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### Executive Summary — Overview and context and climate finance needs
- Asia‑Pacific is responsible for more than half of current global greenhouse gas emissions and contributes more than 70 percent of global growth in 2023.
- The region’s share of global carbon emissions exceeded 58 percent in 2021.
- To align with net zero GHG (carbon dioxide) emissions by 2050 (1.5 degrees Celsius warming), Asia’s commitments must be strengthened and accompanied by policies supporting vulnerable regions and populations.
- Emerging and developing Asia will need at least $1.1 trillion annually for climate mitigation and adaptation investments.
- Actual investment falls short by $800 billion.
- More than 80 percent of climate financing flows (and 88 percent of loan flows) to the region are directed to mitigation activities.
- Financing of climate adaptation totaled less than $30 billion per year in 2019–20 (about 0.1 percent of regional GDP).
- Pacific island countries: grants account for 83 percent of financing and a higher share is allocated to adaptation.

### Executive Summary — current flows, instruments, and market structure
- Global sustainable debt issuance doubled from $800 billion in 2020 to $1.6 trillion in 2022; Asia‑Pacific accounted for roughly 25 percent of the total (surpassing $350 billion in 2022 or roughly 1.3 percent of regional GDP).
- Issuance in Asia‑Pacific is split evenly between EMDEs and AEs; in EMDE Asia, China accounts for more than 85 percent of sustainable debt issuance (about $140 billion in 2022, 0.7 percent of GDP).
- ASEAN economies and India together contribute nearly 15 percent of EMDE Asia’s sustainable debt issuance (ranging from 0.2 to 0.7 percent of GDP).
- Sustainable debt issuance in Asia‑Pacific’s developing economies is less than 1 percent of EMDE Asia’s sustainable debt issuance.
- Debt is the main instrument of sustainable financing in Asia‑Pacific; sustainability‑linked loans and bonds have grown quickly in AE Asia and now account for a higher share of issuance than green bonds, whereas in EMDE Asia green bonds dominate (led by China).

### Major challenges impeding mobilization of climate finance (summary)
- Data, disclosure, and taxonomy gaps hinder climate risk reporting and analysis and undermine investor confidence in directing private investments toward climate action.
- Conflicting national policy approaches (for example, introducing carbon taxes amid widespread fossil fuel subsidies) are compounded by inadequate institutional coordination and oversight.
- A complex global environment with increasing geoeconomic fragmentation threatens collective and cooperative action on climate change.
- Limited fiscal space in many countries constrains public investment and the ability to mobilize private capital.

### IMF in‑house survey (key facts)
- Survey sent in late 2022 with responses to 16 questions from officials in 12 Asia‑Pacific countries; key findings reported in Annex 1.
- Survey findings provide important insights but may not apply to all countries; policy measures should be tailored to country-specific circumstances.
- Survey: 89 percent of respondents cite data gaps and a lack of capacity in firms to analyze available information for risk identification and reporting as the main challenges.
- Among respondents, only Korea mandates SOE disclosures.

### Policy recommendations — Governments (high level)
- Establish a comprehensive strategy with strong institutional oversight and coordination to enhance frameworks on data, taxonomies, and disclosures.
- Phase out fossil fuel subsidies and expand carbon pricing to create fiscal space; recycle revenues to promote investment in green technology, jobs, and growth while supporting vulnerable households.
- Strengthen macroeconomic and public investment management to keep risk premiums and funding costs low, generate economic dividends, and attract private capital.

### Policy recommendations — Central banks and financial supervisors
- Coordinate across jurisdictions to support adoption of global and interoperable disclosure standards to enhance transparency and consistency.
- Strengthen climate risk analyses and reporting, and incorporate climate‑related financial risks into prudential frameworks.
- Develop climate labels for sustainable investment funds and shift the focus of ESG scores to better capture sustainability and climate impact to foster trust in evaluations.

### Policy recommendations — IMF and multilateral institutions
- Cover macro‑critical climate‑related risks and policies in surveillance and lending activities.
- Contribute to reducing climate financing gaps through catalytic and reform‑supporting functions of the Resilience and Sustainability Trust.
- Strengthen data and statistics—including capacity building and peer learning—to develop common standards around climate risk measurement and analysis.
- Scale up grant financing and concessional lending, and where appropriate adopt risk‑mitigating mechanisms to expand lending capacity.
- Emphasize cooperation among multilateral institutions to align efforts and resources and achieve a balanced allocation between mitigation and adaptation lending.

---

### Box 1 — Sustainable Debt Instruments: definitions, markets, and gaps
- Green bonds: proceeds used exclusively to finance projects with positive environmental impact; use of proceeds is verified and can subject the issuer to penalties.
- Sustainability bonds: finance projects with both positive environmental and social impact; use of proceeds is verified and can subject the issuer to penalties.
- Sustainability‑linked bonds: issuers commit to achieving predetermined sustainability performance targets; use of proceeds is not constrained; issuer receives a bonus or pays a penalty if the target is met or missed.
- Social bonds: aim to achieve social benefits such as improvements in health and education.
- Green loans and sustainability‑linked loans: analogous to bonds but in loan form.

- Standardization and verification:
  - Standardization is crucial; taxonomies in some jurisdictions have facilitated robust standards and transparency.
  - The Social Bond Principles support transparent social credentials (ICMA 2023).

- Role of equity funds and ESG in Asia‑Pacific:
  - More than 30 percent of global assets under management now comprise ESG funds (IMF 2022a), and more than half of this is allocated to equity investments.
  - EMDE Asia makes up about 10 percent of global assets for non‑ESG funds, but only 2 percent for ESG funds.
  - If Asia’s share of global ESG funds rose to about 10 percent (the region’s share of overall funds), this would generate about $500 billion per year in inflows to the region. (IMF staff estimate using Lipper Data.)
  - Current ESG methodologies do not reward EMDEs that implement climate policies; little correlation between ESG ratings and environmental performance.

- Climate finance flows, public‑private mix, and initiatives:
  - Private financing estimated to make up about 40 percent of total climate financing in Asia (Figure 6).
  - Just Energy Transition Partnerships: aim to mobilize $20 billion (Indonesia) and $15.5 billion initial mobilization (Vietnam) from a mix of public and private finance.
  - Green Climate Fund: between 2014 and 2019 approved $3.3 billion for adaptation and mitigation projects in the Pacific; total disbursements amounted to only a quarter of annual adaptation needs.
  - Innovative finance examples: Asian Development Bank Innovative Finance Facility for Climate in Asia and the Pacific (May 2023) expected to raise $3 billion in guarantees enabling as much as $15 billion over five years; World Bank Innovative Finance Facility for Climate‑Amundi $2 billion EMDE green bond fund.

- Financing needs and gaps:
  - Gap for mitigation: approximately $600 billion per year.
  - Gap for adaptation: estimated to reach about $200 billion per year in Asia‑Pacific, including about $1 billion for the Pacific island countries (Fouad and others 2021b).
  - IEA estimates: average annual investment in clean power, grids, and energy end use in climate‑driven scenarios to cost more than $150 billion per year by 2030 in EMDE Asia excluding China; previous year’s estimate was more than $375 billion per year.
  - Bhattacharya and others (2022) estimate private financing must at least double between 2019 to 2025 for an incremental $395 billion.
  - Asia received about $140 billion in private capital in 2020.
  - Filling adaptation gap will require continued public sector support because adaptation investments are typically viewed as public goods.

- Carbon offsets:
  - Asia produced 44 percent of the $2 billion global offset market in 2021.
  - Probst and others (2023) estimate only 12 percent of total volume of existing credits constitute real emissions reductions.
  - Average price of a renewable energy offset traded at about $2 per ton in 2021.
  - Article 6 of the Paris Agreement allows voluntary cooperation; Article 6.4 establishes a supervised mechanism for trading emission reductions.

- Costs of issuing sustainable debt and greenium evidence:
  - Additional administrative costs for green instruments relative to conventional sovereign bonds.
  - Global panel estimate of greenium: almost 6 basis points.
  - Panel details: 212 bonds from 23 economies (5 in Asia‑Pacific), 3,474 observations, February 2018 to July 2023.
  - Global literature: Ando and others (2023) estimate average greenium about 4 basis points, larger in EMDEs; Baker and others (2022) find a small greenium in US municipal bonds; Zerbib (2019) estimates a small negative greenium of about 2 basis points for certain issuers.

---

### 1. India: Example of Pseudo‑Twin Bonds — empirical yield facts and greenium findings
- India pseudo‑twin bond yields (Yield to maturity; percentage points):
  - 6.8; 7.7; 6.9; 7.0; 7.1; 7.2; 7.3; 7.4; 7.5; 7.6; –0.12; 0.04; –0.10; –0.08; –0.06; –0.04; –0.02; 0.02; 0.00
- Greenium panel estimates: dates shown include 03 Feb. 2023; 15 Feb. 23; 27 Feb. 23; 11 Mar. 23; 23 Mar. 23; 04 Apr. 23; 16 Apr. 23; 28 Apr. 23; 10 May 23; 22 May 23; 03 June 23; 15 June 23; 27 June 23; 09 July 23.
- Key empirical findings:
  - The estimated greenium corresponds to only a modest reduction in interest costs for sovereign issuers: the annual coupon on a $1 billion bond is reduced by approximately $600,000.
  - For the rest of the world outside Asia‑Pacific, the average greenium is approximately 6.5 basis points.
  - For Asia‑Pacific issuers, the greenium is not statistically significant; the point estimate is slightly positive for AE issuers.
  - Results show greenium is larger for EMDE issuers than for AE issuers but is significant in both groups (outside Asia‑Pacific).
  - Interpretation: green bonds issued by Asia‑Pacific sovereigns have not led to lower interest costs than would have been obtained by issuing a conventional instrument.
  - Gao and Schmittmann (2022) propose a model that rationalizes a zero greenium with asymmetric information enabling “greenwash.”

---

### 3. Challenges to Mobilizing Climate Finance — detailed impediments
- Gaps in the climate finance architecture: three pillars needed:
  1. High‑quality, reliable, and comparable data.
  2. A globally harmonized and consistent set of climate disclosure standards.
  3. Globally agreed‑on principles for climate finance taxonomies and classification approaches.
- Specific data gaps:
  - Inability to estimate geolocational climate conditions on a forward‑looking basis.
  - Socioeconomic data gaps on population vulnerabilities and adaptive capacities.
  - Lack of granular data on soil moisture, land use, ocean interactions, and sea level rise.
  - Lack of transition risk assessments.
- Data quality deficiencies: reliability (consistency and transparency) and comparability (lack of sound methodologies and metrics).
- Disclosure and taxonomy status:
  - Disclosure requirements exist in laws or regulations for private firms in: Australia, Korea, Hong Kong SAR, Japan, Malaysia, Philippines, Thailand.
  - Asia‑Pacific firm‑level carbon reporting rose from about 200 firms in 2014 to almost 1,000 in 2022.
  - A total of 7 of 12 countries surveyed reported having no climate taxonomy.
  - People’s Bank of China issued the region’s first climate taxonomy in 2015.
  - Korea, Indonesia, Malaysia, and Mongolia have finalized taxonomies; Japan provides high‑level guidance and is considering a taxonomy.
  - ASEAN developing version 2.0 of regional taxonomy with screening criteria for six focus sectors and three enabling sectors.
- Institutional capacity and coordination challenges:
  - Responsibilities for climate policy tend to be spread across many ministries; coordination is often a challenge.
  - Examples: Indonesia’s climate finance strategy covers only the public sector; Malaysia’s covers only the private sector.
  - Pacific island countries face difficulty meeting Green Climate Fund accreditation due to stretched capacity.
  - Shallow financial markets across much of EMDE Asia constrain hedging against long‑term risks.
- Fossil fuel subsidies and fiscal implications:
  - In 2022, fossil fuel subsidies in Asia‑Pacific surged to $579.7 billion, or about 44 percent of the global total.
  - When implicit fossil fuel subsidies are included, Asia‑Pacific reached more than $3 trillion in 2022, making up nearly two‑thirds of the global total.
  - IMF estimates: removing subsidies with a full fossil fuel price reform could raise additional fiscal revenue by about $1.8 trillion or 4.4 percent of GDP in East Asia and the Pacific.
- Carbon pricing coverage and design notes:
  - Momentum: five countries in Asia (China, Indonesia, Japan, Korea, New Zealand) have introduced ETSs; only Japan and Singapore have implemented a carbon tax.
  - Policymakers favor ETS over carbon tax though carbon taxes have practical advantages (broader coverage, administrative simplicity, predictability, revenue generation).
  - Specific 2021 details (selected):
    - Indonesia: Carbon Tax Year Introduced 2022; Coverage: Power ✓; Coverage Rate, all GHGs (percent) 26; Price, $/ton 2; Revenue/Rent, percent of GDP 0.05; Point of Tax/Regulation Midstream; Revenue Use General budget.
    - Singapore: Year Introduced 2019; Coverage: Power ✓, Industry ✓; Coverage Rate, all GHGs (percent) 80; Price, $/ton 4; Revenue/Rent, percent of GDP 0.04; Point of Tax/Regulation Midstream; Revenue Use General budget.
    - China (ETS): Year Introduced 2013, 2014, 2016, 2021; Coverage: Power ✓; Coverage Rate, all GHGs (percent) 38; Price, $/ton 9; Revenue/Rent, percent of GDP 0.32; Point of Tax/Regulation Downstream; Revenue Use Environmental spending proposal.
    - Korea (ETS): Year Introduced 2015; Coverage: Power ✓, Industry ✓, Transport ✓, Buildings ✓; Coverage Rate, all GHGs (percent) 73; Price, $/ton 19; Revenue/Rent, percent of GDP 0.99; Point of Tax/Regulation Downstream; Revenue Use Environmental spending.
    - New Zealand (ETS): Year Introduced 2008; Coverage: Power ✓, Industry ✓, Transport ✓; Coverage Rate, all GHGs (percent) 49; Price, $/ton 53; Revenue/Rent, percent of GDP 0.20; Point of Tax/Regulation Downstream; Revenue Use General budget, environmental spending.
    - Japan (Hybrid): Year Introduced 2010, 2011, 2012; Coverage: Power ✓, Industry ✓, Transport ✓, Buildings ✓; Coverage Rate, all GHGs (percent) 77; Price, $/ton 2; Revenue/Rent, percent of GDP 0.05; Point of Tax/Regulation Midstream; Revenue Use Environmental spending.
  - Country notes:
    - Japan introduced a carbon tax of about $3 per ton in 2012.
    - Singapore carbon tax introduced 2019 starting at S$5 per metric ton and will rise to S$25 per metric ton in 2024 and to between S$50 and S$80 by 2030; tax applies to facilities emitting at least 25,000 tons CO2e annually (about 80 percent of total emissions).
    - Indonesia legislated plans for carbon tax in 2022 but implementation delayed; Indonesia launched an emissions credit trading system in 2023.
- Global issues:
  - Geoeconomic fragmentation, volatile energy prices, splintered supply chains, new export restrictions on key low‑carbon commodities, and rising trade restrictions threaten transition costs and coordination.
  - Carbon border adjustment taxes under consideration; emissions in traded products account for 10 percent of total emissions.

---

### 4. Policy Considerations and the Way Forward — detailed policy actions
A. The Role of Governments
- Integrate mitigation and adaptation targets into a climate finance strategy and establish sound climate governance.
- Climate finance strategy should:
  - Articulate translation of NDCs and NAPs into policies and financing.
  - Lay out deliverables, timelines, financial estimates, and stakeholders.
  - Develop nexus between climate plans and alignment approaches (taxonomies).
- Establish a centralized coordinating body/authority to:
  - Limit silos, facilitate information sharing, assess investment needs, determine priority projects, identify gaps and bottlenecks, and publish progress reports.
- Mobilize additional domestic fiscal resources by:
  - Undertaking subsidy reforms and introducing carbon pricing schemes.
  - Phasing out fossil fuel subsidies and implementing carbon taxation.
  - Redirecting revenues from allowance auctioning to support green transition and vulnerable households.
- Attract private capital and align risk‑return:
  - Use policies and innovative financing for coal phaseouts, leverage PPPs and credit guarantees, consider targeted subsidies consistent with WTO rules, ensure appropriate allocation of contractual risks, and strengthen infrastructure governance.
- Establish a strong climate information architecture:
  - Climate finance taxonomies following globally agreed principles; harmonize to attract cross‑border finance; use transition taxonomies.
  - Globally harmonized disclosure standards; mandate disclosures initially for targeted industries or firms with large transition risks.
  - Timely, reliable, granular, and comparable data; resource statistical agencies; align taxonomies at business level with international classifications.
- Public investment management reform:
  - Address inefficiencies that lead to about 30 percent lower potential gains from public investment (IMF 2015).
  - Use Public Investment Management Assessment (PIMA); integrate PFM reforms; set numerical targets for green technology adoption.
- Strengthen economic management to attract private capital:
  - Maintain sound macroeconomic policies to lower risk premiums; mainstream adaptation in fiscal policy to strengthen resilience.

B. The Role of Central Banks and Financial Sector Supervisors
- Integrate physical and transition climate risks into prudential frameworks.
- Develop supervisory guidelines for reporting climate risks, strengthen reporting requirements, and build capacity for climate risk analyses.
- Where permissible, consider climate considerations in collateral frameworks and asset purchases with caution.
- Do not substitute prudential regulation for effective government climate policy; green supporting factors should reflect negative correlation between financial risks and greenness.
- Require granular supervisory data on credit exposures related to scope 1, scope 2, and scope 3 emissions and sectoral/geographic distributions.
- Reduce greenwashing by requiring public disclosures based on globally harmonized standards (align with ISSB where relevant).
- Strengthen capacity for climate risk analyses using a suite of macro, micro, and sectoral models; leverage IMF FSAP stress‑testing.

C. The Role of the IMF and Other Multilateral Institutions
- IMF to cover climate‑related policies and risks in surveillance and provide capacity development on climate PFM, public investment management, debt sustainability, and PPP frameworks.
- Climate PIMA can address uneven institutional capacity and weak coordination.
- Resilience and Sustainability Trust (RST) offers long‑term affordable financing for reforms; Bangladesh is first Asia‑Pacific member to benefit; about 40 members have expressed interest.
- RST resources insufficient to meet overall needs but can catalyze other financing and help reduce macro risk premiums.
- IMF capacity development priorities (survey preference: “capacity development”):
  - Financial sector: integrate climate risk into FSAPs.
  - Fiscal sector: mainstream climate into fiscal policies; tools include Climate Policy Assessment Tool and green PFM framework; climate PIMA assesses planning, budgeting, and risk management.
  - Statistics: update statistical manuals; System of Environmental Economic Accounting; IMF Climate Change Indicators Dashboard; Balance of Payments and IIP Manual to include annex on sustainable finance; System of National Accounts 2025 Update to include environmental classes.
- Multilateral cooperation and MDB roles:
  - Collaborate for peer‑to‑peer learning; IMF works with BIS, NGFS, World Bank, Basel Committee.
  - MDBs can expand lending using preferred creditor status and leverage, use credit and performance guarantees to de‑risk exposures.
  - Asian Development Bank Innovative Finance Facility for Climate in Asia and the Pacific is a donor‑backed guarantee facility to leverage ADB balance sheet.
- Allocation balance:
  - In 2021, total MDB climate finance to low‑ and middle‑income countries amounted to $50.7 billion, of which only $17.6 billion was channeled to adaptation.
  - For Pacific island countries, access to the Green Climate Fund is crucial for adaptation.

---

### Box 3 — The IMF’s Global Initiatives to Improve Climate Data
- The IMF leads two climate data–related initiatives collaborating with BIS, ECB, Eurostat, FSB, OECD, UN Statistics Division, World Bank, and national statistical agencies.
- Climate Change Indicators Dashboard (URL provided in source): provides globally comparable climate indicators, including:
  - greenhouse gas emissions from economic activity, trade in environmental goods, green finance, government policies, physical and transition risks.
  - Financial indicators: Carbon Footprint of Bank Loans, Green Debt indicators.
  - Coverage: Dashboard includes data for all countries in Asia‑Pacific.
- Group of Twenty Data Gaps Initiative (G20 DGI): third phase covers 14 recommendations; seven recommendations focus on climate change including:
  - tracking progress toward national GHG emissions and national carbon footprints;
  - monitoring energy mix and renewables share;
  - monitoring cross‑border emissions through trade and global value chains;
  - tracking sources of funds for green projects;
  - quantifying forward‑looking risks;
  - providing comparable estimates of government subsidy regimes; and
  - tracking level of expenditures to mitigate and adapt to climate change.

---

*Source: Executive Summary, Box 1, Boxes 2–3, Sections 1, 3, and 4, and excerpts from Unlocking Climate Finance in Asia‑Pacific: Transitioning to a Sustainable Future (IMF Departmental Papers).*

### Executive Summary ...............................................................................................vii

### Executive Summary

### Overview and context
- Asia-Pacific is responsible for more than half of current global greenhouse gas emissions and contributes more than 70 percent of global growth in 2023.
- The region’s share of global carbon emissions exceeded 58 percent in 2021.
- To align with net zero GHG (carbon dioxide) emissions by 2050 (1.5 degrees Celsius warming), Asia’s commitments must be strengthened and accompanied by policies supporting vulnerable regions and populations.

### Climate finance needs and gap
- Emerging and developing Asia will need at least $1.1 trillion annually for climate mitigation and adaptation investments.
- Actual investment falls short by $800 billion.

### Current state of climate finance flows and instruments
- Global sustainable debt issuance doubled from $800 billion in 2020 to $1.6 trillion in 2022; Asia-Pacific accounted for roughly 25 percent of the total (surpassing $350 billion in 2022 or roughly 1.3 percent of regional GDP).
- Issuance in Asia-Pacific is split evenly between EMDEs and AEs; in EMDE Asia, China accounts for more than 85 percent of sustainable debt issuance (about $140 billion in 2022, 0.7 percent of GDP).
- ASEAN economies and India together contribute nearly 15 percent of EMDE Asia’s sustainable debt issuance (ranging from 0.2 to 0.7 percent of GDP).
- Sustainable debt issuance in Asia-Pacific’s developing economies is less than 1 percent of EMDE Asia’s sustainable debt issuance.
- Debt is the main instrument of sustainable financing in Asia-Pacific; sustainability-linked loans and bonds have grown quickly in AE Asia and now account for a higher share of issuance than green bonds, whereas in EMDE Asia green bonds dominate (led by China).
- More than 80 percent of climate financing flows (and 88 percent of loan flows) to the region are directed to mitigation activities.
- Financing of climate adaptation totaled less than $30 billion per year in 2019–20 (about 0.1 percent of regional GDP).
- Pacific island countries: grants account for 83 percent of financing and a higher share is allocated to adaptation.

### Major challenges impeding mobilization of climate finance
- Data, disclosure, and taxonomy gaps hinder climate risk reporting and analysis and undermine investor confidence in directing private investments toward climate action.
- Conflicting national policy approaches (for example, introducing carbon taxes amid widespread fossil fuel subsidies) are compounded by inadequate institutional coordination and oversight.
- A complex global environment with increasing geoeconomic fragmentation threatens collective and cooperative action on climate change.
- Limited fiscal space in many countries constrains public investment and the ability to mobilize private capital.

### Key insights from the IMF in‑house survey
- The paper draws on an IMF Asia-Pacific Department survey sent in late 2022 with responses to 16 questions from officials in 12 Asia-Pacific countries; key findings are reported in Annex 1.
- Survey findings provide important insights into regional challenges but may not apply to all countries; policy measures should be tailored to country-specific circumstances.

### Policy recommendations — Governments
- Establish a comprehensive strategy with strong institutional oversight and coordination to enhance frameworks on data, taxonomies, and disclosures.
- Phase out fossil fuel subsidies and expand carbon pricing to create fiscal space; recycle revenues to promote investment in green technology, jobs, and growth while supporting vulnerable households.
- Strengthen macroeconomic and public investment management to keep risk premiums and funding costs low, generate economic dividends, and attract private capital.

### Policy recommendations — Central banks and financial supervisors
- Coordinate across jurisdictions to support adoption of global and interoperable disclosure standards to enhance transparency and consistency.
- Strengthen climate risk analyses and reporting, and incorporate climate-related financial risks into prudential frameworks.
- Develop climate labels for sustainable investment funds and shift the focus of ESG scores to better capture sustainability and climate impact to foster trust in evaluations.

### Policy recommendations — IMF and multilateral institutions
- Cover macro-critical climate-related risks and policies in surveillance and lending activities.
- Contribute to reducing climate financing gaps through catalytic and reform-supporting functions of the Resilience and Sustainability Trust.
- Strengthen data and statistics—including capacity building and peer learning—to develop common standards around climate risk measurement and analysis.
- Scale up grant financing and concessional lending, and where appropriate adopt risk-mitigating mechanisms to expand lending capacity.
- Emphasize cooperation among multilateral institutions to align efforts and resources and achieve a balanced allocation between mitigation and adaptation lending.

*Source: Executive Summary, Unlocking Climate Finance in Asia‑Pacific: Transitioning to a Sustainable Future (IMF Departmental Papers).*

### Box 1. Sustainable Debt Instruments: A Brief Overview

### Box 1. Sustainable Debt Instruments: A Brief Overview

### Definitions and classes of sustainable debt instruments
- Green bonds: debt security whose proceeds are used exclusively to finance projects that have positive environmental impact. Use of proceeds is verified and can subject the issuer to penalties.
- Sustainability bonds: finance projects with both positive environmental and social impact. Use of proceeds is verified and can subject the issuer to penalties.
- Sustainability-linked bonds: issuers commit to achieving predetermined sustainability performance targets, measured using indicators such as greenhouse gas emissions. Although the use of proceeds is not constrained, the issuer receives a bonus or pays a penalty if the target is met or missed.
- Social bonds: aim to achieve social benefits such as improvements in health and education.
- Green loans: credit facility offered to a borrower for environmental purposes approved by the lender.
- Sustainability-linked loans: like sustainability-linked bonds, emphasize improvements in the sustainability performance of the borrowing entity.

- Standardization and verification:
  - Standardization is crucial to ensure market development; if targets or penalties are not sufficiently ambitious or strict, instruments may fail to attract climate-conscious investors.
  - Taxonomies in some jurisdictions have facilitated robust standards and transparency for bonds.
  - The Social Bond Principles seek to support issuers in financing socially sound and sustainable projects and provide transparent social credentials (ICMA 2023).

### Role of equity funds and ESG in Asia-Pacific
- Global context:
  - More than 30 percent of global assets under management now comprise ESG funds (IMF 2022a), and more than half of this is allocated to equity investments.
- Asia-Pacific specifics:
  - EMDE Asia makes up about 10 percent of global assets for non-ESG funds, but only 2 percent for ESG funds.
  - If Asia’s share of global ESG funds rose to about 10 percent (the region’s share of overall funds), this would generate about $500 billion per year in inflows to the region. (This is an IMF staff estimate using underlying data from Lipper Data.)
- ESG ratings and limitations:
  - Current methodologies of ESG rating agencies do not reward EMDEs that implement climate policies; there is little correlation between ESG ratings and environmental performance.
  - Refinitiv’s “E” score uses 64 variables with equal weights, but only 16 variables directly reflect the climate impact.
  - Elmalt, Kirti, and Igan (2021) find a limited link between ESG scores and carbon emission performance at the firm level.
  - In the absence of credible alternative climate impact scores, ESG ratings remain important guides for fund managers.

### Climate finance flows, public-private mix, and recent initiatives
- Share of private financing:
  - Private financing is now estimated to make up about 40 percent of total climate financing in Asia (Figure 6).
- Examples of public initiatives intended to crowd in private participation:
  - Just Energy Transition Partnerships aim to mobilize $20 billion from a group of AEs co-led by Japan and the United States to phase out coal-fired power plants in Indonesia.
  - The Just Energy Transition Partnership in Vietnam will aim to mobilize an initial $15.5 billion of public and private finance during the next three to five years for the country’s green transition.
  - Green Climate Fund: between 2014 and 2019 approved $3.3 billion for adaptation and mitigation projects in the Pacific island countries; total disbursements amounted to only a quarter of annual adaptation needs (Fouad and others 2021b).
- Innovative finance instruments announced:
  - Asian Development Bank Innovative Finance Facility for Climate in Asia and the Pacific (May 2023): expected to raise $3 billion in guarantees from financing partners, which could enable as much as $15 billion for new climate-related projects in the region over an initial five-year period.
  - World Bank Innovative Finance Facility for Climate-Amundi $2 billion EMDE green bond fund to leverage private capital in the region.
- Observation on private flows:
  - Private flows are small, consistently below $1 billion dollars in certain plotted categories (Figure 6 note).

### Financing needs and gaps
- Estimated financing gaps:
  - Gap for mitigation: approximately $600 billion per year for mitigation, including for infrastructure investments in clean energy sources (Figure 6).
  - Gap for adaptation: estimated to reach about $200 billion per year in Asia-Pacific, including about $1 billion for the Pacific island countries (Fouad and others 2021b).
- Investment cost references:
  - IEA estimates: average annual investment in clean power, grids, and energy end use in climate-driven scenarios to cost more than $150 billion per year by 2030 in EMDE Asia excluding China (IEA 2021); previous year’s estimate was more than $375 billion per year.
- Scaling private finance:
  - Bhattacharya and others (2022) estimate private financing must at least double between 2019 to 2025 for an incremental $395 billion.
  - Asia received about $140 billion in private capital in 2020.
- Adaptation financing:
  - Filling the gap for adaptation financing will require continued public sector support because adaptation investments are typically viewed as public goods that do not generate a continuous and visible income stream to attract private capital.

### Carbon offsets in Asia-Pacific (Box 2)
- Definition and function:
  - Carbon offsets are tradable certificates that provide a means for polluters to compensate for their emissions by investing in projects that reduce or remove greenhouse gas emissions elsewhere.
  - Offsets allow firms with higher abatement costs to cross-subsidize those with lower abatement costs.
  - Efficient, well-designed offset regimes can increase competitiveness of green investments by improving financial margins of viable projects and expanding the universe of viable projects.
  - Risks: without coordinated regulation and robust verification, a large supply of low-quality offsets can lead to inefficient transfers and potentially increase global emissions.
- Asia-Pacific market facts:
  - Asia is the world’s largest producer of carbon offsets, producing 44 percent of the $2 billion global market in 2021.
  - Many jurisdictions in the region have recently launched carbon exchanges (Hong Kong SAR, Malaysia, Singapore, Thailand); several others are in development (China, India, Indonesia, Japan, Korea).
- Integrity and standards:
  - Ensuring offsets lead to carbon reductions requires coordinated regulations, standardization of contracts, and a verification mechanism to ensure integrity.
  - Additionality principle: offset revenue should flow only to projects that satisfy additionality (project becomes viable due exclusively to offset revenue).
  - Probst and others (2023) estimate only 12 percent of the total volume of existing credits constitute real emissions reductions.
  - The average price of a renewable energy offset traded at about $2 per ton in 2021.
- Paris Agreement reference:
  - Article 6 of the Paris Agreement allows countries to voluntarily cooperate to achieve Nationally Determined Contributions; Article 6.4 establishes a mechanism for trading greenhouse gas emission reductions between countries under COP supervision.

### Costs of issuing sustainable debt and evidence on “greenium”
- Issuance costs and borrower perspective:
  - Issuing green instruments involves additional administrative costs compared to conventional sovereign bonds.
  - Sovereign issuers have green bond frameworks aligned with International Capital Market Association principles to ensure transparency, tracking, and reporting of use of proceeds.
  - Borrower justification: investors in green bonds are hypothesized to accept lower returns (a “greenium”) because of nonpecuniary preferences for green activities.
- Empirical findings and regional evidence:
  - Globally, 28 economies have issued sovereign green bonds since 2016, including eight from Asia-Pacific.
  - Empirical studies are mixed: some find evidence for a sovereign greenium; others do not.
  - Market pricing of recently issued green bonds in the region has often mirrored conventional bonds; India’s early 2023 issuance of two 10-year rupee-denominated bonds (one green, one conventional) observed the conventional bond yield a few basis points lower than the green bond—indicating absence of greenium in that instance.
- Panel estimate of greenium:
  - A global panel of sovereign bonds yields an estimated greenium of almost 6 basis points.
  - Panel construction and sample details:
    - Monthly panel of sovereign bonds i where at least one conventional and one green bond are in circulation for the same country j, denominated in the same currency d, and remaining maturities differ by no more than 18 months.
    - Matching criteria yield 212 bonds issued by 23 economies, of which 5 are in the Asia-Pacific region.
    - Estimation sample contains 3,474 observations and spans the period of February 2018 to July 2023.
  - Model specification (as presented):
    - Yijdt = a_jdt + b · Green_i + g · BidAsk_ijdt + θ · Tenor_ijdt + «ijdt
    - BidAsk_ijdt captures liquidity; Tenor_ijdt controls for duration and term premium; Green_i is a dummy for classification as “green” by the Climate Bond Initiative; country-currency-time fixed effects a_jdt capture time-varying shocks.
    - Coefficient β captures average yield difference between comparable green and conventional bonds; estimated parameter of 6 basis points suggests investors have a nonpecuniary motive to hold green instruments.
- Literature context on greenium estimates:
  - Ando and others (2023) estimate an average greenium of about 4 basis points, larger in EMDEs.
  - Baker and others (2022) document evidence for a small greenium of a few basis points in a sample of US municipal bonds but find that the greenium is not present in primary issuance of twin bonds.
  - Zerbib (2019) estimates a small negative greenium of about 2 basis points, most pronounced for instruments issued by financial corporates and low-rated debtors.

*IMF Departmental Papers • Unlocking Climate Finance in Asia-Pacific: Transitioning to a Sustainable Future — Box 1. Sustainable Debt Instruments: A Brief Overview*

### 1. India: Example of Pseudo-Twin Bonds

### 1. India: Example of Pseudo-Twin Bonds

### India pseudo-twin bond yields (Yield to maturity; percentage points)
- 6.8
- 7.7
- 6.9
- 7.0
- 7.1
- 7.2
- 7.3
- 7.4
- 7.5
- 7.6
- –0.12
- 0.04
- –0.10
- –0.08
- –0.06
- –0.04
- –0.02
- 0.02
- 0.00

### Greenium panel estimates (Estimated difference in yield; percentage points)
- Dates shown in panel: 03 Feb. 2023; 15 Feb. 23; 27 Feb. 23; 11 Mar. 23; 23 Mar. 23; 04 Apr. 23; 16 Apr. 23; 28 Apr. 23; 10 May 23; 22 May 23; 03 June 23; 15 June 23; 27 June 23; 09 July 23
- By income group and region categories listed:
  - World average
  - Advanced
  - EMDE
  - Rest of the world
  - Asia
  - Asia-Advanced
  - Asia-EMDE
- Note: Panel 1 compares secondary market yields of 10-year sovereign bonds denominated in Indian rupee. The green bond has ticker 968KJF and was issued on January 26, 2023, while the brown bond has ticker 9681RR and was issued on February 3, 2023.
- In panel 2, bars show estimated parameter β from equation (1) in the main text. Dark shade indicates statistical significance at the 95 percent confidence level.
- EMDE = emerging market and developing economy.

### Key empirical findings on greenium and India/Asia-Pacific
- The estimated greenium corresponds to only a modest reduction in interest costs for sovereign issuers: the annual coupon on a $1 billion bond is reduced by approximately $600,000.
- For the rest of the world outside Asia-Pacific, the average greenium is approximately 6.5 basis points.
- For Asia-Pacific issuers, the greenium is not statistically significant; the point estimate is slightly positive for AE issuers.
- The results show that the greenium is larger for EMDE issuers than for AE issuers but is significant in both groups (outside Asia-Pacific).
- Interpretation: green bonds issued by Asia-Pacific sovereigns have not led to lower interest costs than would have been obtained by issuing a conventional instrument.
- Literature note: Gao and Schmittmann (2022) propose a model that rationalizes a zero greenium with the presence of asymmetric information, which gives issuers the ability to “greenwash.”

### Policy-relevant implication from the findings
- With interest rates staying high as major central banks tighten monetary policy to tackle inflation, addressing the challenges described below may help achieve more favorable pricing for Asia-Pacific sovereign green bonds issued in the future.

---

### 3. Challenges to Mobilizing Climate Finance

### Overview of principal challenges
- Significant challenges complicate efforts to scale up private climate finance in Asia-Pacific, including:
  - Gaps in the climate information architecture that hamper accurate assessment and tracking of risks, impeding transparency and accountability.
  - Resource constraints, inadequate coordination, and lack of institutional oversight at the national level for climate initiatives.
  - A weak global economy, successive shocks, and a shift toward protectionist industrial policies and geoeconomic fragmentation that threaten collective action on climate change.

### A. Gaps in the Climate Finance Architecture: Data, Disclosure, and Taxonomies
- Three key pillars required for a sound climate information architecture:
  1. High-quality, reliable, and comparable data.
  2. A globally harmonized and consistent set of climate disclosure standards.
  3. Globally agreed-on principles for climate finance taxonomies and other classification approaches to align investments with climate goals.
- Macro-critical data gaps and deficiencies limit the ability of governments, financial regulators and supervisors, and businesses to prepare for and respond to climate change.
- Specific data gaps cited:
  - Inability to estimate geolocational climate conditions on a forward-looking basis, impairing country-specific economic risk assessment, disaster planning, and financial industry risk management.
  - Socioeconomic data gaps, including population vulnerabilities and adaptive capacities, hampering assessment of climate impacts on labor markets and poverty.
  - Lack of granular data on soil moisture, land use, interactions between ocean temperatures and currents, and sea level rise, impeding assessments of agricultural productivity, food security, and sectors like fisheries and maritime transportation.
  - Lack of transition risk assessments, complicating evaluation of potential economic and financial stability impacts of evolving toward a low carbon economy.
- Data quality deficiencies include reliability (consistency and transparency) and comparability (lack of sound methodologies and metrics).
- Financing climate projects through conventional financing sources without proper screening supported by taxonomies and principles could be susceptible to greenwashing concerns.
- These data gaps impede decision making and prevent scaling up of climate finance; investors need accurate and comparable data to assess risks and identify investable green and transition projects.
- Private data partially closes gaps, but significant room remains for improvement with official public data collected by statistical organizations and regulatory bodies such as central banks.

### Observations from survey responses and recent progress
- Survey: 89 percent of respondents cite data gaps and a lack of capacity in firms to analyze available information for risk identification and reporting as the main challenges.
- Examples of national actions:
  - Hong Kong SAR is developing data on historical catastrophic damages and tools to estimate GHG emissions, with clearly disclosed methodologies that companies can use.
  - Korea is working to link relevant data systems by establishing a common platform for climate disclosures.
  - Brunei Climate Change Secretariat launched the Mandatory Directive requiring monthly and annual reporting of carbon inventory, directing all facilities that emit or remove GHGs to report their emissions to the government as of April 2023.
  - Korea mandates disclosures from its state-owned enterprises (among survey respondents, only Korea mandates SOE disclosures).
- Disclosure requirements exist in laws or regulations for private firms in several economies: Australia, Korea, Hong Kong SAR, Japan, Malaysia, Philippines, Thailand.
- Asia-Pacific has seen growth in firm-level carbon reporting: the number of firms headquartered in Asia-Pacific that self-report carbon emissions rose from about 200 in 2014 to almost 1,000 in 2022.
- Despite progress, disclosure requirements are rarely imposed on government agencies and public institutions; coverage varies significantly across regions and is often limited to a few sectors.

*Source: IMF staff calculations based on data from Thomson Reuters Eikon; excerpted content from IMF DEPARTMENTAL PAPERS • Unlocking Climate Finance in Asia-Pacific: Transitioning to a Sustainable Future.*

### 2. Percent of TCFD Disclosures Implemented,

### 2. Percent of TCFD Disclosures Implemented, by Region (Percent of disclosing firms; 2021)

### TCFD adoption and regulatory developments
- Recent improvements in adopting Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations have been observed.
- Hong Kong SAR and Malaysia will mandate disclosures aligned with TCFD recommendations for listed companies.
- New Zealand will require large firms, including financial sector entities, to report climate disclosures starting in 2023.
- Central banks in China, Japan, and Singapore have issued guidelines in line with TCFD recommendations (Shirai 2023).
- Adoption of recommendations concerning governance, strategy, risk management, metrics, and targets is lagging in Asia-Pacific compared to Europe.
- Companies applying the new ISSB standards—International Financial Reporting Standards S1 (general sustainability) and S2 (climate-related)—effective for annual reporting beginning in January 2024, will meet the TCFD recommendations that are fully incorporated into ISSB standards.

### Climate taxonomies and interoperability
- A total of 7 of 12 countries surveyed reported having no climate taxonomy that defines economic activities and financial instruments that qualify as “sustainable”.
- The People’s Bank of China issued the region’s first climate taxonomy in 2015, supplemented by additional guidelines.
- Korea, Indonesia, Malaysia, and Mongolia have finalized their taxonomies.
- Japan provides high-level guidance on climate finance and is considering development of a taxonomy.
- Regional harmonization efforts:
  - China has highlighted major areas of commonality between the EU and Chinese taxonomies to increase comparability and interoperability (see IPSF 2022).
  - ASEAN development of version 2.0 of the regional taxonomy (ASEAN 2023a, 2023b) provides alignment on principles and harmonizes classification across ASEAN with screening criteria for six focus sectors and three enabling sectors, including carbon capture, storage, and utilization and certain coal phaseout activities.
  - Different criteria of alignment (red/amber/green) aim to support financing initiatives such as Asian Development Bank’s Energy Transition Mechanism, Indonesia’s Just Energy Transition Partnership, and the Managed Phaseout Program.

### Data, labels, and investment challenges
- Lack of accurate climate labels and climate impact scores limits sustainable investments in EMDE Asia.
- In the absence of climate labels and impact-oriented scores, fund managers and investors use ESG scores to gauge climate policy impact, but ESG scores are problematic as a climate metric.
- Low ESG scores may unfairly penalize EMDE Asia as ESG funds allocate only a small share of their portfolio to EMDE assets, concentrated in major emerging market economies such as China.

### Institutional capacity and coordination
- Inadequate institutional coordination and cohesion hinder capacity building needed to facilitate climate finance.
- Most survey respondents flagged lack of capacity and expertise to “monitor, report, and verify” climate-related risks and impact of climate policies, noting need for capacity development support from multilateral institutions.
- Respondents preferred peer-learning opportunities to address capacity gaps in implementing taxonomy and disclosure standards.
- Weak or fragmented institutional frameworks:
  - Responsibilities for climate policy tend to be spread across many government ministries; coordination is often a challenge, especially where no oversight committee exists.
  - Examples: Indonesia’s climate finance strategy covers only the public sector; Malaysia’s covers only the private sector.
- Structural issues—contract enforcement, property rights, management of fiscal risks and public investment—make it hard to attract long-term investments in sustainable infrastructure.
- Pacific island countries face difficulty meeting accreditation requirements of the Green Climate Fund due to stretched capacity and challenging public investment management.
- Shallow financial markets across much of EMDE Asia constrain investors’ ability to hedge against long-term risks.

### Fossil fuel subsidies, fiscal space, and revenue potential
- Ongoing subsidization of fossil fuels reduces viability of green projects and impedes transition to renewable energy.
- In 2022, fossil fuel subsidies in Asia-Pacific surged to $579.7 billion, or about 44 percent of the global total.
- When implicit fossil fuel subsidies (undercharging for environmental costs and forgone consumption taxes) are included, Asia-Pacific reached more than $3 trillion in 2022, making up nearly two-thirds of the global total.
- IMF estimates: removing subsidies with a full fossil fuel price reform could raise additional fiscal revenue by about $1.8 trillion or 4.4 percent of GDP in East Asia and the Pacific.
- High debt levels, rising debt distress, and low fiscal revenue across Asia-Pacific limit fiscal resources available for climate action; this constraint was cited by survey respondents as a critical challenge for mobilizing climate action.

### Carbon pricing: coverage, design, and implementation
- Recent momentum toward carbon pricing is positive: five countries in Asia (China, Indonesia, Japan, Korea, New Zealand) have introduced emissions trading schemes (ETSs); only Japan and Singapore have implemented a carbon tax.
- Policymakers in the region favor introducing an ETS over imposing a direct carbon tax, though carbon taxes offer practical advantages including broader coverage, administrative simplicity, predictability of emissions prices, revenue generation, and complementarity with overlapping policies.
- Implementation of carbon pricing has been slow and patchy, with coverage generally narrow and restricted to a few sectors.
- Eliminating fossil fuel subsidies and expanding carbon pricing would yield major fiscal savings but face political resistance due to concerns about inflation, competitiveness, and income inequality.
- Specific carbon pricing details (Table 1, 2021):
  - Carbon Taxes
    - Indonesia: Year Introduced 2022; Coverage: Power ✓; Coverage Rate, all GHGs (percent) 26; Price, $/ton 2; Revenue/Rent, percent of GDP 0.05; Point of Tax/Regulation Midstream; Revenue Use General budget
    - Singapore: Year Introduced 2019; Coverage: Power ✓, Industry ✓; Coverage Rate, all GHGs (percent) 80; Price, $/ton 4; Revenue/Rent, percent of GDP 0.04; Point of Tax/Regulation Midstream; Revenue Use General budget
  - ETSs
    - China: Year Introduced 2013, 2014, 2016, 2021; Coverage: Power ✓; Coverage Rate, all GHGs (percent) 38; Price, $/ton 9; Revenue/Rent, percent of GDP 0.32; Point of Tax/Regulation Downstream; Revenue Use Environmental spending proposal
    - Korea: Year Introduced 2015; Coverage: Power ✓, Industry ✓, Transport ✓, Buildings ✓; Coverage Rate, all GHGs (percent) 73; Price, $/ton 19; Revenue/Rent, percent of GDP 0.99; Point of Tax/Regulation Downstream; Revenue Use Environmental spending
    - New Zealand: Year Introduced 2008; Coverage: Power ✓, Industry ✓, Transport ✓; Coverage Rate, all GHGs (percent) 49; Price, $/ton 53; Revenue/Rent, percent of GDP 0.20; Point of Tax/Regulation Downstream; Revenue Use General budget, environmental spending
  - Hybrid
    - Japan: Year Introduced 2010, 2011, 2012; Coverage: Power ✓, Industry ✓, Transport ✓, Buildings ✓; Coverage Rate, all GHGs (percent) 77; Price, $/ton 2; Revenue/Rent, percent of GDP 0.05; Point of Tax/Regulation Midstream; Revenue Use Environmental spending
- Country-specific carbon tax and schedule notes:
  - Japan introduced a carbon tax of about $3 per ton in 2012.
  - In Singapore, the carbon tax was introduced in 2019 starting at S$5 per metric ton and will rise to S$25 per metric ton in 2024 and to between S$50 and S$80 by 2030. The tax applies to all facilities that directly emit at least 25,000 tons of carbon dioxide equivalent of GHG emissions annually, which make up about 80 percent of total emissions.
  - In 2021, Indonesia legislated plans for the introduction of a carbon tax in 2022, but implementation has been delayed; Indonesia launched an emissions credit trading system in 2023.

### Global issues: trade fragmentation, supply chains, and transition risks
- Geoeconomic fragmentation of trade and financial flows could complicate climate action.
- Energy prices have been highly volatile amid recovery from the global pandemic and geopolitical tensions (Russia’s invasion of Ukraine; strategic de-risking between China and the United States).
- Supply chains are being splintered into politically aligned blocs and “friend-shoring” to ensure access to affordable and reliable energy.
- New export restrictions on commodities vital for the low-carbon transition (e.g., nickel and germanium) rose in 2022; the number of new trade restrictions affecting commodities rose to six times its 2016–19 average.
- Protectionist shifts risk making production of solar panels and electric vehicles more costly, delaying transition policies including retirement of nuclear and coal-fired power plants, and impeding technology transfer and peer collaboration needed for capacity building in EMDEs.
- Coordination in introduction of carbon pricing has stalled; disparities in carbon pricing raise carbon leakage and competitiveness concerns and have prompted consideration of carbon border adjustment taxes, which are complex to administer, prone to legal challenges, and cover emissions in traded products that account for 10 percent of total emissions.

*IMF Departmental Paper: Unlocking Climate Finance in Asia-Pacific: Transitioning to a Sustainable Future (excerpts).*

### 4. Policy Considerations and the Way Forward

### 4. Policy Considerations and the Way Forward

### A. The Role of Governments
- Governments must integrate mitigation and adaptation targets into a climate finance strategy and establish a sound climate governance framework for attracting private capital.
- Climate finance strategy should:
  - Articulate how Nationally Determined Contributions and National Adaptation Plans are translated into policies and financed.
  - Lay out deliverables and timelines, financial estimates, and key stakeholders.
  - Develop a nexus between countries’ climate plans and alignment approaches, such as taxonomies.
- Establish a centralized coordinating body/authority to:
  - Limit silos and facilitate information sharing across the public sector.
  - Periodically assess investment needs, determine priority projects, and identify gaps and bottlenecks.
  - Publish regular public progress reports.
- Mobilize additional domestic fiscal resources in Asia-Pacific by:
  - Undertaking subsidy reforms and introducing carbon pricing schemes.
  - Phasing out fossil fuel subsidies—recognized as politically difficult but highly regressive in Asia.
  - Implementing carbon taxation to mobilize revenues and engender behavioral responses toward greener choices.
  - Redirecting revenues from allowance auctioning under an emissions trading system to support green transition investments and to redistribute to low-income and vulnerable households.
  - Identifying and supporting vulnerable households through targeted support schemes.
- To attract private capital and align risk-return trade-offs:
  - Recognize high coal dependence for affordable and secure energy in Asia-Pacific and the costly nature of net-zero transitions when including grid and storage investments.
  - Use appropriate policies and innovative financing structures for coal phaseouts with due consideration of country circumstances.
  - Leverage public-private partnerships and credit guarantees as credit enhancement mechanisms (Annex Figure 1.7).
  - Consider targeted subsidies consistent with World Trade Organization rules to steer adoption of low-carbon technologies.
  - Ensure governments assume appropriate allocation of contractual risks with private parties and strengthen infrastructure governance to prevent cost overruns and manage project and fiscal risks.
- Establish a strong climate information architecture comprising three pillars:
  - Climate finance taxonomies that follow globally agreed principles and consider differing development stages; apply harmonization to attract cross-border finance; use transition taxonomies to identify activities that reduce GHG emissions over time.
  - A globally harmonized and consistent set of climate disclosure standards; mandate disclosures initially for targeted industries or firms exposed to large transition risks.
  - Timely, reliable, granular, and comparable data; provide adequate resources to statistical agencies to collect data and develop macro-critical aggregates; align taxonomies at business level with international statistical classifications and standards.
- Public investment management reform:
  - Address inefficiencies that lead to about 30 percent lower potential gains from public investment (IMF 2015).
  - Use Public Investment Management Assessment (PIMA) to assess planning, resource allocation, and implementation; evaluate legal/regulatory framework, staff capacity, and IT systems.
  - Integrate public financial management reforms to identify bankable and deliverable projects, set numerical targets for green technology adoption, estimate financing needs, and strengthen capacity to assess costs and risks of climate-related debt.
- Strengthen economic management to attract private capital:
  - Sovereign and foreign exchange risks raise risk premiums; inappropriately loose fiscal or monetary policies can raise public debt and external vulnerabilities.
  - Maintain sound macroeconomic policies to lower risk premiums.
  - Mainstream adaptation strategies in fiscal policy to strengthen resilience and generate long-term domestic savings.

### B. The Role of Central Banks and Financial Sector Supervisors
- Central banks and supervisors should integrate physical and transition climate risks into prudential frameworks to address financial stability risks.
- Develop supervisory guidelines to:
  - Incorporate reporting of climate risks.
  - Strengthen supervisory reporting requirements of climate-related data by financial institutions and climate-related financial disclosures.
  - Build capacity to conduct climate risk analyses.
- Where permissible within legal mandates, consider incorporating climate considerations into collateral frameworks and asset purchases to foster green market development; caution against premature adjustments that could pose financial stability risks.
- Do not substitute prudential regulation for effective government climate policy; green supporting factors should reflect a negative correlation between financial risks and “greenness” of exposures.
- Require granular climate-related supervisory data beyond public disclosures:
  - Set expectations and guidelines on collecting data on credit exposures related to scope 1, scope 2, and scope 3 emissions.
  - Identify granular data on sectoral and geographic distributions of exposures for climate risk monitoring.
  - Improve consistency of information submitted by financial institutions for comparability and aggregation; move toward regular supervisory reporting as data and methodologies improve.
- Reduce greenwashing and improve pricing of financial risks by requiring public disclosures based on globally harmonized and consistent sustainability disclosure standards (align with ISSB reporting standards where relevant).
  - Recommend disclosures of direct and indirect GHG emissions during the reporting period and climate-related physical and transition risk exposures and impacts on financial statements.
  - Regulators could issue guidelines on disclosure requirements, implementation timelines, and transition plans.
- Strengthen capacity to conduct climate risk analyses:
  - Use a suite of in-house macro, micro, and sectoral models to gauge systemic impact.
  - Consider a variety of models and scenarios given model uncertainty, data quality issues, and long time horizons.
  - Leverage IMF Financial Sector Assessment Program stress-testing exercises as a first step.
- Examples of jurisdictional practices in Asia-Pacific:
  - Japan (Bank of Japan, Japan Financial Services Agency) and Hong Kong SAR requested institutions to factor climate-related counterparty risks using data from engagements.
  - Monetary Authority of Singapore simulated severe flood impacts and transition risk macroeconomic implications.
  - Bank of Korea linked NGFS transition pathways with an in-house micro-economic model using carbon prices, sectoral emissions, and carbon sequestration.
  - Reserve Bank of New Zealand commenced physical and transition risk stress tests for the five largest banks.
  - People’s Bank of China’s 2021 stress tests focused on increased GHG emission costs and impacts on companies in carbon-intensive industries and subsequent bank asset quality and capital adequacy (Shirai 2023).
- Incorporate climate-related financial risks into prudential frameworks:
  - Follow international best practices (BCBS 2022; NGFS 2020, 2021a, 2021b, 2022).
  - Clarify supervisory expectations for financial institutions, allocate resources, and build internal supervisory capacity.
  - Use qualitative measures where granular data are lacking—strengthen risk management, internal controls, procedures, and consider reducing risk exposures.
  - Benefit from regional best practices, e.g., Monetary Authority of Singapore’s guidelines on environmental risk management for banks (MAS 2020).
- Global-level progress needed on climate labels and climate impact–oriented ESG scores:
  - Develop climate labels for sustainable investment funds and shift ESG scores to better capture sustainability and climate impact.
  - Coordination at technical level between regulators and supervisors and through multilateral standard setters (for example, International Organization of Securities Commissions) to align ESG scores to climate outcomes.

### C. The Role of the IMF and Other Multilateral Institutions
- The IMF covers climate-related policies and risks in surveillance and provides informed advice on climate commitments; bilateral engagement identifies capacity development needs in climate PFM, public investment management, debt management and sustainability, and PPP frameworks.
- IMF instruments and capacity development:
  - Climate PIMA can help address uneven institutional capacity, fragmented oversight, and weak coordination.
  - The Resilience and Sustainability Trust (RST) offers long-term, affordable financing for reforms that reduce vulnerability to balance of payments shocks, including climate-related shocks.
    - Bangladesh is the first Asia-Pacific member to benefit from the RST.
    - About 40 members have expressed interest in the facility.
    - RST-supported loans have also been approved for Barbados, Costa Rica, Jamaica, Kosovo, Niger, Rwanda, Senegal, and Seychelles.
  - RST resources are insufficient to meet overall climate financing needs but can catalyze financing from other sources and help reduce macro risk premiums by restoring sound macroeconomic management and building institutional capacity for de-risking private investment.
  - RST-supported programs can support design of coherent climate policy packages, strengthen climate-related public financial and investment management, and improve capacity to assess macroeconomic impacts of climate change.
- IMF capacity development priorities (survey respondents overwhelmingly selected “capacity development”):
  - Financial sector: Safeguard financial stability to climate risks through Financial Sector Assessment Program integration of climate risk assessments.
  - Fiscal sector: Mainstream climate into fiscal policies focusing on mitigation policy analysis, climate-focused PFM, and macro-fiscal impact analysis. Tools include the Climate Policy Assessment Tool and the green PFM framework; climate PIMA assesses planning, coordination, project appraisal and selection, budgeting and portfolio management, and risk management.
  - Statistics: Update statistical manuals to address environmental sustainability; System of Environmental Economic Accounting is the international statistical standard for integrating energy and air emissions accounts. IMF provides capacity development to close climate change data gaps and disseminates climate data through the IMF Climate Change Indicators Dashboard.
    - Balance of Payments and International Investment Position Manual will include an updatable annex on sustainable finance.
    - System of National Accounts 2025 Update will have additional environmental classes for bonds, loans and equity, and investment fund shares.
    - System of Environmental Economic Accounting will be revised for agreed definitions, classifications, and accounting rules for climate change–related statistics.
  - IMF, in cooperation with the FSB Secretariat and the Inter-Agency Group on Economic and Financial Statistics, developed a workplan for a new Group of Twenty Data Gaps Initiative with seven recommendations on climate change, including one on green debt and equity financing to improve data on issuance and holdings of green debt securities and listed shares by sector.
- Multilateral cooperation:
  - Multilaterals must collaborate for peer-to-peer learning; IMF works with Bank for International Settlements, NGFS, World Bank, Basel Committee to share knowledge and build capacity.
  - Workshops have raised awareness and shared supervisory practices on climate-related risks.
- Role of Multilateral Development Banks (MDBs):
  - MDBs can expand lending capacity using specialized knowledge, preferred creditor status, and financial leverage; develop programs and lending vehicles for climate projects.
  - Use risk-mitigating mechanisms (credit and performance guarantees) to de-risk MDB loan exposures and free balance sheet space for more lending.
  - The Asian Development Bank’s Innovative Finance Facility for Climate in Asia and the Pacific is a donor-backed guarantee facility to leverage the Asian Development Bank’s balance sheet by multiple times.
  - De-risking mechanisms could help MDBs expand lending and shift more resources to climate action, while properly managing risks.
- Allocation balance:
  - Achieving a balanced allocation between mitigation and adaptation lending is important.
  - In 2021, total MDB climate finance to low- and middle-income countries amounted to $50.7 billion, of which only $17.6 billion was channeled to adaptation.
  - In Pacific island countries, access to the Green Climate Fund is crucial for adaptation; partnerships with MDBs could help overcome accreditation challenges.

*Source: 4. Policy Considerations and the Way Forward (ucfapea - 4. Policy Considerations and the Way Forward).*

### Box 3. The IMF’s Global Initiatives to Improve Climate Data

### Box 3. The IMF’s Global Initiatives to Improve Climate Data

### Overview
- The IMF currently leads two climate data–related initiatives to improve the climate information architecture.
- Both projects involve extensive collaboration with other international institutions, including the Bank for International Settlements, the European Central Bank, Eurostat, the Financial Stability Board, the Organisation for Economic Co-operation and Development, the UN Statistics Division, and the World Bank, as well as national statistical agencies.

### Climate Change Indicators Dashboard
- URL: https://climatedata.imf.org/
- Purpose: Provides a set of globally comparable climate indicators to enable cross-country analysis.
- Contents include select statistical and experimental indicators on:
  - climate change,
  - greenhouse gas emissions from economic activity,
  - trade in environmental goods,
  - green finance,
  - government policies,
  - physical and transition risks.
- Financial indicators track resources allocated to supporting a transition to a low carbon economy.
  - Carbon Footprint of Bank Loans indicator aims to track carbon intensity of banking loans.
  - Green Debt indicators help assess trends in climate finance to mitigate the economic and social cost of climate change through market-based means.
- Climate-related physical and transition risk indicators provide information on the impact of climate change on economic growth and financial stability.
- Coverage: Although indicator coverage varies across countries, the Dashboard includes data for all countries in Asia-Pacific.

### Group of Twenty Data Gaps Initiative (G20 DGI)
- URL: https://www.imf.org/en/News/Seminars/Conferences/g20-data-gaps-initiative
- Aim: To bridge data gaps affecting the most urgent policy needs.
- The third phase covers 14 recommendations addressing various priority policy areas.
- There are seven recommendations on climate change:
  - Tracking progress toward national greenhouse gas emissions and national carbon footprints;
  - Monitoring the energy mix used by economic activities, including the share of renewable energy sources;
  - Monitoring cross-border emissions through trade, investment, and global value chains;
  - Tracking the source of funds available for green projects that can mitigate climate change;
  - Quantifying and monitoring forward-looking risk to help prioritize and develop support for climate action;
  - Providing comparable estimates for insight into government subsidy regimes to tackle climate change; and
  - Tracking level of expenditures to mitigate and adapt to the effects of climate change to ensure achievement of national commitments.

*Source: Box 3, IMF Departmental Papers — Unlocking Climate Finance in Asia-Pacific: Transitioning to a Sustainable Future.*

### References

### References

### Climate risk analysis, supervision, and scenarios
- Adrian, T., P. Grippa, M. Gross, V. Haksar, I. Krznar, C. Lepore, F. Lipinsky, and others. 2022. “Approaches to Climate Risk Analysis in FSAPs.” IMF Staff Climate Note 2022/005, International Monetary Fund, Washington, DC.
- Basel Committee on Banking Supervision (BCBS). 2022. “Principles for the Effective Management and Supervision of Climate-Related Financial Risks.” Basel, Switzerland.
- Financial Stability Board (FSB). 2022a. Climate Scenario Analysis by Jurisdictions: Initial Findings and Lessons. Basel.
- Financial Stability Board (FSB). 2022b. FSB Roadmap for Addressing Financial Risks from Climate Change: 2022 Progress Report. Basel.
- Network for Greening the Financial System (NGFS). 2020. “Guide for Supervisors: Integrating Climate-Related and Environmental Risks into Prudential Supervision.” Paris, France.
- Network for Greening the Financial System (NGFS). 2021a. “Progress Report on Guide for Supervisors.” Paris, France.
- Network for Greening the Financial System (NGFS). 2021b. “NGFS Climate Scenarios for Central Banks and Supervisors.” Paris, France.
- Gardes-Landolfini, C., P. Grippa, W. Oman, and S. Yu. 2023a. “Energy Transition and Geopolitical Fragmentation: Implications for Climate Scenario Design.” IMF Staff Climate Note 2023/003, International Monetary Fund, Washington, DC.

### Mobilizing and scaling climate finance (MDBs, private finance, and policy frameworks)
- African Development Bank (AfDB), Asian Development Bank (ADB), Asian Infrastructure Investment Bank (AIIB), Council of Europe Development Bank (CEB), European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB), Inter-American Development Bank Group (IDBG), and others. 2021. Joint Report on Multilateral Development Banks’ Climate Finance.
- Bhattacharya, A., M. Dooley, H. Kharas, C. Taylor, and N. Stern. 2022. “Financing a Big Investment Push in Emerging Markets and Developing Economies for Sustainable, Resilient and Inclusive Recovery and Growth.” Grantham Research Institute on Climate Change and the Environment, London School of Economics, London, UK.
- Prasad, A., E. Loukoianova, A. Xiaochen Feng, and W. Oman. 2022. “Mobilizing Private Climate Financing in Emerging Market and Developing Economies.” IMF Staff Climate Note 2022/007, International Monetary Fund, Washington, DC.
- International Energy Agency (IEA). 2021. “Financing Clean Energy Transitions in Emerging and Developing Economies 2021.” Paris, France.
- International Energy Agency (IEA). 2023. “Net Zero Roadmap: A Global Pathway to Keep the 1.5 °C Goal in Reach: 2023 Update.” Paris, France.
- IMF. 2022a. “Scaling Up Private Climate Finance in Emerging Market and Developing Economies: Challenges and Opportunities.” In Global Financial Stability Report: Navigating the High-Inflation Environment. Washington, DC, October.
- Fouad, M., N. Novta, G. Preston, T. Schneider, and S. Weerathunga. 2021b. “Unlocking Access to Climate Finance for Pacific Island Countries.” IMF Departmental Paper 2021/020, International Monetary Fund, Washington, DC.
- Fouad, M., C. Matsumoto, R. Monteiro, I. Rial, and O. Aydin Sakrak. 2021a. “Mastering the Risky Business of Public-Private Partnerships in Infrastructure.” IMF Departmental Paper 2021/010, International Monetary Fund, Washington, DC.

### Fiscal policies, public investment, and national/regional policy work
- Alonso, C., V. Balasundharam, M. Bellon, E. Dabla-Norris, C. Chen, D. Corvino, J. Daniel, and others. 2021. “Fiscal Policies to Address Climate Change in Asia and the Pacific.” IMF Departmental Paper 21/07, International Monetary Fund, Washington, DC.
- International Monetary Fund (IMF). 2015. “Making Public Investment More Efficient.” IMF Policy Paper. International Monetary Fund, Washington, DC.
- International Monetary Fund (IMF). 2021a. Fiscal Monitor: A Fair Shot. Washington, DC, April.
- Dabla-Norris, E., T. Helbling, K. Kashiwase, G. Magistretti, and M. Sy. 2023a. “Asia’s Perspectives on Climate Change: Policies, Perceptions, and Gaps.” IMF Departmental Paper 2023/008, International Monetary Fund, Washington, DC.
- Dabla-Norris, E., T. Helbling, S. Khalid, H. Khan, G. Magistretti, A. Sollaci, and K. Srinivasan. 2023b. “Public Perceptions of Climate Mitigation Policies: Evidence from Cross-Country Surveys.” IMF Staff Discussion Note 23/002, International Monetary Fund, Washington, DC.
- Dabla-Norris, E., M. Nozaki, and J. Daniel. 2021. “Asia’s Climate Emergency.” Finance & Development (September): 48–52.

### Carbon pricing, border measures, and mitigation instruments
- Parry, I. W. H., S. Black, and K. Zhunussova. 2022. “Carbon Taxes or Emissions Trading Systems? Instrument Choice and Design.” IMF Staff Climate Note 2022/006, International Monetary Fund, Washington, DC.
- Parry, I. W. H., P. Dohlman, C. Hillier, M. D. Kaufman, F. Misch, J. Roaf, C. J. Waerzeggers, and others. 2021. “Carbon Pricing: What Role for Border Carbon Adjustments?” IMF Staff Climate Note 2021/004, International Monetary Fund, Washington, DC.
- Keen, M., I. W. H. Parry, and J. Roaf. 2021. “Border Carbon Adjustments: Rationale, Design and Impact.” IMF Working Paper 21/239, International Monetary Fund, Washington, DC.
- Kammer, Alfred. 2023. “Europe, And the World, Should Use Green Subsidies Cooperatively.” IMF Blog, May 11, 2023.

### Green bonds, greenium, and market integrity (greenwashing, offsets)
- Ando, S., C. Fu, F. Roch, and U. Wiriadinata. 2023. “How Large Is the Sovereign Greenium?” IMF Working Paper 23/80, International Monetary Fund, Washington, DC.
- Baker, M., D. Bergstresser, G. Serafeim, and J. Wurgle. 2022. “The Pricing and Ownership of US Green Bonds.” Annual Review of Financial Economics 14: 415–37.
- Gao, Y., and J. M. Schmittmann. 2022. “Green Bond Pricing and Greenwashing under Asymmetric Information.” IMF Working Paper 22/246, International Monetary Fund, Washington, DC.
- Zerbib, O. D. 2019. “The Effect of Pro-Environmental Preferences on Bond Prices: Evidence from Green Bonds.” Journal of Banking and Finance 98: 39–60.
- Calel, R., J. Colmer, A. Dechezleprêtre, and M. Glachant. 2021. “Do Carbon Offsets Offset Carbon?” Centre for Climate Change Economics and Policy Working Paper 398, London School of Economics and Political Science, London, UK.
- Probst, B., T. Malte, A. Laura, K. Andreas, and H. Volker. 2023. “Systematic Review of the Actual Emissions Reductions of Carbon Offset Projects Across All Major Sectors.” Working Paper, ETH Zurich, Zurich, Switzerland.

### Disclosure, reporting standards, and data gaps
- Task Force on Climate-Related Financial Disclosures (TCFD). 2022. “2022 Status Report.” Financial Stability Board, Basel, Switzerland.
- International Financial Reporting Standards (IFRS). 2023. “Comparison: IFRS S2 Climate-related Disclosures with the TCFD Recommendations.” London, UK.
- Network for Greening the Financial System (NGFS). 2022. “Final Report on Bridging Data Gaps.” Paris, France.
- Black, S., A. Liu, I. Parry, and N. Vernon. 2023. “IMF Fossil Fuel Subsidies Data: 2023 Update.” IMF Working Paper 23/169, International Monetary Fund, Washington, DC.

### Regional / country-level guidance and examples (Asia-Pacific focus)
- Bank of Thailand. 2023. “Policy Statement of Bank of Thailand: Internalizing Environmental and Climate Change Aspects into Financial Institution Business.” 
- Monetary Authority of Singapore (MAS). 2020. “Guidelines on Environmental Risk Management for Banks.” Singapore, Malaysia.
- Association of Southeast Asian Nations (ASEAN). 2023a. “Joint Statement of the 10th ASEAN Finance Ministers’ and Central Bank Governors’ Meeting.” Jakarta, Indonesia.
- Association of Southeast Asian Nations (ASEAN). 2023b. “ASEAN Taxonomy for Sustainable Finance: Version 2.” Jakarta, Indonesia.
- Shirai, S. 2023. “Green Central Banking and Regulation to Foster Sustainable Finance.” ADBI Working Paper 1361, Asian Development Bank Institute, Tokyo, Japan.
- Dabla-Norris, E., M. Nozaki, and J. Daniel. 2021. “Asia’s Climate Emergency.” Finance & Development (September): 48–52.
- Fouad, M., N. Novta, G. Preston, T. Schneider, and S. Weerathunga. 2021b. “Unlocking Access to Climate Finance for Pacific Island Countries.” IMF Departmental Paper 2021/020, International Monetary Fund, Washington, DC.

### Cross-cutting IMF outputs and analyses
- International Monetary Fund (IMF). 2021b. The Philippines Financial System Stability Assessment. Washington, DC.
- International Monetary Fund (IMF). 2022b. “Medium-Term Output Losses after COVID-19 in Asia: The Role of Corporate Deby and Digitalization.” In Regional Economic Outlook: Asia and Pacific—Sailing into Headwinds. Washington, DC, October.
- International Monetary Fund (IMF). 2022c. “Philippines: Financial Sector Assessment Program—Technical Note on Stress Test for Climate Change Risks.” Washington, DC.
- International Monetary Fund (IMF). 2022d. “United Kingdom: Financial Sector Assessment Program—Technical Systemic Stress, and Climate-Related Financial Risk: Implications for Balance Sheet Resilience.” Washington, DC.
- International Monetary Fund (IMF). 2022e. “Capacity Development Annual Report 2022.” Washington, DC.
- International Monetary Fund (IMF). 2023a. “Geoeconomic Fragmentation and Foreign Direct Investment.” In World Economic Outlook: A Rocky Recovery. Washington, DC, April.
- International Monetary Fund (IMF). 2023b. “Financial Sector Policies to Unlock Private Climate Finance in Emerging Market and Developing Economies.” In Global Financial Stability Report: Financial and Climate Policies for a High-Interest-Rate Era. Washington, DC, October.
- International Monetary Fund (IMF). 2023c. “Fragmentation and Commodity Markets: Vulnerabilities and Risks.” In World Economic Outlook: Navigating Global Divergences. Washington, DC, October.

*Unlocking Climate Finance in Asia-Pacific: Transitioning to a Sustainable Future — References (DP/2024/001)*

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_Source: https://www.imf.org/-/media/files/publications/dp/2024/english/ucfapea.pdf_