Preparing Financial Sectors for a Green Future: Managing Risks and Securing Sustainable Finance
Departmental Papers, February 12, 2024
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Bibliographic details
- Authors: Bozena Radzewicz-Bak, Jérôme Vacher, Gareth Anderson, Filippo Gori, Mahmoud Harb, Yevgeniya Korniyenko, Jiayi Ma, Moheb T Malak, Dorothy Nampewo, Sahra Sakha
- Published: February 12, 2024
- Series: Departmental Papers
- DOI: https://doi.org/10.5089/9798400255250.087
Key messages and findings
- Financial sectors in the Middle East and Central Asia (ME&CA) should play an important role in supporting climate-related policies for the region.
- The sectors are vulnerable to downside risks from climate-related shocks and at the same time offer the potential to help fill the financing gap for needed adaptation and mitigation strategies.
- Policymakers must ensure that financial sectors are prepared for a green future by enhancing the resilience of banks to physical and transition risks from climate change and boosting the capacity of insurance sectors to speed recovery from climate-related disasters and help offset economic costs.
- The paper is the first to evaluate the impact of climate change on banking institutions in the region and assess the capacity of insurance in mitigating climate-related damages and losses.
- The paper synthesizes the size and nature of regional financing needs for adaptation and mitigation and discusses both opportunities and challenges for the development of green finance.
Near-term priorities (measurement, disclosure, forecasting)
- Prioritize implementation of methodologies for quantifying and reporting climate-related risks.
- Promote transparent disclosure of climate-related risks by financial institutions.
- Strengthen frameworks for forecasting and analyzing climate-related risks to inform regulatory and supervisory actions.
Medium-term policy actions (incentives, market mechanisms, phasing out subsidies)
- Governments can support green finance through incentives and market mechanisms.
- Phase-out energy subsidies to reallocate fiscal resources and correct market distortions.
- Introduce new tools and markets (such as carbon pricing frameworks) to stimulate demand for investment in green technologies.
- Foster an enabling environment for private green finance and attract investment from other official entities, such as sovereign wealth funds (SWF).
- Facilitate support from international financial institutions and multilateral development banks.
Role of financial institutions and instruments
- Banks: enhance resilience to both physical risks (climate shocks) and transition risks (policy and market shifts).
- Insurance sectors: expand capacity to speed recovery from climate-related disasters and help offset economic costs.
- Private green finance: create conditions to mobilize private capital toward adaptation and mitigation investments.
- Official investors and multilateral financiers: provide complementary financing and risk-sharing instruments to catalyze private investment.
Contribution and policy guidance
- Offers a unique regional perspective on climate risks in ME&CA financial sectors and outlines the road ahead in transitioning to a green future.
- Contributes to the literature by evaluating banks’ exposure to climate change in the region, assessing insurance capacity, and synthesizing financing needs for adaptation and mitigation.
- Provides policy recommendations to guide policymakers in developing regulatory responses to enhance financial sustainability amid climate change risks.
IMF Departmental Paper: "Preparing Financial Sectors for a Green Future: Managing Risks and Securing Sustainable Finance" (February 12, 2024).