## B.6 Sustainable Finance: Integrating Measures of Climate Change Risk into External Sector Statistics ## Source details **Canonical URL:** [B.6 Sustainable Finance: Integrating Measures of Climate Change Risk into External Sector Statistics](https://www.imf.org/-/media/files/data/statistics/bpm6/bptt/b6-sustainable-finance-integrating-measures-of-climate-change-risk-into-external-sector-statistics.pdf) ## Other formats - [Markdown version](/-/media/files/data/statistics/bpm6/bptt/b6-sustainable-finance-integrating-measures-of-climate-change-risk-into-external-sector-statistics.pdf.md) - [Structured JSON version](/-/media/files/data/statistics/bpm6/bptt/b6-sustainable-finance-integrating-measures-of-climate-change-risk-into-external-sector-statistics.pdf.json) --- ### Background and rationale - The Guidance Note (GN) proposes introducing an updatable appendix to the revised Balance of Payments Manual (BPM) on measures and Balance of Payments and International Investment Position (IIP) indicators relevant for climate change-related financial risks. - The appendix is initially proposed to include: - detailed geographical and industrial sector breakdowns of direct investment; and - an “of which” category to identify green bonds in the balance of payments/IIP. - The appendix could be updated as sustainable finance work and data needs evolve; possible future indicators mentioned include developing physical and transition risk measures for portfolio investment and making cross-border transactions in CO2 emissions permits visible. - The GN leverages existing international initiatives and inputs from the IMF’s Committee on Balance of Payments Statistics and draws on the System of Environmental Economic Accounting (SEEA) and ongoing research by international organizations. ### Nature of climate-related financial risks (physical and transition) - Climate change creates: - "physical risks" — e.g., extreme weather events affecting insurance claims, mortgage portfolios, land productivity, and nonfinancial companies across sectors such as agriculture and food and beverages; and - "transition risks" — financial implications of moving toward a low-carbon economy, including changes in regulation, consumer preferences, and possible asset stranding (assets prematurely written down, devalued or converted to liabilities). - Both physical and transition risks have market risk and credit risk components: - market risk: changes in value of financial assets due to price movements (e.g., extreme weather events); - credit risk: loan losses from worsening borrowers’ repayment capacity. - The GN recognizes that focusing on "climate change" excludes many other sustainability dimensions (other environmental aspects, social and governance considerations) for the present scope. ### Role of balance of payments/IIP statistics - Balance of payments statistics relevant for climate-related financial risks should: - be relevant at the national (or at most, institutional sector) level; - contain a clear resident–nonresident dimension; - examine exposures to decreases in asset values from both physical and transition risks. - Cross-border tracking of green financing instruments would illuminate the globalization of green financing and the extent to which cross-border capital flows finance adaptation and transition, especially to low-income countries. ### Short-term feasible indicators and priorities - Two aspects highlighted as most feasible in the short term: - Physical location and sector classification of direct investments: - Information on physical location of investments combined with physical-risk profiles of those locations would inform exposure to physical and transition risks at bilateral and aggregated levels. - For physical risks, more detailed geographical granularity (such as city or postal-code area) is ideal, though national data remain relevant for macro-stability implications. - Data sources on physical risks by detailed geographical area are noted as readily available for use. - Sectoral information on Direct Investment is valuable to assess climate-related risks faced by nonfinancial corporations investing in specific sectors (e.g., agriculture or real estate) and to capture indirect exposures of financial corporations through subsidiaries’ lending portfolios. - The GN notes methodological challenges for portfolio investment breakdowns by location and sector because the asset’s physical location or issuer sector may differ from the holder’s location; instrument-by-instrument data linked to issuer emissions or risk profiles would be required. - Type of investments: - Identifying whether instruments are "green" (for example, green bonds defined as bonds for which proceeds are exclusively allocated to green or climate-related expenditures) would help assess financing of mitigation and transition-related investments. - The GN does not recommend narrowing coverage to climate-related green bonds only until taxonomy distinctions are consistently available. - Voluntary “of which: ‘green’” categories could be included for bonds, lending (including intercompany debt), and equity, and for returns on these instruments. ### Additional candidate indicators and topics for the appendix - Source of funding (location of borrowers): information on lenders and their jurisdictions may inform assessment of exposure to climate-related physical or transition risks (e.g., energy-exporting jurisdictions). - Climate-related financial derivatives: reporting cross-border holdings of derivatives tied to sustainable investments or climate risks (e.g., weather-related derivatives; derivatives tied to commodities such as oil, agricultural products, or tons of CO2 emissions) would show hedging and risk-transfer activities. - Making purchases and trade in CO2 emissions permits visible: - BPM6 principles allow multiple classifications of emissions-permit arrangements (e.g., cross-border tax on production, equity investment if part of establishing a direct investment enterprise, services if extensive services provided by the issuer government). - If tradable, permits are economic assets; resales are recorded under contracts, leases, and licenses in the capital account. - Differing treatments under BPM6 complicate a complete picture of cross-border transactions in CO2 permits. - Presenting cross-border transactions for waste treatment and depollution services: - BPM6 classifies waste treatment and depollution services (including production of carbon offsets or carbon sequestration when not classified elsewhere) and related environmental services. - Showing insurance claims from climate-related natural catastrophes: - BPM6 normally classifies nonlife insurance claims as current transfers; exceptionally large catastrophe claims may be recorded as capital transfers. - Consistent identification of such events is difficult; a simplifying convention classifies all cross-border nonlife insurance claims as current transfers unless capital-transfer treatment is necessary for national accounts consistency. - A supplementary item is recommended for insurance claims included in capital transfers to aid comparability. ### Outcomes and recommendation - The GN recommends including an updatable appendix to the revised BPM on measures and balance of payments/IIP indicators related to climate change-related financial risks to allow adaptation as methodologies and data availability evolve. ### Recommendations on statistics and classification - Continue to invest in more detailed geographical and industrial sector breakdowns of direct investment, to allow for better linking with geographic and sector-specific risk data, including numerical examples. - Add a voluntary “of which” category, to identify green bonds in the balance of payments and IIP. - The definition of “green” financial instruments will be based on the international standards such as those that are published by the International Capital Markets Association (ICMA).11 ### Questions for discussion (draft agenda for BPM7 appendix) - Do you agree with the inclusion of an updatable appendix to the BPM7 on sustainable finance? - Do you agree that the focus should first be on developing indicators related to climate change? - Do you agree with the proposed voluntary information on green bonds and on direct investment? - Do you agree that future work should include: - making cross-border transactions in CO2 emissions permits visible in the accounts? - waste treatment and depollution services? - insurance losses from exceptionally large claims identified within capital transfers? - Do you have suggestions for additional indicators that should be included in the first version of the appendix? ### Annex I — Summary of responses to the Sustainable Finance stocktaking survey - At the October 2020 Balance of Payments Committee meeting, the Committee agreed to fill out a stocktaking survey on climate related statistics, in collaboration with relevant agencies in their countries to serve as inputs to developing guidance for the updated BPM6. - The stocktaking questionnaire is the same as the one developed by the ECB Statistics Committee’s Expert Group on Climate Change and Statistics (ECB EG CCS), chaired by De Nederlandsche Bank (DNB). The ECB EG CCS work is intended to serve as an input to discussions on how the European System of Central Banks (ESCB) Statistical Function could support the wider debate on climate change and the global financial system with data and statistics.12 - The request to the Committee targeted members that had not already responded to the ECB EG CCS stocktaking questionnaire, with the goal to complement their findings with a more geographically diverse set of respondents. - Only a few Committee members (Canada, Indonesia and China) filled out the survey, providing information about climate related databases as well as existing and ongoing studies on climate change. ### Country contributions and data practices - Canada (Statistics Canada) - Maintains three databases: - (i) physical flow account for greenhouse gas emissions (GHG) that included GHG emissions by province by industry and by households; - (ii) direct plus indirect energy and GHG emissions intensity, by industry; - (iii) physical flows of GHG emissions by final demand category. - These databases provide annual data back to 2009 that follow SEEA/SNA and could be linked to other relevant databases. - Planning to release, by December 2021, an environmental protection tax accounts database which will include data on transfers paid per tax types per each industry and household for Canada and sub-national geography. - All databases are or will be publicly available. - Indonesia - Pursued analytical work on risks of climate change, including marine climates; the role of sustainable finance in the insurance industry; and economic modelling to support the transition to a low carbon economy. - The annual survey of large and medium manufacturing firms (SIBS) collects data on non-financial corporations’ use of waste materials from other firms as inputs into their production, enabling circular economy analysis. - Bank Indonesia used SIBS information in a working paper examining the dynamics and importance of circular economy variables on firm productivity. - Other Bank Indonesia studies used parameters from other studies to build economic models for estimating environmental risk premiums and assessing central bank policies from a green and sustainable growth perspective. - The Financial Services Authority of Indonesia has studied implications of climate change on the insurance sector (disaster insurance). - Low Carbon Development Indonesia studied costs and benefits of transforming Indonesia’s economic growth model to a low carbon economy. - China - China’s Wind Economic Database pairs monthly, quarterly and annual macroeconomic and industrial time series data with graphics and data analysis; it includes information on carbon dioxide emissions and particulate matter 2.5 microns or less in width at the national level by industry going back to 2009.13 - The People’s Bank of China produced a key study focusing on financial risks of climate change and evaluates various regulatory responses the central bank could take to address these risks using various methodologies and tools. - China’s 2018 and 2019 Green Finance Progress Reports summarize progress on green finance, focusing on general policies, financial instruments, markets, innovative measures and global cooperation. - The China Council for International Cooperation on Environment and Development (CCICED)’s 2018 research report on “Environmental Information Disclosure System of Listed Companies” discusses environmental information disclosures of listed companies. *International Monetary Fund — Guidance Note (BPM6 Update), "B.6 Sustainable Finance: Integrating Measures of Climate Change Risk into External Sector Statistics."* ### Section 1 ### B.6 Sustainable Finance: Integrating Measures of Climate Change Risk into External Sector Statistics ### Background and rationale - The Guidance Note (GN) proposes introducing an updatable appendix to the revised Balance of Payments Manual (BPM) on measures and Balance of Payments and International Investment Position (IIP) indicators relevant for climate change-related financial risks. - The appendix is initially proposed to include: - detailed geographical and industrial sector breakdowns of direct investment; and - an “of which” category to identify green bonds in the balance of payments/IIP. - The appendix could be updated as sustainable finance work and data needs evolve; possible future indicators mentioned include developing physical and transition risk measures for portfolio investment and making cross-border transactions in CO2 emissions permits visible. - The GN leverages existing international initiatives and inputs from the IMF’s Committee on Balance of Payments Statistics and draws on the System of Environmental Economic Accounting (SEEA) and ongoing research by international organizations. ### Nature of climate-related financial risks (physical and transition) - Climate change creates: - "physical risks" — e.g., extreme weather events affecting insurance claims, mortgage portfolios, land productivity, and nonfinancial companies across sectors such as agriculture and food and beverages; and - "transition risks" — financial implications of moving toward a low-carbon economy, including changes in regulation, consumer preferences, and possible asset stranding (assets prematurely written down, devalued or converted to liabilities). - Both physical and transition risks have market risk and credit risk components: - market risk: changes in value of financial assets due to price movements (e.g., extreme weather events); - credit risk: loan losses from worsening borrowers’ repayment capacity. - The GN recognizes that focusing on "climate change" excludes many other sustainability dimensions (other environmental aspects, social and governance considerations) for the present scope. ### Role of balance of payments/IIP statistics - Balance of payments statistics relevant for climate-related financial risks should: - be relevant at the national (or at most, institutional sector) level; - contain a clear resident–nonresident dimension; - examine exposures to decreases in asset values from both physical and transition risks. - Cross-border tracking of green financing instruments would illuminate the globalization of green financing and the extent to which cross-border capital flows finance adaptation and transition, especially to low-income countries. ### Short-term feasible indicators and priorities - Two aspects highlighted as most feasible in the short term: - Physical location and sector classification of direct investments: - Information on physical location of investments combined with physical-risk profiles of those locations would inform exposure to physical and transition risks at bilateral and aggregated levels. - For physical risks, more detailed geographical granularity (such as city or postal-code area) is ideal, though national data remain relevant for macro-stability implications. - Data sources on physical risks by detailed geographical area are noted as readily available for use. - Sectoral information on Direct Investment is valuable to assess climate-related risks faced by nonfinancial corporations investing in specific sectors (e.g., agriculture or real estate) and to capture indirect exposures of financial corporations through subsidiaries’ lending portfolios. - The GN notes methodological challenges for portfolio investment breakdowns by location and sector because the asset’s physical location or issuer sector may differ from the holder’s location; instrument-by-instrument data linked to issuer emissions or risk profiles would be required. - Type of investments: - Identifying whether instruments are "green" (for example, green bonds defined as bonds for which proceeds are exclusively allocated to green or climate-related expenditures) would help assess financing of mitigation and transition-related investments. - The GN does not recommend narrowing coverage to climate-related green bonds only until taxonomy distinctions are consistently available. - Voluntary “of which: ‘green’” categories could be included for bonds, lending (including intercompany debt), and equity, and for returns on these instruments. ### Additional candidate indicators and topics for the appendix - Source of funding (location of borrowers): information on lenders and their jurisdictions may inform assessment of exposure to climate-related physical or transition risks (e.g., energy-exporting jurisdictions). - Climate-related financial derivatives: reporting cross-border holdings of derivatives tied to sustainable investments or climate risks (e.g., weather-related derivatives; derivatives tied to commodities such as oil, agricultural products, or tons of CO2 emissions) would show hedging and risk-transfer activities. - Making purchases and trade in CO2 emissions permits visible: - BPM6 principles allow multiple classifications of emissions-permit arrangements (e.g., cross-border tax on production, equity investment if part of establishing a direct investment enterprise, services if extensive services provided by the issuer government). - If tradable, permits are economic assets; resales are recorded under contracts, leases, and licenses in the capital account. - Differing treatments under BPM6 complicate a complete picture of cross-border transactions in CO2 permits. - Presenting cross-border transactions for waste treatment and depollution services: - BPM6 classifies waste treatment and depollution services (including production of carbon offsets or carbon sequestration when not classified elsewhere) and related environmental services. - Showing insurance claims from climate-related natural catastrophes: - BPM6 normally classifies nonlife insurance claims as current transfers; exceptionally large catastrophe claims may be recorded as capital transfers. - Consistent identification of such events is difficult; a simplifying convention classifies all cross-border nonlife insurance claims as current transfers unless capital-transfer treatment is necessary for national accounts consistency. - A supplementary item is recommended for insurance claims included in capital transfers to aid comparability. ### Outcomes and recommendation - The GN recommends including an updatable appendix to the revised BPM on measures and balance of payments/IIP indicators related to climate change-related financial risks to allow adaptation as methodologies and data availability evolve. *Source: IMF Guidance Note (BPM6 Update), "B.6 Sustainable Finance: Integrating Measures of Climate Change Risk into External Sector Statistics."* ### Section 2 ### b6-sustainable-finance-integrating-measures-of-climate-change-risk-into-external-sector-statistics - Section 2 ### Recommendations on statistics and classification - Continue to invest in more detailed geographical and industrial sector breakdowns of direct investment, to allow for better linking with geographic and sector-specific risk data, including numerical examples. - Add a voluntary “of which” category, to identify green bonds in the balance of payments and IIP. - The definition of “green” financial instruments will be based on the international standards such as those that are published by the International Capital Markets Association (ICMA).11 11 Th e d efin ition o f “g reen ” fin ancial in strumen ts will be based o n th e in tern atio nal stan d ards such as th e th o se th at are p ublish ed by th e In tern atio n al Cap ital Markets Asso ciatio n (ICMA). ### Questions for discussion (draft agenda for BPM7 appendix) - Do you agree with the inclusion of an updatable appendix to the BPM7 on sustainable finance? - Do you agree that the focus should first be on developing indicators related to climate change? - Do you agree with the proposed voluntary information on green bonds and on direct investment? - Do you agree that future work should include: - making cross-border transactions in CO2 emissions permits visible in the accounts? - waste treatment and depollution services? - insurance losses from exceptionally large claims identified within capital transfers? - Do you have suggestions for additional indicators that should be included in the first version of the appendix? ### Annex I — Summary of responses to the Sustainable Finance stocktaking survey - At the October 2020 Balance of Payments Committee meeting, the Committee agreed to fill out a stocktaking survey on climate related statistics, in collaboration with relevant agencies in their countries to serve as inputs to developing guidance for the updated BPM6. - The stocktaking questionnaire is the same as the one developed by the ECB Statistics Committee’s Expert Group on Climate Change and Statistics (ECB EG CCS), chaired by De Nederlandsche Bank (DNB). The ECB EG CCS work is intended to serve as an input to discussions on how the European System of Central Banks (ESCB) Statistical Function could support the wider debate on climate change and the global financial system with data and statistics.12 - The request to the Committee targeted members that had not already responded to the ECB EG CCS stocktaking questionnaire, with the goal to complement their findings with a more geographically diverse set of respondents. - Only a few Committee members (Canada, Indonesia and China) filled out the survey, providing information about climate related databases as well as existing and ongoing studies on climate change. 12 Th e o utco mes o f th e sto cktakin g survey co nducted by th e ECB EG CCS are summarized in th e “To ward s Statistics on Climate Ch an g e Relevant fo r Cen tral Ban k Activities”, Octo ber 2020, an in tern al ESCB rep o rt. ### Country contributions and data practices - Canada (Statistics Canada) - Maintains three databases: - (i) physical flow account for greenhouse gas emissions (GHG) that included GHG emissions by province by industry and by households; - (ii) direct plus indirect energy and GHG emissions intensity, by industry; - (iii) physical flows of GHG emissions by final demand category. - These databases provide annual data back to 2009 that follow SEEA/SNA and could be linked to other relevant databases. - Planning to release, by December 2021, an environmental protection tax accounts database which will include data on transfers paid per tax types per each industry and household for Canada and sub-national geography. - All databases are or will be publicly available. - Indonesia - Pursued analytical work on risks of climate change, including marine climates; the role of sustainable finance in the insurance industry; and economic modelling to support the transition to a low carbon economy. - The annual survey of large and medium manufacturing firms (SIBS) collects data on non-financial corporations’ use of waste materials from other firms as inputs into their production, enabling circular economy analysis. - Bank Indonesia used SIBS information in a working paper examining the dynamics and importance of circular economy variables on firm productivity. - Other Bank Indonesia studies used parameters from other studies to build economic models for estimating environmental risk premiums and assessing central bank policies from a green and sustainable growth perspective. - The Financial Services Authority of Indonesia has studied implications of climate change on the insurance sector (disaster insurance). - Low Carbon Development Indonesia studied costs and benefits of transforming Indonesia’s economic growth model to a low carbon economy. - China - China’s Wind Economic Database pairs monthly, quarterly and annual macroeconomic and industrial time series data with graphics and data analysis; it includes information on carbon dioxide emissions and particulate matter 2.5 microns or less in width at the national level by industry going back to 2009.13 - The People’s Bank of China produced a key study focusing on financial risks of climate change and evaluates various regulatory responses the central bank could take to address these risks using various methodologies and tools. - China’s 2018 and 2019 Green Finance Progress Reports summarize progress on green finance, focusing on general policies, financial instruments, markets, innovative measures and global cooperation. - The China Council for International Cooperation on Environment and Development (CCICED)’s 2018 research report on “Environmental Information Disclosure System of Listed Companies” discusses environmental information disclosures of listed companies. 13 Based on responses from the People’s Bank of China and China’s State Administration for Foreign Exchange responded to th e sto cktakin g q uestion naire. --- _Source: https://www.imf.org/-/media/files/data/statistics/bpm6/bptt/b6-sustainable-finance-integrating-measures-of-climate-change-risk-into-external-sector-statistics.pdf_