It is my great pleasure to join you today at the Chongqing-Singapore Connectivity Initiative Financial Summit. I sincerely congratulate you on this important event.
The COVID-19 pandemic has dealt a severe shock to the global economy. Policymakers around the world have taken steps to contain the spread of the virus, to protect the vulnerable and support economic activity, and to bring about an early recovery.
But the crisis also provides a unique opportunity to address some of the structural and strategic challenges that existed even before the pandemic, yet never received sufficient attention from us. Chief among these is how to deal with the challenge of climate change, including through the mobilization of green finance.
There are many issues to discuss about green finance, but today I would like to focus on three in particular.
First, let me start by emphasizing the importance of expanding green investment. For the world to transition to a low-carbon future, substantial investments will be required—in renewable energy resources, in more energy-efficient buildings, in seawalls and other infrastructure to adapt to rising sea levels, and in a host of other areas. How will this all be financed? Clearly both market forces and policies can contribute. Market forces will need to play a fundamental role in helping allocate resources from high- to low-carbon sectors. Indeed, issuance of green bonds and loans has risen from nothing 10 years ago, to an estimated $320 billion this year, bringing the outstanding amount of green debt to over $1.5 trillion. At the same time, policies can do their part as well. For example, the revenues generated by carbon pricing can certainly help. Policymakers may also have a role in encouraging bond financing—witness, for example, the Sustainable Bond Grant Scheme launched in 2017 by the Monetary Authority of Singapore.
Second—and closely related to the goal of deepening markets for green finance—adequate, transparent, and open disclosure of information is essential. Market participants rely on transparent public information to help inform their investment and consumption decisions. Adequate information is critical for aligning market incentives, measuring results, ensuring proper asset valuations, and managing risk effectively.
Disclosure of climate-related financial information is generally weak right now across the globe. The IMF is working with the Central Banks and Regulators Network for Greening the Financial System (NGFS) in bridging data gaps. We are also working together with other international financial institutions and global standard-setters to promote more standardized and transparent information about sustainable products, as well as to achieve stronger disclosure standards for climate data.
My third point is that close attention must be paid to financial risks. Financial instability can materialize if the low-carbon transition becomes uncoordinated or abrupt, triggering rapid shifts in investor and consumer behavior. Financial institutions must incorporate the climate-risk perspective in their strategic decisions, and they may choose to adjust their business models to manage and mitigate the impact of climate risks on their balance sheets. Prudential supervisors should set out expectations for financial institutions to include climate risks in their risk management and governance frameworks.
I would also note that, over the past decade, the IMF, and the World Bank have worked through the Financial Sector Assessment Program to capture physical climate-related risks, such as storms, floods, and droughts in their stress tests.
Let me wrap up by saying that promoting green finance is a critical component in the global effort to address climate change and achieve sustainable development. It will be essential to promote green investment, and green finance as well, to enable resources to flow to low-carbon sectors. At the same time, we must be able to identify systemic risks and maintain financial stability during the transition toward a low-carbon growth model.
The IMF is ready to work with all its members to explore ways to promote green finance that best serve their own development objectives.
With these remarks, I wish you all the best for this Financial Summit.
Thank you very much.
Presented at IMF Chongqing-Singapore Connectivity Initiative Financial Summit, November 23–24, 2020