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PROMOTING INCLUSIVE GREEN FINANCE INITIATIVES AND POLICIES
SECTION 5: PROMOTION THROUGH MONETARY POLICY LINKING MONETARY POLICY TO THE 4P FRAMEWORK
Central banks can augment traditional monetary policy instruments to promote access to finance for disadvantaged groups, including women, youth and forcibly displaced persons, and to promote the financing of environmental and climate disaster response initiatives. The use of monetary policy instruments to support IGF objectives overlaps with Promotion and Provision policies. Monetary policy promotion aims to change financing behavior by altering the money supply without using direct capital injection or mandating quotas. Examples of promotion include changing the criteria for setting central bank interest rates, adjusting reserve and capital requirements and changing the collateral framework for open market operations. The capacity of central banks to learn about the impacts of monetary policy change through better data collection on IGF and coordinated peer sharing is also included under
FIGURE 9: MONETARY POLICY UNITS ADDRESSING CLIMATE CHANGE IN THE AFI NETWORK, % Does the Monetary Policy or Research Unit in your institution address climate change and/or Financial Inclusion issues? 31
Y es In progress No
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Promotion. Gender-sensitive IGF provision policies of a central bank, such as the use of refinancing facilities, lending quotas and quantitative easing, will be covered in a separate report. Monetary policy action to promote IGF is an extremely complex and challenging proposition due to the shortterm price instability that might occur while trying to achieve long-term price stability. There is a lack of peer experience in implementing green monetary policy, and a potential downside of these adjustments is creating undesirable market distortions through improper actions. Identifying market (or regulatory) failure and setting intervention boundaries is absolutely necessary. In all cases, government intervention should be carefully researched and designed to avoid disincentivizing private sector investment altogether. Interventions need to be monitored and evaluated carefully to measure impact and ensure the desired effects of correcting market failure is being achieved.
BASE INTEREST RATES Central banks use a variety of methods to set base interest rates, depending on their jurisdiction. However, the main outcome of interest rate adjustments is raising or lowering the cost of borrowing from a central bank by commercial banks. These interest rates can be differentiated to favor banks that adhere to green principles for lending. For example, fully fledged green banks could take advantage of lower funding costs than banks that do not undertake greening efforts, therefore incentivizing non-green banks to adopt green principles to gain access to cheaper sources of funds.
RESERVE REQUIREMENTS Reserve requirements require banks to hold a portion of deposits in reserve with central banks to safeguard financial stability (e.g. to prevent bank runs or influence interbank operations). A higher reserve requirement effectively reduces the available money supply. For example, differentiated reserve requirements (with IGF-related stipulations for how funds can be used) could allow banks that acquired funds raised through green savings and deposit accounts to hold lower reserves, thus making more funds available for banks to lend to consumers affected by climate change or to green businesses.
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Source: AFI, 2020 IGF Annual Survey
21 Forthcoming IGFWG Special Report: “Greening the Financial Sector through Provision Policies”, 2020.
