IMF: central banks can help unlock green financing in Asia Pacific

February 5, 2024|Written by |International Monetary Fund

Central banks can help countries in Asia Pacific fill their financing gap by coordinating to support disclosure standards and taking measures to increase trust in ESG scores, a paper from the International Monetary Fund says.

Although many Asia Pacific countries have declared their intentions to lessen their reliance on coal and other carbon-intensive energy sources, they do not necessarily have the funding they need to do so.

Asia Pacific countries will need US$1.1tn annually for climate mitigation and adaptation but are short by US$80bn, the IMF said. However the cost of sustainable debt is higher than other areas, which “hampers its ability to tap into private flows”.

“With fiscal space constrained by public debt accumulated during the global pandemic, there is an urgency to confront these challenges and mobilize private capital for climate financing,” the IMF paper states.

It goes on to say that central banks can help unlock climate finance in the region by developing guidelines for financial institutions to incorporate reporting climate risks, as well as strengthen reporting requirements and conduct climate risk analysis.

IMF recommendations to bridge the green finance gap

Where a central bank’s mandate allows it, incorporating climate considerations into frameworks and asset purchases could help “foster green market development”. However, there are potential risks if a country’s sustainable finance market is underdeveloped.

Prudential regulation should not be used as a substation for government policy as it would have unintended consequences.

“As the prudential framework is aimed at mitigating financial risks, green supporting factors should reflect a negative correlation between financial risks and ‘greenness’ of exposures,” the IMF wrote.

Central banks that don’t have climate change as part of their mandate can still help markets by understanding the impact of risks from climate change.

Central banks should also establish guidelines for reporting climate data that goes “beyond public disclosure requirements,” such as requiring data on scope 2 and 3 emissions.

“These efforts will help ensure fair, efficient, and transparent markets with appropriate safeguards that will foster investor protection and promote climate finance,” the IMF said.

To help reduce greenwashing and encourage investor protection, central banks should require disclosure based on globally consistent disclosure standards that are in line with ISSB reporting standards.

In addition, regulators should clarify what is expected of financial institutions when it comes to climate risks, as well as allocate resources to supervise such risks.

Lastly, Asia Pacific central banks should work towards helping develop climate labels for sustainable investment funds and “creating climate impact-oriented ESG scores” on a global level. As such labeling systems are still in their infancy, coordination with multilateral standard setters is needed.

“Shifting the focus of ESG scores to better capture sustainability and climate impact – perhaps through an alternative metric – would require cooperation at a technical level between regulators and supervisors globally,” the IMF wrote.

This page was last updated February 5, 2024

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