4 minute read

B. Inclusive Green Finance

Next Article
INTRODUCTION

INTRODUCTION

In the past, financial policymakers and regulators, handled green finance and inclusive finance mostly as two separate agendas. But there is an increasing awareness among financial regulators on the links between the effects of climate change and the stability of the financial sector. Moreover, key target groups for inclusive finance (women and youth), tend to be disproportionally exposed to the risks and impacts of local and global environmental changes while also playing an important role in mitigating environmental change.25 The actions financial policymakers and regulators can take include: enhanced monitoring of climate-related risks through adequate mappings and stress tests; developing new methodologies to improve the assessment of climate-related risks; inclusion of the ESG criteria in their pension funds; helping to develop and assess the proper taxonomy to define the carbon footprint of assets more precisely (e.g. “green” vs. “brown” assets commonly known as “greenwashing”); working closely with the financial sector on disclosure of carbon-intensive exposure to assess potential financial stability risks, and focusing resources on studying how prudential regulation can address the financial stability risks linked to the impacts of climate change.

Additionally regulators in the AFI network have begun responding – often in an urgent matter –with strategies, policies and regulations to mitigate and build resilience against the impacts of climate change in their respective countries. There is also a growing recognition of the intersectional nature of these policies and regulations, and the need to build in gender sensitivities from the outset.26

Advertisement

Many AFI network members have indicated that climate change is a problem in their country which imposes a high cost on low-income and vulnerable populations. Some expressed concerns that, in extreme cases, climate change could undermine financial stability so regulators would need to step in where disruptions could spread.

Therefore, there is an emerging trend in the AFI network to link financial inclusion and climate change on a national strategic level, either via an NFIS or other financial sector strategies, to formulate a holistic policy for the national financial sector.

B. INCLUSIVE GREEN FINANCE

This guideline note aligns most of its components to AFI’s 4P policy framework (promotion, provision, protection, prevention) on Inclusive Green Finance.

Although financial regulators have taken a variety of approaches to advancing IGF, they have found that there is often no need to reinvent the wheel. Often, existing policy tools and techniques for low-income populations and micro, small and medium enterprises (MSMEs) can be refined and repurposed with a gendersensitive and green focus. This allows policymakers to act swiftly while laying the groundwork for innovative policies.

These policies are presented here in the IGF framework: Promotion, Provision, Protection and Prevention, known as the AFI 4P framework. All policies under the 4Ps either catalyze financial services from the private sector or use financial infrastructure to deploy finance for climate action and some of them are interrelated .27

Although these four categories sometimes overlap, the 4P policy framework provides financial regulators with an intuitive way to think about the full range of policy actions they can take for IGF.

25 Banque de France. 2020. Bolton, P., Morgan Despres, Luiz Awazu Pereira

Da Silva, Frédéric Samama & Romain Svartzman. The green swan:

Central banking and financial stability in the age of climate change.

Available at: https://www.bis.org/publ/othp31.pdf 26 AFI. 2020. Inclusive Green Finance: A Survey of the Policy Landscape (Second Edition). Available at: https://www.afi-global.org/publications/ inclusive-green-finance-a-survey-of-the-policy-landscape-secondedition/ 27 AFI. 2020. Inclusive Green Finance: A Survey of the Policy Landscape (Second Edition). Available at: https://www.afi-global.org/publications/ inclusive-green-finance-a-survey-of-the-policy-landscape-secondedition/

FIGURE 1: THE 4P POLICY FRAMEWORK OF IGF

INCLUSIVE GREEN FINANCE

PROMOTION

Promotion policies and initiatives prepare the private sector to offer financial services for green projects or related climate action activities to qualified beneficiaries (through awareness raising, information sharing, capacity building, disaggregated data collection and certain monetary policy actions). Promotion is the preparatory and framework development phase for action on IGF, but also includes critical ongoing efforts that support the implementation of the other three pillars.28 Provision policies help ensure that financial resources are provided to inclusive green projects through adequate monetary and regulatory measures and supported by relevant payment systems.29 Protection policies reduce financial risk by “socializing” potential losses through insurance, credit guarantees, social payments or any other related risksharing mechanisms. Policies in this category provide a much-needed safety net and help to build resilience by accelerating and facilitating recovery from extreme climate events.30 Prevention policies aim to avoid undesirable outcomes by lowering financial, social and environmental risks. As part of this effort, financial regulators are enacting environmental (and social) risk management guidelines to assess and proactively address the social and environmental externalities and risks of their institutions’ activities.

PROVISION PROTECTION PREVENTION

28 AFI. 2021. Promoting Inclusive Green Finance Initiatives and Policies. Available at: https://www.afi-global.org/publications/promoting-inclusive-greenfinance-initiative-and-policies/ 29 AFI. 2021. Greening the Financial Sector through Provision Policies: The Role of Central Bank. Available at: https://www.afi-global.org/publications/ greening-the-financial-sector-through-provision-policies/ 30 AFI. 2020. Climate Risk Insurance for the Agriculture Sector in Armenia. Available at: https://www.afi-global.org/publications/climate-risk-insurance-forthe-agriculture-sector-in-armenia/

This article is from: