IMF Managing Director’s remarks to the Green Swan Conference

June 2, 2021


Thank you very much, Minouche.

It is fantastic that our organizations came together with this incredible panel and conference.

Before we get to answering your question, I want to remind the audience that you were Deputy Managing Director of the IMF. And you were there when the question of whether climate is relevant for macroeconomic stability was first asked.

Today, we recognize fully that dealing with climate change is critical for the economy and it is critical for financial stability.

That should not be news to us. The panic of 1857 was caused by, among other things, a climate event—a hurricane that sank a boat carrying gold.

We have seen climate affecting different types of financial products and – more importantly, over time – we have recognized that we are talking about a systemic issue. Climate is, for sure, a factor today and it will be even more so tomorrow.

This means that we have to move forward on integrating climate into the work of each and every organization, especially those that are dealing with policy decisions that affect the viability of our economies and the financial sector.

So, to put it simply—move the transition to the new climate economy forward. Bring emissions down and resilience up.

So, how does that translate into the work of the Fund?

We have a very important role to play with the two types of assessments we are mandated to carry out regularly.

The first one is known as Article IV consultations. This is an annual or bi-annual engagement with each member of the IMF to look at their macro policies and come up with recommendations.

We have now integrated climate in these assessments—with a decision from our Board and shareholders. And what impressed me tremendously was that—while there are some differences around the parameters of integrating climate in these annual policy consultations, there is no disagreement whatsoever that it must be done.

How do we approach it? We first look at mitigation policies in countries that are significant emitters. We have already engaged with about 30 countries—among them, the United Kingdom, Canada, Germany, Korea, the United States. It will feature in our China and India assessments soon. We are going to cover all top 20 emitters within two years.

When we engage with countries on mitigation policies, our top priority is to help them shape the incentive environment for public and private investments and consumer behavior—to change and shift to low-carbon intensity—and first and foremost that requires concentrating on pricing carbon.

This is not an easy topic, but our research shows that if we do not move to pricing carbon—and do it fast with forward guidance on how the trajectory of carbon price will go upwards—we are not going to meet the goals of the Paris Agreement. And therefore, how we go about pricing carbon in different country situations, and at what level to pricing, is a top of mind priority.

We are looking at three ways: tax—the most efficient way to do it; trade—which has taken off and is quite popular; and also regulatory equivalency of pricing carbon—in other words, a sort of a shadow carbon price based on regulation.

Why are we taking these three possible ways forward? Because we want the biggest tent to bring everybody in and move on this significantly over the next few years.

We do not have time to waste. Today, we have 21.5* percent of carbon emissions being covered by tax or trade—we don't have exactly the number for regulatory equivalency—and it has jumped by 5 percentage points in just this last year. So, we are on the right track, but we have a long way to go.

But there is not just mitigation to consider. For many countries, a much more troubling factor is the criticality of climate shocks. And therefore, we are looking into vulnerability to climate shocks, and what can be done with policies to address this vulnerability. In other words, policies for resilience.

We look at fiscal buffers, public spending on adaptation, new insurance products, social protection and how all this together can build more resilient societies. And, by the way, investing can help—and education is an investment resilience.

And finally, we have a lot of work to do on just transition—within countries and across countries.

And that takes me to the second pillar in our assessment: IMF surveillance of the financial sector, the Financial Sector Assessment Programs (FSAPs). This is now also being done with a goal to reach an intensity of 12 to 14 countries per year over the medium term*.

We have already covered climate risks in one-in-five past Assessments and our objective—again, with the support of the membership—is to go for full coverage.

Here, we are looking at two types of risks, physical risks and transition risks.

Physical risk is a simple concept—when there is a shock that does damage, it translates into impact on the balance sheets of businesses and, of course, on the balance sheets of banks.

Much more complicated is the transition risk. This would play out over time and it will demonstrate itself as we move towards lower-carbon intensity. But we need to look into this risk today. How are ‘dirty’ assets going to evolve, how will their value decline, will they be replaced by others? How we integrate this is a question we are wrestling with together with our partners in central banks and in the Network for Greening the Financial System.

To give you examples of what that means in practice. In highly vulnerable countries, we zero in on financial stability risks linked to climate shocks—and we did this in Jamaica. For advanced economies, we have covered natural catastrophic risks through insurance stress-testing*. And as we move forward, we are building this in a comprehensive manner.

And just to give you two examples of the new generation of FSAPs where climate risks are much more present. In the Philippines, we looked at how low­-lying islands that are hit by typhoons can manage this risk and how the authorities can model future storms, and the impact of these storms on bank capital.

In Norway, a major oil exporter, we looked at the transition risks and how carbon price increases would affect banks’ credit exposure.

So, when we look into the future, you ask us what this conference should do. I think it needs to build more consensus on three topics.

One, how we can go about enhanced stress-testing. Two, how to ensure supervisory frameworks appropriately manage the full range of climate risks. Three, how to narrow the scope for greenwashing by coming up with a smaller set of credible frameworks and standards for integrating climate-related risks.

The good news is that green investment is going up. So far this year, 140 financial institutions have invested $203 billion in bonds and loans in green projects, in comparison with 189 billion in hydrocarbon businesses.

The bad news is we have not yet found a uniformity of standards – 200 frameworks is a little too much to handle. We have to narrow this down and accept that mandatory reporting can only be done when we have commonalities of standardized disclosure and accepted frameworks.

So, we have work to do, all of us. At the Fund, we take this extremely seriously. Count on us.

Thank you.

*Information updated on March 29, 2022 to reflect the latest information.

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