Washington, DC: On July 16, 2021, the Executive Board of
the International Monetary Fund (IMF) discussed a paper proposing a
strategy to help members address climate change-related policy challenges.
The paper highlights macro-critical climate-related policy challenges that
will confront all IMF members in the coming years and decades. For example,
global warming is bound to undermine productivity and growth, affecting
fiscal positions and debt trajectories. It will also impact asset
valuations, with repercussions for financial stability. Further, climate
change will redistribute income across the globe, which will influence
trade patterns and exchange rate valuations. To live up to its mandate, the
paper argues, the IMF needs to assist its members with addressing these
challenges. Moreover, as a multilateral institution, the IMF can play a
helpful role in facilitating policy coordination between countries to
mitigate climate change.
The paper takes stock of climate-related activities in the IMF to date. It
finds that the Fund has stepped up engagement on climate significantly in
recent years—reflecting in part demands by the membership—with a focus on
policy papers and flagship reports, accompanied by some discussion of
climate change-related policy challenges in bilateral country reports.
The paper argues that the time has come for a systematic and strategic
integration of macro-critical aspects of climate change into the IMF’s core
activities. It proposes covering climate change-related policy challenges
comprehensively in Article IV consultations, aiming at discussing such
challenges with all members every 5-6 years, and more frequently with the
largest emitters of greenhouse gases and countries particularly vulnerable
to climate change. It also suggests expanding coverage of climate risk to
all financial stability assessments (FSAPs), and a substantial scaling up
of climate-related capacity development (CD) activity in line with member
demand. In strengthening its engagement on climate, the IMF will continue
to cooperate and partner closely with other institutions to leverage
complementarities and provide the best service to its members. The paper
also estimates the cost of implementing the strategy.
Executive Board Assessment
[1]
Executive Directors welcomed the opportunity to discuss a strategy to help
Fund members address climate change related policy challenges. They
concurred that climate change is a global existential threat that poses
critical macroeconomic and financial policy challenges for the whole Fund
membership in the coming years and decades. Against this backdrop,
Directors broadly agreed that the Fund has an important role to play,
within its mandate, in supporting members’ efforts to address climate
change related challenges through its surveillance, when macro-critical,
and through its capacity development (CD) activities.
Directors supported a more comprehensive coverage of climate change related
policy challenges in Article IV consultations, where macro-critical. In
line with the conclusions from the Comprehensive Surveillance Review, they
generally agreed that coverage of climate change mitigation in Article IV
consultations would be strongly encouraged for the largest emitters of
greenhouse gases. Some Directors stressed that this means that coverage of
these policies would be voluntary. Directors supported the proposal to
regularly cover adaptation and resilience building policies for the most
vulnerable countries to climate change, including options to attract
climate financing. In addition, they generally saw a need to cover the
management of transition risks, including for fossil fuel exporters, of
adjusting to a low carbon economy, while taking into consideration each
country’s own circumstances.
Directors agreed that Financial Sector Assessment Programs should have a
climate component where climate change may pose financial stability risks.
This would help assess any potential pressure points for the financial
system from physical climate shocks and from the transition to a low-carbon
economy. A few Directors emphasized that this climate component should be
aligned with the standards being developed by relevant international
standard-setting bodies to ensure a consistent policy advice.
Directors supported expanding climate-related CD efforts, given rising
demand by the membership. They also generally supported complementing Fund
CD resources with donor funded activities. A number of Directors also noted
that the Fund could consider using program conditionality to support
borrowing countries to increase their resilience to climate change shocks
and ensure macroeconomic sustainability, provided the conditionality is in
line with the Fund’s lending mandate and policies. A few Directors
cautioned, however, against using climate-related conditionality.
Directors agreed that policy papers and multilateral surveillance reports
should remain critical outlets for disseminating the Fund’s analytical and
policy work on climate change, especially for topics with a multilateral
component that require policy coordination, such as mitigation policies or
climate financing. Directors underscored that reliable climate data are a
critical foundation for macro-climate analysis and encouraged further work
in this area. They generally stressed the importance of developing models
and standardized toolkits to support the Fund’s work in both multilateral
and bilateral surveillance, while being mindful of potential limitations in
models and toolkits, including due to specific country circumstances.
Directors stressed the importance of partnering with other institutions,
including the World Bank Group, on climate-related work. They called for a
more systematic approach to collaboration to leverage the expertise of
other institutions, while minimizing overlap and maximizing value for the
membership.
Directors took note of the proposal for gradually adding 95 Full-Time
Equivalents to implementing the proposed climate strategy. They looked
forward to assessing this, together with other funding requests, during the
discussion of the Fund’s overall budget.
Directors generally agreed that some internal re-organization that
facilitates an efficient delivery of the climate strategy would be needed,
in particular by establishing climate hubs in functional departments and
reinforcing area departments as necessary. A few Directors stressed that
greening the Fund’s own operations and reducing its carbon footprint will
be key for the institution’s credibility.
[1]
At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country's authorities. An
explanation of any qualifiers used in summings up can be found
here:
http://www.IMF.org/external/np/sec/misc/qualifiers.htm.