-intensive sectors The paper looks specifically at a subsector of QE – taken by BoE governor Mark Carney, who gave a towards green and sustainable alternatives. Conversely, the purchase of corporate bonds, introduced by highly influential speech in 2015 on the risks from through policies such as quantitative easing, central the Bank of England and the European Central Bank climate change’s ‘tragedy of the horizon’ and has banks may be inadvertently supporting high-carbon in 2016 in a bid to prompt more lending activity in urged corporates to be more transparent about industries, as the Reading opposite argues. the economy. Although it still represents a relatively their assessment criteria for climate risk. small sub-sector of QE programmes, the majority of which are delivered through the purchase of public “This strategy is in direct contradiction with, and may assets such as gilts, the corporate bond buying undermine, the signals that financial regulators are programmes of the ECB and the BoE send an making about the risks associated with high-carbon important message of confidence in certain sectors investments and the impact on market efficiency,” to the wider financial market. the report notes. “While monetary policy cannot 330 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks be a substitute for environmental policy, monetary so they get rid of the bank bonds and so on. So at histories and good credit ratings that easily meet policymakers should be mindful of the impacts on every stage it takes some corporations out. To a certain the central banks’ criteria. The central banks could asset pricing, including risks to market efficiency and extent this is a structural problem – it doesn’t appear work with other institutions to lend a hand to some financial stability.” to be a deliberate attempt by the central banks to focus of the smaller market insurgents, which low-carbon on manufacturing and utilities,” she concludes. firms tend to be, to help them clear criteria hurdles The report also points to evidence of a larger counterparts sail through. “We’d like to see “disproportionate jump” in the price of eligible Added to that, central banks can only purchase the central banks seeing themselves as working with assets after the introduction of central bank available issuances. If there simply aren’t green and in collaboration with these other institutions,” corporate bond purchasing programmes. This could bond issuances on the market, for example, the she explains. “If you have a new [renewable energy] “exacerbate existing mispricing” around high-carbon central bank can’t buy. company that would like to issue corporate bonds sectors, it warns. but it can’t get the appropriate credit rating because In response to the report, a spokesperson for the it doesn’t have enough credit history or there is But the QE programmes are meant to be sector ECB insisted that it is not practically possible for uncertainty about the future direction of renewable neutral to avoid market distortions, and despite the central bank to start embedding non-monetary energy prices, it might be that instead of lowering warning the wider financial sector of the potential policy considerations into its QE corporate bond the eligibility criteria that requires intervention from impact of climate change, the central banks have to programme. “The ECB does not favour specific sectors, someone else.” date maintained that intervening more directly to it roughly ‘buys the market’,” they said in a statement. support the low-carbon transition is outside of their “Given the relatively small size of the euro area Matikainen continues: “So one thing that we mention apolitical mandate. corporate bond market, it is not possible to embed in the paper is that the European Investment Bank non-monetary policy considerations into a large-scale (EIB) has this project bond investment enhancement Therefore, their corporate bond choices are made asset purchase programme that is carried out as [a] tool, which is used to actually increase the credit rating using a strict set of criteria, explains Sini Matikainen, temporary monetary policy measure over a relatively of project bonds... So it could be that you realise there a policy analyst at the Grantham Research Institute short time period. They would limit the effectiveness of is this skew towards manufacturing and utilities which and lead author of the report. the programme. A number of assets that are classified reflect[s] an overall problem in the financial sector, it as ‘green bonds’ are eligible for the CSPP and have also could be that the real problem is coming from other “[Buying] corporate bonds is already restricted to been purchased by the Eurosystem.”. areas but it requires some kind of awareness or co- certain companies that are issuing corporate bonds,” she tells Business Green. “So that already restricts ordination.” Such tools could be used to enhanced But Matikainen insists there are measures the the sectors. Then both banks set an eligibility criterion: the credit rating of green projects, she suggested. central banks can implement without taking direct that they want to buy something that is investment measures to favour bond purchases in low-carbon To kick this off, the paper calls for the central grade, with a very high credit rating and a certain sectors. banks to initiate reviews into their processes to maturity. So that restricts it as well. And then they take assess climate impacts. The mere act of opening out [the] financial sector because they don’t want to be Firstly, the system currently favours incumbents – up the discussion on the problem may prompt seen as preferentially buying from the financial sector, the established companies with strong investment a much wider awareness of an inherent bias in 331 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks Some central banks are now taking – or considering 8.1.3 Using Central Bank Tools to Promote the system that institutions can collaborate to – active steps to decarbonise their asset purchase Sustainability address, it suggests. Should the integration of programmes. For instance: As discussed in the previous section and in Chapter 5 corporate bonds into QE continue in the long (in the context of central banks as financial regulators), In 2018, the People’s Bank of China (central bank) term, incorporating climate risk into the eligibility many central banks are playing an increasingly active included green bonds in the pool of assets eligible for criteria may be an option, particularly now ratings role in addressing the risks posed by climate change and its Medium Term Lending Facility. agencies are beginning to do the same and more supporting the greening of the financial system. This is climate disclosure data is starting to feed through The European Central Bank announced in 2020 that it the case individually, and collectively through bodies onto the open market. “By mainstreaming climate would accept sustainability-linked bonds as eligible for such as the Network for Greening the Financial System considerations into their day-to-day operations and its asset purchase schemes (green bonds were already (NGFS). While some central banks are more advanced in disclosing their approach to transitional risk, central eligible), and in 2021 that it would invest in the Bank for this area than others, there is an increasing recalibration banks would send a strong signal to financial markets International Settlements’ Green Bond Fund. of traditional tools central banks use in support of and begin to address their own ‘tragedy of the horizon’,” The Swedish Central Bank’s (Sveriges Riksbank) asset their monetary policy and financial stability objectives the report suggests. purchasing programme was updated in 2020 to (credit guidance policies, microprudential regulation and include Swedish sovereign and municipal green bonds, supervision) to incorporate environmental sustainability, The paper makes clear that any bias towards in particular, and to encourage the growth of green and plus corporate bonds where issuers comply with high-carbon bond purchases is the result of a set sustainable finance. We look at four of these tools in this “international standards and norms for sustainability”. of stringent eligibility criteria that inadvertently section: favour market incumbents. But the unintended The Swiss National Bank has announced that it will consequences of such corporate bond QE exclude all coal extraction and power production from Credit allocation instruments that aim to encourage programmes deserve to be investigated more fully, its bond purchases. the flow of credit to environmentally sustainable particularly when central banks are beginning to sectors take more of a leadership position in the climate Reflecting the recent change to its mandate, the Bank of England announced in 2021 that it will “tilt” its asset Risk weightings that incentivise lending to debate. The carbon impact of QE may seem like an purchases, through its Corporate Bond Purchase Scheme environmentally sustainable sectors, firms and obscure topic, but if we aren’t careful we may find (CBPS), to reflect the risks inherent in exposure to activities, and/or penalise lending to environmentally we are using new money to prop up old, polluting high-carbon firms and sectors. It will begin by excluding harmful sectors, firms and activities industries. thermal coal from purchases, and over time extend this Microprudential regulation and firm supervision Source: Business Green (2017) Printing money, burning carbon? to other sectors incompatible with achieving net zero (building on our earlier discussion of regulatory Why QE may be stimulating more than just the money markets by 2050. As well as reducing climate risk in the Bank approaches to climate risk in Chapter 5) (online). Available at: https://www.businessgreen.com/ of England’s own portfolio, this should encourage and analysis/3010873/printing-money-burning-carbon-why-qe- Developing and promoting green and sustainable may-be-stimulating-more-than-just-the-money-markets incentivise issuers’ transition plans, and encourage other finance guidelines, frameworks and initiatives [Accessed: 22 January 2023] investors to take similar action. 332 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks 8.1.3.1 Credit allocation instruments Secondly, mandatory or minimum credit quotas require banks to allocate a fixed percentage of their loan portfolio to Credit allocation policies, also known as credit guidance a specified sector. These are also referred to as credit floors, lending requirements, or window guidance. Minimum policies, direct the creation and allocation of credit credit quotas are most often implemented in the form of a priority sector lending programme, where the central bank towards certain industries or sectors. Historically, credit determines minimum credit quotas and requires commercial banks to lend a specific percentage of their overall lending allocation policies have been used by central banks to to specific sectors. Maximum credit ceilings or quotas are used to limit bank lending to less economically desirable guide lending to prioritised sectors deemed essential sectors or industries of the economy. Whereas minimum credit quotas might be applied to areas such as renewable for economic development. More recently, these policies energy projects, maximum credit quotas would limit lending to carbon-intensive sectors. Quotas have been deployed in have been used in some countries to direct credit some countries, including Bangladesh and India, to direct credit towards green and sustainable sectors. towards green and sustainable areas, and away from environmentally harmful activities. Three main policy instruments are employed to direct credit towards CASE STUDY: RESERVE BANK OF INDIA PRIORITY SECTOR LENDING PROGRAMME environmentally sustainable activities. The Reserve Bank of India’s (RBI) Priority Sector Lending Programme (PSL) has the objective of allocating credit Firstly, targeted refinancing lines offer central bank to vulnerable sections of society. The PSL has traditionally focused on enabling access to finance for agriculture, finance to commercial banks at reduced interest rates for infrastructure, education and micro, small, and medium enterprises (MSMEs), and ensures that 40% of specified asset classes. In contrast to outright subsidies, commercial bank lending flows to the priority sectors identified by the RBI. they rely on the private sector as a gatekeeper in the allocation of capital. The default risk remains with the In 2012, the RBI reviewed its priority sectors and concluded that access to clean energy should be added. The PSL banking sector. Targeted refinancing lines have been guidelines were revised to include commercial loans for off-grid renewable energy solutions, including solar and a common policy tool used by many central banks in other clean energy solutions. emerging and developing economies since the 1950s, In 2015, the PSL guidelines were updated to include a wider range of renewable energy solutions, including solar and more recently they have come to be increasingly and clean energy solutions from the existing guidelines, plus biomass-based power generators, wind turbines, used to direct credit towards environmentally sustainable small scale hydroelectric plants, and remote village electrification. economic activities. For example: In 2020, to increase lending to the renewable energy sector, the PSL guidelines were further updated to include In July 2021 the People’s Bank of China announced it loans to the agricultural sector for the installation of solar power and bio-gas plants. would provide funding to commercial banks to offer discounted loans (at an annual interest rate of 1.75%) Sources: New Economics Foundation (2017) Green Central Banking In Emerging Market And Developing Country Economies (online). Available at: to companies making ‘significant impacts on emission https://neweconomics.org/uploads/files/Green-Central-Banking.pdf [Accessed: 22 January 2023] and author’s research. reductions’ 3. In December 2021, the Bank of Japan announced a new lending facility that will provide funds to financial Thirdly, central banks can influence credit allocation through differentiated reserve requirements. A reserve requirement institutions at zero interest for lending to sectors and is the share of reserves that private sector financial institutions must hold with the central bank relative to their total firms that address climate change4. assets. Reserve requirements have a significant impact on banks’ ability to create credit. If the central bank lowers the reserve requirement, financial institutions can increase their lending; if the reserve requirement goes up, lending is constricted. Allowing a differentiated (lower) reserve requirement for “green” assets is another way to incentivise 333 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks credit allocation towards environmentally sustainable carbon assets. Whilst these are still largely only on the lower banks’ capital requirements for environmentally sectors. In 2018, for example, the People’s Bank of China drawing boards of central banks and regulators, some sustainable lending and investments, accelerate the EU’s announced it would accept green bonds and green institutions are beginning to signal that they may consider “green economy”, and help the bloc meet its (then) targets loans as eligible collateral in its Medium-Term Lending their introduction, and/or encourage financial institutions for cutting carbon emissions by 40% from 1990 levels Facility, allowing financial institutions posting eligible themselves to introduce them in their internal risk by 2030. Capital relief might be granted, for instance, for green collateral to increase their lending. This seems to models. In June 2021, for example, the Governor of Bank green bonds, green loans and green mortgages aligned have been a success, leading to a significant increase in Negara (the Malaysian Central Bank), announced that: with environmentally sustainable activities as set out in green bond issuance from Chinese financial institutions the EU Taxonomy, making these more attractive relative following its introduction. There are, however, some “Over the last two years, we have been actively encouraging to lending to other sectors and firms. More detail on concerns that not all these bonds were truly ‘green’ – improvements in how financial institutions consider climate the EU Commission’s 2017 proposals are outlined in some, particularly earlier issues, were issued to finance risk in their risk management approaches. We know that the Reading on the next page; at the time of writing, the cleaner coal power generation, which would not seem to it will take some time before we see greater uniformity Commission had not moved forward with its proposals be compatible with environmental sustainability. in approaches and while we would prefer not to dictate because it was awaiting the introduction of the EU practices, we see a clear need to reduce the substantial Taxonomy, and this is now being further considered in the 8.1.3.2 Risk Weightings divergence currently observed across institutions. The context of the European Green Deal. In response to the Global Financial Crisis in 2008, many Bank is exploring various options to encourage better risk central banks in advanced economies introduced management approaches by outlier institutions - including The converse of a ‘green supporting factor’ is a ‘brown macroprudential policy tools aimed at preventing an through Pillar 2 capital requirements and supervisory penalty factor’ (i.e. a higher capital weighting) for lending excessive build-up of systemic risk in the financial assessments to reflect an inadequate consideration of climate to high-carbon, environmentally damaging sectors such system. These have often taken the form of higher capital risks.” 5 as coal. It may be more difficult politically to introduce a requirements for institutions seen as posing a significant penalty on legacy assets and investments, however, than Similarly, as the European Commission continues to to encourage investment in new, green and sustainable risk to overall financial stability (e.g. large global banks develop the EU’s European Green Deal, it has asked the assets. Where financial institutions perceive that, and insurers), or higher risk weightings for sectors such European Banking Authority (EBA) to assess whether because of physical and transition climate risks, lending as real estate, where excessive lending may, in the view additional capital charges might be justified to reflect the to high-carbon sectors is riskier, many central banks and of policymakers and regulators, pose particular risks higher risks of institutions holding high-carbon assets, financial regulators already expect internal risk weightings to financial stability. A higher risk weighting means and the effects of these on financial stability and bank to take account of this by requiring more capital to be that a bank needs to hold more capital against a loan lending. The Bank of England has also signalled that, in held against these. to a particular sector or firm, reflecting the higher risk the future, it might be prepared to impose additional associated with that lending. capital charges where institutions have significant Some analysts have explored how macroprudential exposure to climate and environmental risks6. policies could be used to guide lending and investment Previously, in December 2017, the EU Commission towards environmentally sustainable sectors and announced that it was considering the introduction of firms; for example, by imposing higher risk weightings a ‘green supporting factor’ as it developed its Action for carbon-intensive sectors or firms (a ‘brown penalty Plan for Financing Sustainable Growth. This would factor’) or by a ‘green supporting factor’ favouring low- 334 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks READING: GREEN DOESN’T MEAN RISK-FREE: The amount of risk banks have to factor in when technological shift, there will be winners and losers WHY WE SHOULD BE CAUTIOUS ABOUT A GREEN making different types of investments is called in low-carbon sectors and in carbon-intensive ones, SUPPORTING FACTOR IN THE EU ‘risk-weighting’. A higher risk-weighting means a and it’s not easy to predict who the winners will be. bank needs to have more capital to insulate it The European Commission announced this week from potential losses if an investment fails. These For instance, since 2015, more than 200 North (December 2017) that the EU is considering regulations are designed to make banks more American oil and gas companies have declared lowering capital requirements for sustainable resilient. Their aim is to avoid another financial crisis bankruptcy (mainly due to low oil prices), but so financial products. This means that, in future, EU where governments have to bail out banks to keep have more than 100 American and European solar financial regulators would treat green investments them from failing. companies between 2011 and 2015. In contrast, oil as less risky than carbon-intensive investments. majors like Shell and Exxon Mobil have weathered So banks would need to hold less capital to A ‘green supporting factor’ would mean banks need low oil prices by increasing production efficiency buffer themselves against potential losses. The to hold less capital when making green investments and reducing overhead costs. The shift to low- announcement comes as part of the Commission’s because those investments would have a lower risk- carbon energy generation will have wider-reaching efforts to support sustainable finance and take weighting. The Commission hopes that this would effects than low oil prices. Some companies may action on climate change. encourage sustainable investment, because some be able to adapt by diversifying their business European banks have responded to higher capital operations. So it is not a foregone conclusion that Creating incentives for banks and financial markets requirements by reducing lending. the oil and gas sector will disappear, particularly as to make investments in green assets sounds oil and gas will continue to be part of the energy advantageous for the green economy. However, Some banks have been lobbying for the mix during the transition to low-carbon energy. using regulations designed to reduce risk in the Commission to cut risk-weightings for green assets financial system to mobilise investment should be rather than increase them for carbon-intensive In the announcement, the Vice President of the approached cautiously. ones, because requiring them to hold more capital European Commission mentioned housing as one to buffer risks can lower their profits. But with less of the first areas that could qualify for lower risk- A ‘green supporting factor’ would mean banks have less loss-absorbing capital, banks will also be more weightings. Efficient homes have lower energy costs. buffer against losses. vulnerable if their investments fail. In theory, by spending less on energy, green home- owners are better able to repay their mortgage. In their July 2017 report, the High Level Expert Using risk-weightings to motivate investment should This makes the risk of them defaulting on payments Group on Sustainable Finance (HLEG), which be approached with caution. lower. However, there is little empirical evidence reports to the Commission on the opportunities for this – just one study from the US. This lack of and challenges of sustainable finance, raised Green isn’t necessarily safer than brown evidence suggests it is premature to conclude that the possibility of a ‘green supporting factor’. The In the long term, the shift to a low-carbon economy green mortgages are categorically lower risk than regulation is designed to boost green investment, means there will be significant changes to areas standard mortgages. More data and research in but the HLEG noted multiple drawbacks. like energy generation. As with every kind of the EU is needed, and we should be particularly 335 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks cautious since European banks may already be The European Commission introduced a ‘Small to Instead of trying to increase the flow of finance exposed to risk from overheated property markets. Medium Enterprise (SME) supporting factor’ to towards green assets by hook or by crook, decrease the risk-weighting for loans to SMEs. The increasing investment should be approached in the The case for a brown-penalising factor is stronger. aim was to encourage banks to lend more. However, light of existing evidence. Regulators can increase The financial sector is likely not taking proper there is little evidence that the SME supporting the resilience of the financial system through better account of the climate change risks associated with factor has been effective. The European Banking a understanding of climate risks. The HLEG should carbon-intensive assets. Increasing the risk banks Authority’s initial assessment of the policy did not focus on identifying the most effective policies need to account for in making carbon-intensive find evidence that it had significantly decreased for scaling up green finance, rather than the most investments could go some way towards correcting borrowing costs or increased access to finance for politically palatable or convenient ones. this. However, there is still considerable debate SMEs. about what the right level of risk-weighting would Source: Centre for Climate Change Economics and Policy (2017) Green doesn’t mean risk-free: why we should be cautious about a be. There is also discussion over whether other In addition, interviews carried out by the green supporting factor in the EU (online). Available at: https:// policy tools would be better suited to addressing Cambridge Institute for Sustainability Leadership www.cccep.ac.uk/news/eu-green-supporting-factor-bank-risk/ the risk. More research is needed before moving to with regulators and bank practitioners found that [Accessed: 22 January 2023]. concrete policy proposals. capital requirements only had a marginal impact on investment decisions for green projects. Other There is no clear evidence that lowering risk-weightings studies support the view that capital requirements will encourage greater investment do not significantly constrain bank lending across the economy. Although the primary purpose of risk-weighting is to reduce the exposure of banks to risk, the Without robust evidence for a green supporting Commission has used risk-weighting in the past to factor, the Commission and HLEG should look for try to encourage investment. However, there’s no other avenues to increase green investment. Giving clear evidence that reducing capital requirements in to bank lobbying could send the wrong signal on investing in green assets will boost lending to to the financial sector. By supporting an unproven green projects. regulatory tool without a robust evidence base, the European Commission could risk damaging the reputation of the concept of sustainable finance as a whole. 336 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks 8.1.3.3 Microprudential regulation and firm supervision Microprudential regulation refers to the supervision of QUICK QUESTION: WHAT IS YOUR VIEW ON INTRODUCING individual financial institutions to ensure they operate HIGHER RISK-WEIGHTINGS FOR LENDING TO in a safe and sound manner, are resilient to changes in economic conditions and external shocks, and maintain ENVIRONMENTALLY DAMAGING SECTORS AND FIRMS? CAN adequate capital and liquidity to remain solvent. As THESE BE JUSTIFIED? we noted previously, in many cases central banks are financial regulators, too, and are responsible for Write your answer here before reading on. supervising financial institutions (especially banks and insurers) in their respective jurisdictions. As we discussed in Chapter 5, the identification and disclosure of climate risks and stranded assets has become a priority for financial regulators due to the potential impact of climate risks on financial institutions’ resilience and solvency. Acute physical risks, such as flooding or tropical storms, may impose direct costs in the short term on businesses, individuals and communities, and the financial institutions exposed to them (for example, by disrupting production or supply chains, or by leading to claims against insurance policies). The chronic physical risks, transition risks and liability risks arising from climate change can significantly affect organisations’ business models, as well as individuals’ and communities’ resilience and finances, in the medium and long term. In turn, banks, investors, insurers, and other institutions exposed to these risks will face increased costs and other charges. As we have discussed in earlier chapters, financial institutions whose strategies are overly reliant on sectors, firms, countries and regions that are highly dependent on fossil fuels, high-carbon means of production and distribution and/or are particularly vulnerable to the physical impacts of climate change may suffer from asset impairment and stranding that could, in extremis, threaten their solvency. This could impact financial stability overall, especially if several major financial 337 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks institutions follow similar strategies and therefore are all impacted. CASE STUDY: EUROPEAN CENTRAL BANK SUPERVISORY EXPECTATIONS ON CLIMATE AND ENVIRONMENTAL RISKS For these reasons, central banks and financial regulators are adopting an increasingly harmonised approach to the In May 2020, the European Central Bank (ECB) published guidance setting out its expectations for financial microprudential regulation of climate and environmental institutions relating to the effective disclosure and management of climate and environmental risks. These are not risks, coordinated through bodies such as the FSB and – at this stage - mandatory, but serve as a basis for regulatory dialogue, signposting the direction of travel the ECB NGFS, in areas including: expects from the institutions it regulates. requiring financial institutions to identify and disclose The ECB expects financial institutions to consider climate-related and environmental risks – as drivers of their exposure to climate and environmental risks established categories of prudential risks – when formulating and implementing their business strategies, (usually aligned with the TCFD’s recommendations, governance and risk-management frameworks. Firms are expected to run internal stress tests to measure which we examined in Chapter 5); and monitor their financial exposures to such risks. The ECB believes this will help financial institutions assess running stress tests to model financial institutions’ the resilience of their business models, understand potential impacts on current and future investments and resilience to climate change, based on climate – perhaps most importantly – consider how climate risks could challenge their capital adequacy and liquidity. scenarios such as those developed by the NGFS The ECB also expects financial institutions to become more transparent by enhancing their climate-related and (summarized in Chapter 5); and environmental disclosures. enhancing financial institutions’ governance and Overview of the ECB’s Supervisory Expectations management of climate and environmental risks, 1. Institutions are expected to understand the impact of climate-related and environmental risks on the including the incorporation of these into risk appetite business environment in which they operate, in the short, medium and long term, in order to be able to make frameworks, ensuring that Boards exercise oversight informed strategic and business decisions. of climate and environmental risks, and requiring firms to clearly assign responsibility for these to competent 2. When determining and implementing their business strategy, institutions are expected to integrate the individuals and team. climate-related and environmental risks that impact their business environment in the short, medium or long term. 3. The management body is expected to consider climate-related and environmental risks when developing the institution’s overall business strategy, business objectives and risk management framework, and to exercise effective oversight of climate-related and environmental risks. 4. Institutions are expected to explicitly include climate-related and environmental risks in their risk appetite framework. 5. Institutions are expected to assign responsibility for the management of climate-related and environmental risks within the organisational structure in accordance with the three lines of defence model. 338 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks In a similar manner, in 2021 the European Banking Authority (EBA) published proposals for integrating what 6. For the purposes of internal reporting, institutions are expected to report aggregated risk data that reflect it terms “ESG factors” and “ESG risks” into its regulatory their exposures to climate-related and environmental risks, with a view to enabling the management body and and supervisory framework7. The EBA’s proposals relevant sub-committees to make informed decisions. include recommendations for institutions to incorporate 7. Institutions are expected to incorporate climate-related and environmental risks as drivers of existing risk consideration of ESG risks into their governance categories into their existing risk management framework, with a view to managing, monitoring and mitigating structures, decision-making and risk management, and these over a sufficiently long-term horizon, and to review their arrangements on a regular basis. Institutions to use scenario analysis to support longer-term resilience are expected to identify and quantify these risks within their overall process of ensuring capital adequacy. planning. In addition, regulators are encouraged to 8. In their credit risk management, institutions are expected to consider climate-related and environmental risks extend their time horizons for stress-testing and other at all relevant stages of the credit-granting process, and to monitor those risks in their portfolios. supervisory activities to at least 10 years in order to better capture physical and transition risks. 9. Institutions are expected to consider how climate-related and environmental events could have an adverse impact on business continuity, and the extent to which the nature of their activities could increase Stress Testing reputational and/or liability risks. An important supervisory tool used by central banks and 10. Institutions are expected to monitor, on an ongoing basis, the effect of climate-related and environmental regulators is stress testing. Following the Global Financial factors on their current market risk positions and future investments, and to develop stress tests that Crisis in 2008, many central banks and regulators incorporate climate-related and environmental risks. introduced stress testing to model the resilience of 11. Institutions with material climate-related and environmental risks are expected to evaluate the financial institutions, and the financial sector overall, appropriateness of their stress testing, with a view to incorporating those risks into their baseline and adverse against different economic scenarios and external shocks. scenarios. In recent years, some institutions have begun to include climate change scenarios in stress tests, assessing the 12. Institutions are expected to assess whether material climate-related and environmental risks could cause net resilience of financial institutions’ (usually banks’ and cash outflows or depletion of liquidity buffers and, if so, to incorporate these factors into their liquidity risk insurers’) balance sheets to different climate change management and liquidity buffer calibration. pathways, significant environmental shocks, and the 13. For the purposes of their regulatory disclosures, institutions are expected to publish meaningful information impacts of physical and transition risks under different and key metrics on climate-related and environmental risks that they deem to be material, with due regard to scenarios. Many central banks and financial regulators the European Commission’s Guidelines on non-financial reporting. use the scenarios developed by the NGFS, described in Chapter 5, as a basis for their stress tests. Source: European Central Bank (2020) Guide on climate-related and environmental risks: Supervisory expectations relating to risk management and disclosure (online). Available at: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.202011finalguideonclimate-relatedandenviro nmentalrisks~58213f6564.en.pdf?1f98c498cb869019ab89194a118b9db4 [Accessed: 22 January 2023] 339 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks CASE STUDY: BANK OF ENGLAND BIENNIAL variation in sectoral Gross Value Added (GVA) balance sheets. There is also variation in sectoral EXPLORATORY SCENARIO ON THE FINANCIAL paths associated with the major transition in how Gross Value Added (GVA) paths, reflecting the RISKS FROM CLIMATE CHANGE energy, and goods and services in general are different extent of exposure to physical risks produced. across different sectors. In the absence of a rapid The Bank of England conducts annual stress transition, some physical risks will crystallise tests to assess the resilience and solvency of Late Policy Action (LPA): the transition is delayed until 2030 and must be more sudden and in the period to 2050, but the largest material financial institutions under a range of scenarios. shocks will occur later in the century. It supplements these annual stress tests with substantial in order to ensure that the mean “Biennial Exploratory Scenarios” (BES) designed global temperature increase stays well below Recognising the challenges faced by financial to investigate a range of other risks that may 2.0 0C (relative to pre-industrial levels) by the end institutions in identifying, measuring and modelling not be directly linked to prevailing economic or of the century. The Bank expects this to result in climate risks, the Bank of England notes that it financial conditions. The Bank’s 2021 BES has been material short-term macro disruption. It is likely intends the 2021 BES to be a “… learning exercise developed to test the resilience of large UK banks, to feature a large fall in GDP, as well as falls in [that] will develop the capabilities of both the Bank and life insurers and general insurers – and the financial property prices, equity prices and changes in … participants.” It will not be used to adjust capital system overall - to the physical and transition risks interest rates. Transition policies and sectoral requirements for participating institutions. associated with different climate scenarios. GVA paths will continue to be important in this scenario, but macroeconomic paths should also The results of the 2021 BES were published in May Three climate scenarios have been developed, drive results. Physical risks will be the same as in 2022, and are summarized in Chapter 5. based on the “Orderly”, “Disorderly” and “Hot House the EPA scenario. Source: Bank of England (2021) The 2021 Biennial Exploratory World” scenarios published by the NGFS: No additional policy action (NAPA): no policy Scenario on the financial risks from climate change (online). action beyond that which has already been Available at: https://www.bankofengland.co.uk/-/media/boe/ Early Policy Action (EPA): the transition to a files/stress-testing/2021/the-2021-biennial-exploratory- enacted is delivered. Thus, the transition is carbon-neutral economy starts in 2020 and scenario-on-the-financial-risks-from-climate-change. insufficient for the world to meet its climate continues through to the end of the scenario in pdf?la=en&hash=2E5CAECE75E701315B51B09303F99FCF8D21C8E2 ambition, and global temperatures increase 2050. Carbon prices rise, other policies intensify [Accessed: 22 January 2023] by more than in the other scenarios, leading gradually, and the mean global temperature to severe physical risks. The mean global increase does not exceed 1.60C (relative to temperature increase exceeds 4 0C (relative to pre-industrial levels) by the end of the century. pre-industrial levels) by the end of the century. There will be some increase in the frequency This stress will materially lower trend growth and severity of physical perils such as flooding, rates, especially at the global level, and will affect but the overall level of physical risk remains a range of asset prices. A combination of physical subdued. The Bank expects the effect on global risk and macroeconomic variables will be needed GDP to be moderate (although there will be to measure the total impact on participants’ some regional variation). There will be significant 340 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks 8.1.3.4 Developing and promoting green and sustainable finance guidelines, frameworks and CASE STUDY: THE PEOPLE’S BANK OF CHINA AND GREEN FINANCE initiatives. In their role at the centre of the global and national The People’s Bank of China (PBoC) has become a central agent in mainstreaming green and sustainable finance in financial systems, central banks are in a powerful position China by working with other governmental organisations and the finance sector on various measures to develop to promote and mobilise green and sustainable finance comprehensive green banking guidelines. It has also developed a high profile internationally in this area through through their advocacy, research, participation in and cooperation other central banks, governments and international organisations, including the UNEP. support for international and national initiatives to In 2006, the PBoC created a countrywide credit database for disclosing information on credit and administrative develop standards, guidelines and frameworks. We have penalties and on the environmental compliance of firms. In July 2007, the PBoC, the Ministry of Environmental introduced and examined many of these elsewhere in Protection and the China Banking Regulatory Commission jointly launched China’s Green Credit Policy. This this study guide, including, but not limited to: was a principles-based approach which recommended that banks include environmental compliance and risk the Task Force on Climate-related Financial Disclosures assessment as criteria to be considered in the loan origination process, with the overall aim of reallocating credit (TCFD) from high-polluting, energy-intensive firms towards greener projects. the Task Force on Nature-related Financial Disclosures In 2012, the China Banking Regulatory Commission (CBRC) strengthened this system by issuing Green Credit (TNFD) Guidelines, and in 2014 this was complemented by a Green Credit Monitoring and Evaluation mechanism and a the Network for Greening the Financial System key Performance Indicators Checklist. (developing climate scenarios for use by central banks The PBoC has also been involved in developing the domestic green bond market. In 2015 it introduced the first and other financial institutions for scenario analysis) official green bond guidelines in China - the ‘Green Bond Endorsed Project Catalogue’. In 2020, an updated the Green Bond Principles (and national green bond Catalogue was issued, which classifies eligible green projects in six areas: guidelines and frameworks) Energy Saving and Environmental Protection the Green and Sustainability-Linked Loan Principles Clean Production and Manufacturing initiatives to harmonize sustainability standards (such as the new International Sustainability Standards Clean Energy Board). Ecology and Environmental Sectors In many countries, national central bank-led green and Green Infrastructure Upgrades sustainable finance guidelines have begun to emerge, Green Services developed by central banks and financial regulators themselves or often in cooperation with finance sector Source: UNEP (2017) and author’s own research bodies and other stakeholders. China is a good example of this, as summarised in the short case study opposite. 341 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks In addition, central banks can use their soft power to promote the development of new green and sustainable READING: THE POSITIVE MONEY GREEN CENTRAL BANKING SCORECARD market segments or products and nurture sustainable financial market practices. For example, by including In 2021, Positive Money, a think-tank and NGO that campaigns for “ … a banking system that enables a fair, climate and other environmental challenges in their sustainable and democratic economy”, set out a range of policies and activities that, in its view, the “ideal” central policy and regulatory strategies and priorities, central bank should adopt to genuinely embed environmental sustainability into its strategy and operations. It then banks can signal the importance of these to market scored and ranked G20 countries on the policies and activities implemented by central banks and financial actors. Central banks can “lead by example” by disclosing regulators, in four main areas: their climate-related risks, with the Bank of England and Research and advocacy – the extent to which central banks deepen their understanding of climate and De Nederlandsche Bank (the Dutch central bank) having environmental risks and sustainable finance via research activities, and promote the importance of these issues already done so. In December 2021, the Network for across the financial sector and beyond Greening the Financial System (NGFS) published new guidance to encourage and support more central banks Monetary policy – whether central banks include sustainability within their monetary policy operations, such as in disclosing climate risks8. Similarly, central banks are asset purchase programmes as described earlier in this unit uniquely positioned to conduct and disseminate research Financial policy (prudential regulation) – the extent to which central banks and other financial regulators on green and sustainable finance, since they have well- incorporate climate and environmental sustainability factors in their supervisory activities (which we examined established research departments, access to market data, in Chapter 5) and (usually) a high profile to ensure that their research findings are strongly promoted. Leading by example – whether and how central banks are greening their own institutions by disclosing their own exposure to climate risks, decarbonising their portfolios, and supporting initiatives to mobilise green and As the following reading demonstrates, though, while sustainable finance central banks may be very active in encouraging and promoting green and sustainable finance through their As can be seen from Positive Money’s scorecard on the next page, while the majority of G20 central banks score advocacy, research and networking activities, they highly in terms of Research and Advocacy, most score poorly in other areas. In particular, in Positive Money’s view, may not at the present time be as active in embedding very few central banks have taken action to embed sustainability into their own monetary and financial policy sustainability into their own core monetary and financial operations: policy operations and activities. 342 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks Research and Leading by Monetary Policy Financial Policy Aggregate Score Grade Rank Country Advocacy Example (out of 50) (out of 50) (out of 130) (A+ to F) (out of 10) (out of 20) 1 China 10 16 24 0 50 C 2 Brazil 10 16 18 1 45 C- 3 France 10 3 22 8 43 C- 4 United Kingdom 10 4 19 5 38 D+ 5 European Union 10 2 15 6 33 D+ 6 Italy 10 2 15 4 31 D+ 7 Germany 10 1 15 3 29 D 8 Indonesia 10 1 8 2 21 D 9 Japan 10 5 4 0 19 D- 10 Australia 10 0 4 1 15 D- 11= Canada 10 0 2 1 13 D- 11= Mexico 10 1 1 1 13 D- 13= South Korea 10 0 1 0 11 D- 13= United States 10 0 1 0 11 D- 15 India 3 5 1 0 9 F 16 Russia 5 0 1 2 8 F 17 South Africa 7 0 0 0 7 F 18 Turkey 1 0 3 0 4 F 19= Argentina 0 0 0 0 0 F 19= Saudi Arabia 0 0 0 0 0 F Flags by VectorFlags.com 343 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks Positive Money concludes that their research and scorecard reveals “ … a universal absence of high REFLECTING ON POSITIVE MONEY’S GREEN CENTRAL impact policies that target reductions in financial BANKING SCORECARD, WHAT PRIORITY ACTIONS (IF ANY) support for fossil fuel activities from all G20 central banks and supervisors. We consider this …to be the WOULD YOU LIKE THE CENTRAL BANK IN THE COUNTRY most important finding of this report, and we hope WHERE YOU LIVE TAKE TO PROMOTE SUSTAINABILITY? that the stark result is met with recognition from central banks and supervisors that publishing reports and Write your answer here before reading on. giving speeches is not enough. As public institutions with mandates that cannot be fulfilled without environmental considerations, it is imperative that they clean up their act and step up the pace and scale of their green policymaking.” Source: Positive Money (2021) Green Central Banking Scorecard (online). Available at: http://positivemoney.org/wp-content/ uploads/2021/03/Positive-Money-Green-Central-Banking- Scorecard-Report-31-Mar-2021-Single-Pages.pdf [Accessed: 22 January 2023]. 344 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks 8.2 THE ROLE OF DEVELOPMENT BANKS Examples of MDBs include the World Bank, the in overseas markets. Examples of ECAs include the International Finance Corporation (IFC), the Asian Export-Import Bank of China, the Export-Import Bank Development banks are international, regional and Development Bank (ADB), the African Development of the United States, and UK Export Finance. national public financial institutions tasked (usually) Bank (AfDB), the Inter-American Development Bank with promoting socio-economic development. Exact (IDB), the European Bank of Reconstruction and definitions vary, but for the purposes of this study guide Development (EBRD), the European Investment Bank we use the following definition from the World Bank: “a (EIB), and the Asian Infrastructure Investment Bank bank or financial institution with at least 30% state-owned (AIIB). equity that has been given an explicit legal mandate to reach socio-economic goals in a region, sector or particular National Development Banks (NDBs): Institutions market segment” 9. They may sometimes be referred to created by national governments to provide financing as “international financial institutions”, “national/regional for the purposes of economic development in the investment banks”, or similar. domestic economy. Some national development banks also provide financing for international development. Development banks play an important role in promoting NDBs tend to have in-depth local knowledge, as well economic development in both developed and as relationships with and understanding of domestic developing countries by providing finance and a wide policy and markets. Examples of NDBs include the range of advice and capacity building programmes to China Development Bank, the German KfW, and the sectors, organisations and communities whose financial Scottish National Investment Bank (SNIB). needs are not sufficiently served by private commercial Green Development Banks (GDBs): These are publicly banks or local capital markets. Development banks often owned entities, usually much smaller than MDBs and seek to “unlock” lending and investment by commercial NDBs, established to facilitate private investment into institutions, as we shall see below. Clients typically mainly domestic low-carbon and climate-resilient include SMEs, large private corporations and public infrastructure, and other environmental sectors such bodies. as water and waste management. GDBs have been established in countries including, but not limited to, 8.2.1 Overview of Development Banks Australia, Japan, Malaysia, Switzerland, the US, and the Development banks vary widely in scale, and can take UK (the UK’s Green Investment Bank was sold to the several different forms: private sector in 2017). Multilateral Development Banks (MDBs), sometimes Export-Import Banks (or Export Credit Agencies): Public referred to as International Financial Institutions (IFIs): agencies and entities that provide government-backed Supranational institutions set up by sovereign states, loans, guarantees and insurance to corporations from who are their shareholders. Their remits reflect the their home country that are seeking to do business development and cooperation policies established by overseas in developing countries and emerging these states, and often include developing countries. markets. ECAs provide loans or guarantees, and can also underwrite risks entailed by investments 345 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks QUICK QUESTION: WHICH DEVELOPMENT BANKS OPERATE IN THE MARKET(S) WHERE YOU LIVE AND WORK? IN WHAT WAYS HAVE THEY SUPPORTED THE GROWTH OF GREEN AND SUSTAINABLE FINANCE? Write your answer here before reading on. 346 | Principles and Practice of Green and Sustainable Finance Unit 8: Central and Development Banks 8.2.2 Multilateral Development Banks and Sustainable In practice, the latter commitment meant the EIB would climate investments from $3 billion to $6 billion - one year Finance cease financing oil, gas and coal projects; the bank stated ahead of its 2020 target. Multilateral development banks (MDBs) have played and that it would do so by the end of 2021. The African Development Bank (AfDB) is more focused on continue to play key roles in the development and growth The European Bank for Reconstruction and Development climate change adaptation and resilience than many other of the green and sustainable finance market. Many have (EBRD) has financed some 2,000 green projects to MDBs. Africa is not a major emitter of greenhouse gases, mitigating and adapting to climate change and other date (2021) totalling €36 billion; they are estimated to but is the continent most vulnerable to the effects of sustainable activities as key policy objectives, with the have reduced annual greenhouse gas emissions by climate change, and many communities in Africa will be relative importance of this compared with other policy approximately 104 million tonnes CO2e11. The EBRD significantly impacted by global warming - through rising objectives (e.g. economic development) growing over the recently launched its “Green Economy Transition” strategy sea levels, large tracts of land becoming uninhabitable, past decade. for the period 2021-2025, which will increase its green and the increased frequency and severity of extreme The European Investment Bank (EIB), for instance, issued financing to more than 50% of the EBRD’s total annual weather events such as droughts. The AfDB has a target the first green (‘Climate Awareness’) bond in 2007 and financing by 2025. The bank’s strategy focuses on five of 40% of its overall portfolio supporting climate finance, remains one of the world’s largest issuers, offering a key themes: energy and resource efficiency, renewable with equal weighting given to adaptation and mitigation. wide range of green and sustainable finance products, energy, climate resilience, the just transition, and the The bank also manages the Africa Climate Change Fund, including loans and equity investments. By the end circular economy. The EBRD is also an important issuer whose current focus is on climate resilience and gender of 2020, the EIB had issued green bonds totalling of green bonds known as “Environmental Sustainability equality13. The AfDB plays a leading role in developing nearly Euro 34 billion in 17 countries, including the first Bonds”. The EBRD issued its first such bond in 2010 the capacity of other institutions in Africa to embed ‘Sustainability Awareness Bond’ in 2018, with proceeds and, as of the end of 2019, had issued 92 Environmental sustainability into their activities. It works with central earmarked for projects supporting the UN Sustainable Sustainability Bonds totalling EUR 5.2 billion, supporting and national development banks, and in particular has Development Goals. In November 2020, the EIB made more than 350 sustainability projects. stimulated the development of the green bond market a major strategic commitment to aligning its activities in Africa, both through its own issues and by helping The Asian Development Bank (ADB) provided more than bring other issuers to market (e.g. the first Nigerian green with green and sustainable finance, and supporting the $40 billion of climate finance between 2011 and 2020, bonds). EU’s European Green Deal and other sustainable finance with a focus on cleaner infrastructure and technologies, activities, with the publication of the “Climate Bank conservation and forest management, building more While smaller than many of its peers, the Inter-American Roadmap”10. This set out the EIB’s plans that: resilient communities, and helping communities adapt Development Bank (IDB) plays a key role in the financing lending to support climate action and environmental to the effects of climate change. In 2018, the ADB made of environmental sustainability (and broader aspects sustainability would exceed 50% of the EIB’s overall a commitment that, by 2030, at least 75% of its activities of sustainability, such as social inclusion) in the lending