Speech

Climate-Related Financial Risks and Green Finance: Select Issues for Policy Makers

June 1, 2022

My sincere thanks to presenters, panelists and moderators in our Climate Dialogue yesterday and today. Judging from the quality of the contributions and the lively exchanges it appears that it has been a useful venue for sharing ideas. And of course, we all hope that the messages that came out will strengthen our resolve for collective action.

What are key messages we should take away? Economic activity reacts to incentives, so I want to start with a key point: higher carbon prices should be at the center of efforts to reduce greenhouse gas emissions . Carbon pricing incentivizes mitigation and mobilizes revenues for funding appropriate investment and for mitigating the impact on the most strongly impacted groups and industries. We at the IMF have been big proponents of such policies, and we continue our efforts to integrate climate change into all our work. And, as mentioned, we established the Resilience and Sustainability Trust to provide resources for countries to build resilience to external shocks, such as climate change.

Sitting virtually among you, I observed several themes developing during the discussions, and I walk away with 4 key priorities for action that I want to pose to all of us. Let us label them the “Tokyo Priorities for Climate Financial Action,” since our hosts at the Regional Office for Asia and the Pacific are based in Tokyo.

1. First: We need a common push. More efforts are needed to find the appropriate way for sustainable finance to leave a lasting impact and mobilize the resources to address climate change. The public sector can leverage its position to help with riskier but important projects, and the private sector can play its key role in funding the transition to lower carbon intensity and provide market pricing of risks.

2. Second: Data, disclosures, and taxonomies are key. Although improving, data gaps and lack of appropriately detailed disclosures are impediments to mobilizing finance to fund climate-related investment. Providing comparable, verifiable, and accessible climate-related data can support monitoring, decision making, and the financing of good investments for climate change. Similarly, while recognizing that there are different economic structures and needs at the country level, there is a strong case for consistency and interoperability of taxonomies for climate activities on the national, regional, and global levels. This can help promote greater cross-border investment and development of stronger financial innovation.

3. Third: Regulation needs to adjust. Stronger regulation and potentially a code of conduct are necessary to ensure that sustainable financial products do indeed serve as funding vehicles for climate mitigation and adaptation, ensure fairness and quality of ratings, and help prevent greenwashing. Banks also need a common set of rules. Harmonization of the prudential framework via international standard-setting bodies and international organizations can help strengthen supervision and disclosures and incorporate stress-testing practices across the financial sector. In this context, capacity development is also necessary.

4. And finally, fourth: Monetary policy and operations may have a role as well. They can potentially help combat climate change, but central banks need to weigh the balance of risks to their operations and manage the governance and communication challenges carefully.

Having taken a first step to engage with you and learn from each other, we at the IMF look forward to continuing this dialogue with closer regional interactions and exchange of ideas. We welcome your suggestions and feedback for this event as well as ideas for how to make future discussions better. We will follow up with a survey to receive your valuable suggestions. Thank you.