Taking Steps to Ensure Financial Stability in Sub-Saharan Africa in the Face of Climate Change

IMF News, January 24, 2024

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Canonical URL: Taking Steps to Ensure Financial Stability in Sub-Saharan Africa in the Face of Climate Change

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Published: January 24, 2024

Context and purpose

Speech delivered at Africa Training Institute 10th Anniversary Conference on January 24, 2024.
Focus: how climate change threatens macroeconomic and financial stability in countries and the importance of a well-managed and just green transition—away from fossil fuels and towards renewables.
Emphasis on combining policy reforms, capacity development, and financing arrangements to scale-up climate finance.

Climate risks to financial stability

Physical risks
- Extreme weather events of higher frequency and intensity cause damage to physical assets, markets, and productivity that in turn can affect the resilience of the banking sector.
Transition risks
- Financial stability risks can also stem from the impact of climate-transition policies in some jurisdictions.
Priority action: central banks and financial sector supervisors need to adapt stress-testing frameworks to incorporate channels through which climate risks amplify and transmit risks to the financial sector.

Data, disclosures, and taxonomies

Identifying and closing data gaps is a pre-requisite for proper risk assessment.
Common problem: lack of relevant climate data across jurisdictions (as observed in IMF Financial Sector Assessment Program and technical assistance work).
Needed actions:
- Build comprehensive datasets related to physical risk projections.
- Build granular exposure data of the financial sector to both physical and transition risks.
- Strengthen the architecture for data, disclosures, and taxonomies.
- Develop more-comprehensive transition taxonomies to support sustainable markets, production of climate data useful for financial decision making, and climate-risk assessment, regulation, and supervision.

Role and limits of supervisors and regulators

All climate-related initiatives of financial sector supervisory authorities should be consistent with their respective core mandate.
Mandate-preserving roles:
- Prudential supervisors: focus on ensuring financial stability and promoting a safe and sound financial system.
- Securities regulators: create fair and transparent markets with adequate investor protection safeguards.
Supervisory actions should not be used as substitutes for effective government policy on climate change; by focusing on core mandates, supervisors can create a safer environment that will boost climate investments.

Capacity building for regulators and supervisors

Need for building capacity within organizations given the enormous breadth and depth of expertise required.
Recommended approach:
- Establish specialized solutions to build capacity.
- Ensure capacity building efforts are gradual, sustained, continuously evolving, and inclusive for all functions of organizations, starting from the top.
- Connect interdisciplinary knowledge and capture the depth of climate-related topics.
IMF efforts to increase capacity building:
- Focus primarily on supervisors’ ability to assess climate risks through both multilateral and bilateral efforts.
- In 2021, organized a series of regional webinars to raise awareness on climate-related financial risks with participation of many authorities from emerging market and developing economies.
- Virtual workshops on supervision of climate-related financial risk in cooperation with Chinese authorities and with the IMF’s regional training centers in Africa, with plans to roll out such workshops in other regions.
- Added a climate risk module to the Fund’s online training framework in partnership with BIS’s Financial Stability Institute, available to all of the IMF’s membership.
- On the bilateral front, the Fund provides climate-risk analysis technical assistance to build frameworks to assess the risk of climate-related disasters on the banking sector.

IMF financing and convening role: Resilience and Sustainability Trust (RST)

The Resilience and Sustainability Trust, or “RST,” provides longer-term affordable financing for vulnerable low- and middle-income members to reduce balance-of-payments risks associated with challenges such as climate change.
RST-supported programs cover:
- (i) policy reforms;
- (ii) capacity development; and
- (iii) financing options to catalyze private capital.
Implementation and pipeline:
- The RST was implemented in record time with 11 programs being approved within the first year, and twice that number is in the pipeline for next year.
RST role:
- Provides a critical complement to largely project-based financing from MDBs and other donors by supporting policy reforms that remove policy barriers and help catalyze additional financing from the private sector.
- IMF uses its convening power to bring together MDBs, IFIs, bilateral donors, private investors to help EMDEs explore new options for crowding in private climate finance—such as policy reforms, capacity development needs, and financing arrangements.
- Examples where governments have been able to catalyze the RST to crowd-in additional climate finance: Bangladesh, Barbados, Costa Rica, Jamaica, and Rwanda.

Key recommendations and priorities

Adapt stress-testing frameworks to incorporate physical and transition risk channels.
Close data gaps: build comprehensive physical risk projections and granular exposure datasets.
Strengthen data architecture, disclosures, and transition taxonomies to support sustainable markets and climate-risk assessment.
Ensure supervisory actions remain within legal mandates and focus on core responsibilities to maintain financial stability and market integrity.
Build sustained, specialized, and interdisciplinary capacity within supervisory organizations, inclusive from leadership downward.
Combine policy reforms, capacity development, and financing arrangements to scale-up climate finance; use RST and IMF convening to catalyze private and multilateral financing.

Source: IMF speech, "Taking Steps to Ensure Financial Stability in Sub-Saharan Africa in the Face of Climate Change," Africa Training Institute 10th Anniversary Conference, January 24, 2024.