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PROMOTING INCLUSIVE GREEN FINANCE INITIATIVES AND POLICIES
INTRODUCTION
supervisors, they are of direct interest because they can help them fulfill their mandates in an era of climate uncertainty.3
It is widely accepted in the AFI network that climate change is a threat to development, and that it has already imposed a high cost on low-income and vulnerable populations in developing and emerging economies. However, research shows that financial inclusion is one way to build individual and collective resilience to the effects of climate change.1
The adoption of IGF initiatives and policy development in AFI member jurisdictions has been mixed. There is ongoing debate whether a regulatory or voluntary approach should be taken, especially when reacting to climate risks in the financial sector. In some jurisdictions, awareness raising and industry adoption (e.g. by implementing environmental risk management and disclosure) is being done directly by the private sector via industry associations and progressive banks (typically foreign banks). However, in most cases, central banks or supervisory authorities are leading awareness-raising efforts and proposing policy reforms to promote industry adoption.
In order to set financial sector goals that expand financial inclusion and help people to mitigate, adapt to and build resilience to climate change, it is critical that central banks and financial regulators understand and address the causes and effects of climate change and poverty in their economies. The traditional role of central banks and regulators — ensuring financial stability — can be aligned with promoting responsible financial inclusion for underserved segments of society. New roles can also be undertaken to respond to environmental crises. Inclusive green finance (IGF) is a rapidly evolving policy area for AFI member institutions.
Regardless of the approach, financial institutions will ultimately be the ones providing financial services aligned with IGF policy objectives. Central banks and financial regulators will need to prepare for, coordinate and support this process. Financial regulators will need to develop an appropriate regulatory and supervisory framework while banks will need to integrate environmental and climate change risks in their strategies and risk management systems. Achieving these objectives will require a change in mindset for both regulators and bankers, and they would be well served by a carefully considered transition strategy.
IGF policies and initiatives seek to include disadvantaged groups, such as women, youth, the elderly, forcibly displaced persons, persons with disabilities,2 and MSMEs in climate mitigation and resilience-building efforts. These policies have three things in common: they catalyze financial services from the private sector for climate action; they use financial infrastructure to deploy them; and they strengthen the resilience of financial institutions providing financial inclusion solutions to the effects of climate change. Central banks have a unique perspective on climate change risks that private-sector players and policymakers cannot necessarily share given their differing interests and time horizons. This gives central banks an advantage in proposing policies that support climate action and debate, and enables them to engage in this debate themselves — not by stepping out of their role, but to preserve it. Even though some of the actions do not fall within the remit of central banks and
1 (AFI, 2020) 2 In 2019, the AFI network approved the “Kigali Statement” which commit to harness the capacity of vulnerable groups to drive inclusive growth. For more information: https://www.afi-global.org/sites/default/files/ publications/2020-10/Kigali_FS_20_AW2_digital.pdf 3 (Bolton, et al., 2020) 4
(AFI, 2020)
