Same Storm, Different Boats Solving the Climate Emergency with No One Left Behind 2 CONTENTS SPI JOURNAL JUNE 2021

Sustainable Policy Institute JOURNALIssue 5, June 2021

Same storm, different boats Solving the climate emergency with no one left behind 2 CONTENTS SPI JOURNAL_JUNE 2021

JOURNAL Issue 5, June 2021

Review 4 Ensuring a just transition 15 Sustainable Policy for SMEs in Asia Institute No one should get 8 Peggy Pui Kei Tse, chief strategy 6-9 Snow Hill, London left behind EC1A 2AY, United Kingdom officer, Good City Foundation T: +44 (0)20 700 27898 omfif.org/spi @OMFIF [email protected] Covid-19 could 16 accelerate energy transition

Danae Kyriakopoulou Philip Gass, lead, transitions, Chair, Sustainable Policy energy programme, and Lourdes Institute and Chief Economist & Director of Research Sanchez, senior policy adviser Natalia Ospina and lead, Indonesia, International Editor, Sustainable Policy Nick Robins, professor in Institute Institute for Sustainable practice for sustainable finance, Development Emma McGarthy Grantham Research Institute, Programmes Manager, Sustainable Policy Institute London School of Economics The expensive cost 17 Clive Horwood of inaction Managing Editor and Deputy A greener world is a 11 Chief Executive Officer shared responsibility Simon Hadley Director, Production Francisco G Dakila, Jr, deputy William Coningsby-Brown governor, monetary and Assistant Production Editor economics sector, Bangko Sarah Moloney, Fergus McKeown Sentral ng Pilipinas Subeditors John Orchard Climate change is a 12 Chief Executive Officer green swan David Marsh Matt Lobner, head of Chairman In conversation with Luiz Awazu international markets, Asia, Mingiyan Shalkhakov Pereira da Commercial Director, HSBC Sustainable Policy Institute Silva, deputy Strictly no photocopying is general permitted. It is illegal to reproduce, A marathon, not a sprint 18 store in a central retrieval system manager, or transmit, electronically or In conversation otherwise, any of the content of Bank for this publication without the prior with Henner consent of the publisher. While International every care is taken to provide Asche, deputy accurate information, the publisher Settlements cannot accept liability for any errors director or omissions. No responsibility will be accepted for any loss occurred general by any individual acting or not acting How to make transition 14 as a result of any content in this markets, publication. On any specific matter finance work reference should be made to an Deutsche appropriate adviser. Aayush Tandon, policy analyst, Bundesbank Company Number: 7032533. ISSN: 2398-4236 green finance and investment, OECD Forthcoming meetings 20 OMFIF.ORG/SPI LEADER 3

Same storm, different boats

The determination to ‘build back better’ with a sustainable recovery has dominated the vision for the economic and policy response to the pandemic, writes Danae Kyriakopoulou, chief economist and director of research, OMFIF.

IN recent years, more than 100 countries have pledged others should follow them for the sake of equality. to achieve net-zero emissions by 2050 or earlier. But But that does not mean that concerns over fairness while the destination is common to all, countries differ and justice should be ignored. There are other ways to widely in their abilities and resources in terms of how level the playing field. This edition of the SPI journal – and how quickly – they can reach it. This is because assembles recommendations for how to deliver a just while, as a planet, we are all in the same climate storm, transition. They include proposals for developing we are not all in the same boat. transition finance solutions (p.16), prioritising re- A perhaps simplified but useful distinction is skilling, access to finance and transfer payments the difference between developed and developing systems (p.15), and highlight the role of central banks economies. This applies in at least two ways. First, in managing the risks of inequalities and ‘stranded jobs’ owing to a mix of economic and geographic factors, the (p.12 and 18). physical risks from the climate crisis are highest in the These risks are not only present in developing global south. From India to Southeast Asia and Latin countries. Inequalities have also been widening within America to Africa, developing countries are being hit advanced economies. Parallels can be drawn with hardest by natural disasters (p.8 and 11). globalisation: despite substantial net benefits to the Second, while developed economies have undergone global economy, their unequal distribution gave rise to decades of industrialisation and economic growth backlash movements. We cannot afford the same with without the constraint of ‘internalising’ environmental climate change. Unlike globalisation, the counterfactual considerations, developing countries are now denied the of policy reversal in this case will have existential same opportunities. This is the right thing to do – the consequences. To avoid it, it is imperative that we climate crisis is an existential threat, and just because design a climate transition that is not only green, but policies were misguided in the past it does not mean also just. •

‘While the destination is common to all, countries differ widely in their abilities and resources in terms of how – and how quickly – they can reach it.’ 4 REVIEW SPI JOURNAL_JUNE 2021

Key policy decisions on sustainability, April — May 2021

Taskforce on Nature-related Financial Disclosures launches The TNFD aims to build on and complement the work of the Task Force on Climate-related Financial Disclosures, to give companies and financial institutions a complete picture of their environmental risks. The reporting framework will be tested and refined in 2022 before its launch in 2023.

Japan’s Financial Services Agency and the Tokyo Stock Exchange creating green bond certification framework Supporting the issuance of corporate bonds, the Japanese regulator is building a framework to certify green and transition bonds and promote the decarbonisation of industries. It is intended to provide guidelines and encourage funding in sustainable finance.

Bank of England plans to shift its corporate bond buying programme toward decarbonisation The central bank has proposed four key tools for greening the corporate bond purchase scheme focusing on portfolio targets, asset eligibility, tilting purchases and tightening requirements.

Banque de France launches Climate Change Centre The BdF has set up a climate change centre to monitor its climate initiatives and ensure they are consistent with the priorities of the Central Banks and Supervisors Network for Greening the Financial System. OMFIF.ORG/SPI REVIEW 5

Selected central bankers’ speeches on sustainability

27 May: Luis de Guindos, vice president, European Central Bank, on climate change and financial integration 21 May: Andrew Hauser, executive director, markets, Bank of England, on how central banks can use monetary policy portfolios to 12 May support transition to net zero 21 May: Marja Nykänen, deputy governor, Bank of Finland, on maintaining the European Union as global leader in sustainable finance 20 May: Ravi Menon, managing director, Monetary Authority of Singapore, on a vibrant carbon market for a low-carbon future 18 May: Sarah Breeden, executive sponsor climate change and executive director, UK Deposit Takers Supervision, Bank of England, on plotting our course to net zero 13 May: Tiff Macklem, governor, Bank of Canada, on the benefits of an inclusive economy 12 May: Isabel Schnabel and Frank Elderson, ECB executive board members, on tackling climate change as a central bank 6 May: Christine Lagarde, president, ECB, on a green capital markets union for Europe 21 May 4 May: Ignazio Visco, governor, Banca d’Italia, on raising the bar on climate ambition 29 April: Frank Elderson, vice chair of the ECB supervisory board and member of the executive board, on guiding banks towards a carbon-neutral Europe 19 April: Gabriel Makhlouf, governor, Central Bank of Ireland, on tackling the challenges of Covid-19, digitalisation and climate change 16 April: Jorgovanka Tabaković, governor, National Bank of Serbia, on developing an environmentally supported and orientated domestic economy 15 April: Yi Gang, governor, People’s Bank of China, on green finance and climate policy 6 REVIEW SPI JOURNAL_JUNE 2021

FURTHER READING Selected reports on climate change and sustainable finance, April - May 2021

ShareAction – Paris-alignment United Nations Environment Finance methodologies for banks: reality Initiative, Climate Safe Lending Network or illusion? – Aligning finance for the net-zero The report aims to establish best practice economy: New ideas from leading recommendations for Paris-alignment of bank portfolios. thinkers The report outlines the practical policies financial regulators could adopt if given the responsibility of International Capital Market Association regulating the financial system in line with the needs of – Overview and recommendations for society and the planet. sustainable finance taxonomies This paper provides an international overview of both official and market-based taxonomies. It summarises Bank for International Settlements – the various approaches and objectives that are being Climate-related risk drivers and their pursued. transmission channels This report explores how climate-related risk drivers, including physical and transition risks, can affect Grantham Research Institute on Climate both banks and the banking system via micro- and Change and the Environment – G7 macroeconomic transmission channels. leadership for sustainable, resilient and inclusive economic recovery and growth Prior to the G7 summit from 11-13 June, the report sets BIS – Climate-related financial risks: out the challenges and opportunities facing the world, measurement methodologies as well as the shared vision, strategies and priorities for This provides an overview of conceptual issues related action. to climate-related financial risk measurement and methodologies, as well as practical implementation by banks and banking supervisors. Cambridge Institute for Sustainability Leadership – Understanding the climate performance of investment funds Asian Development Bank – Asian The first of two reports analyses the approaches currently Development Outlook 2021: Financing used to measure and report investment funds’ climate a green and inclusive recovery performance. It makes a case for temperature scores to The report presents economic prospects for developing act as a universal measure of climate performance for the the Asia Pacific region. It analyses the impacts of closures industry. caused by the pandemic and financing a green and inclusive recovery.

Finance For Biodiversity Initiative – Debt and biodiversity: A Chinese leadership International Monetary Fund – G20 opportunity note on environmentally sustainable This consultation document sets out the opportunities investment for the recovery for China to engage with international policy, their role in This paper summarises the main findings of the IMF’s debt markets and emerging market developments around flagship reports regarding the role of environmentally biodiversity. sustainable investment for the recovery. OMFIF.ORG/SPI REVIEW 7

OMFIF’s latest sustainable finance activity

MEETINGS COMMENTARIES OMFIF meetings held in April and May covered a variety of Commentaries in April and May included topics such as topics. They included biodiversity, risk exposure, the role of sustainable infrastructure, climate leadership, climate risk capital markets in climate change and fireside conversations management and central bank strategies for transitioning with central bank officials and climate experts. to a net-zero economy. 26 May: Establishing metrics for biodiversity and 26 May: Luca Bertalot – Housing finance is a pillar ecological transition of sustainability 19 May: Emma McGarthy – Stress testing is integral to green transition 6 May: Dael Wilson – Asia Pacific working to narrow ESG gaps 27 Apr: Janine von Wolfersdorff – European Commission paves way for green accounting standards 26 Apr: Emma McGarthy – Building financial resilience in small island states 21 May: Taxonomy and transition pathways: Risk exposure and financial activities 17 May: In conversation with Ben Caldecott: The Centre for Greening Finance & Investment 11 May: The role of green loans and targeted lending in providing economic growth 5 May: In conversation with Olaf Sleijpen: Quantifying the risk of climate change to financial stability 28 Apr: Stress testing and climate scenario 23 Apr: Philip Moore – Sustainable inflows break analysis: Providing transparency and pathways for new records mitigating climate impact 21 Apr: Danae Kyriakopoulou, David Marsh and 15 Apr: In conversation with Kevin Stiroh: The Mark Sobel – Biden’s climate challenges: China role of the Federal Reserve in mitigating climate- data, turf wars related financial risk 19 Apr: Steve Bowen – Risk management opportunities: climate change and Covid-19 PODCASTS 15 Apr: Philip Moore – Emerging markets embrace In April and May, podcasts covered the importance of sustainable bond agenda gender diversity in financial institutions, the Federal Reserve’s progress in mitigating climate risk and how financial systems can play an important role in the climate crisis. 27 May: Gender diversity in leadership and decision-making in the financial system 4 May: In conversation with Kevin Stiroh: The role of the Federal Reserve in mitigating climate- related financial risk 29 Apr: Designing a financial system that responds 14 Apr: Nick Robins, Simon Dikau and Ulrich Volz – to the climate threat and promotes a healthy planet Net-zero central banking gathers momentum 8 COVER SPI JOURNAL_JUNE 2021

No one should get left behind

Nick Robins, professor in practice for sustainable finance, Grantham Research Institute, London School of Economics, explains why the real test for the just transition to net zero will be in the global south. OMFIF.ORG/SPI 9

THE need to shift to a net-zero underdeveloped financial markets, ‘It means our financial institutions economy is gaining powerful traction high costs of capital and incomplete are faced with grave risks and should across governments and the financial financial inclusion. begin their green transition right system ahead of the COP26 summit Importantly, the assumption that away.’ In India, Dr Arunabha Ghosh in November. As the world emerges high-income countries are where and Vaibhav Chaturvedi of the Council from the Covid-19 crisis, accelerating carbon emissions are highest – and on Energy, Environment and Water investments in climate action and the therefore where decarbonisation have noted that, ‘If India peaked in restoration of nature are no longer efforts will be toughest – no longer 2030, per capita emissions would be seen as a burden, but rather as a driver always holds true. The UK’s carbon 2.2 tonnes. China’s per capita income of economic recovery, job creation and emissions peaked in 1973 and the in its peaking year of 2030 would be innovation. European Union’s in 1979 as de- $29,438 (in purchasing power parity The world’s emerging markets and industrialisation, offshoring and the terms); India’s would be $8,779. When developing countries could be the shift to gas from coal got underway, the US peaked emissions, each citizen greatest beneficiaries of this shift. long before climate policy took effect. was earning [on average] $55,916.’ In According to Carbon Tracker, Africa According to the World Bank, the India, getting to net zero offers huge has the potential to be a ‘renewables UK’s domestic emissions stood at 5.8t potential, but it will happen at a lower superpower’ with its abundant access per capita in 2016, while China’s had level of development and require more to cheap solar and wind power. reached 7.2t pc and South Africa’s effort, including how to find alternative Reaching net zero as soon as possible 8.5t pc. The US still had far higher employment for over half a million coal will reduce the growing burden of emissions per capita at 15.5t in 2016, mining workers. damage from climate change impacts, but its emissions peaked in 2007. This which falls hardest on developing trend will only have deepened since Just transition for emerging countries who have contributed least 2016. markets to the problem. Immense health Delivering a just transition is an benefits will also be achieved as important part of the strategy for urban air pollution is reduced or even achieving net zero across the global eliminated, saving millions of lives south. Long championed by the trade across the global south. union movement, it is incorporated by Realising this huge potential the Paris agreement as a way of making will not happen automatically. By ‘We remain committed sure that the interests of workers and definition, developing countries still to contributing our fair communities are placed centre stage. face structural deficits in meeting basic share to reduce global The financial sector’s focus on development needs and these have emissions, and to do so in climate risk has prioritised the been exacerbated by the pandemic. the context of overcoming avoidance of ‘stranded assets’. The just In the coming decades, net-zero poverty, inequality and transition means widening this view to investment will be most needed in underdevelopment.’ include the avoidance of ‘stranded jobs’ emerging economies. Nick Stern’s South African President Cyril and potentially ‘stranded countries’, report for the UK prime minister ahead Ramaphosa especially the increasingly carbon- of this year’s G7 summit estimated that intensive economies in emerging global investments of $2.6tn–$3.2tn markets. And the just transition goes a year will be needed to deliver the Crucially, this trend in high-income beyond ‘leaving no one behind’ in required transitions in energy and country emissions is production-based high-carbon sectors and regions. It also resilience. Only a quarter of this – it does not reflect imports from means ensuring that the new green investment is needed in the richest developing countries. A heavy reliance jobs in the expanding renewables economies of the G7. on production for export is another sector are good jobs, providing decent reason why, as carbon risks intensify work and boosting local economies. Beyond $100bn in the global economy, it is the global After a series of false starts – Getting these trillions of net-zero south that is increasingly carrying the remember the 2018-19 gilets jaunes investments to flow in emerging burden of exposure. protests in France? – political leaders markets will require a realignment of This point is not lost on decision- increasingly recognise that a just the global financial system. This means makers in major emerging economies. transition is essential to achieving net tapping into domestic pools of capital Speaking in April, Governor Yi Gang of zero. The EU has established a Just – not least in the banking sector – as the People’s Bank of China observed Transition Mechanism to mobilise well as securing international flows that, ‘It will take 70 years for the EU, 45 €150bn by 2027 to support the regions of climate finance far larger than years for the US and about 30 years for most affected by its Green Deal the $100bn per year commitment China to move from carbon peak to net programme. In the US, President Joe in the Paris agreement. This will zero’, and that ‘The time is shorter and Biden has made clear that the solutions require scaling up investment and the curve is much steeper for China.’ to the climate crisis offer historic confronting structural constraints in For Gang, the conclusion was clear: ‘opportunities to create well-paying 10 COVER SPI JOURNAL_JUNE 2021

Year carbon emissions peaked Source: OMFIF analysis

In the US, President Joe Biden has made clear that the solutions to the climate crisis offer historic ‘opportunities to create well-paying union jobs’ and ‘deliver an equitable, clean UK energy future’. 1973 EU 1979 US will be important. Extra funding 2007 from multilateral development banks will also be vital to support in-country just transition plans. The European Bank for Reconstruction and Domestic emissions in 2016 according to World Bank Development and the World Bank have Tonnes per capita introduced dedicated programmes for Source: World Bank, OMFIF analysis the just transition. These will need to be expanded to all MDBs as the momentum to phase out coal and other fossil fuels intensifies. As guardians of the financial system, central banks in emerging markets will also need to incorporate an explicit focus on the just transition. This could involve connecting their longstanding UK China South Africa US commitment to financial inclusion 5.8t pc 7.2t pc 8.5t pc 15.5t pc with their growing response to the climate crisis. This more promotional role could involve tools such as India’s well-established priority sector lending union jobs’ and ‘deliver an equitable, programme. clean energy future’. Heading into COP26, all countries But it is not only post-industrial need to create more ambitious climate countries that recognise the imperative plans. These plans need to be matched for a just transition. Speaking at by nationally driven roadmaps for Biden’s climate summit in April, South financing the just transition. Work is ‘It means our financial Africa’s President Cyril Ramaphosa underway in India and South Africa institutions are faced with made clear his commitment to to set out what these roadmaps could grave risks and should begin ‘contributing our fair share to reduce contain. Increased flows of both their green transition right global emissions’ in the context of international public and private sector away.’ ‘overcoming poverty, inequality and finance to developing countries will Yi Gang, Governor of the underdevelopment’. For Ramaphosa, be essential, not only to speed up the People’s Bank of China this means that a ‘climate-resilient transition to net zero and strengthen future… must be based on a just resilience to physical climate shocks, transition that ensures that those who south climate finance flows need to but also to ensure that fundamental are most vulnerable in society do not be doubled, according to Stern, and social imperatives are addressed get left behind.’ commitment to the just transition will through a just transition. If the EU be key to ‘ensure that the benefits and needs a €150bn mechanism to deliver a Critical to COP26 success opportunities are shared widely’. just transition in Europe, how much is Financing a just transition strategy With more than 70 low-income required for the developing world? • that connects climate action with countries either in debt distress or at The views in this commentary are those building better livelihoods is therefore high risk of debt distress, boosting of the author and do not necessarily essential across emerging economies international public finance through represent those of the Grantham and the developing world. North– grants and concessional mechanisms Research Institute. OMFIF.ORG/SPI 11

A greener world is a shared responsibility

Francisco G Dakila, Jr, deputy governor, monetary and economics sector, Bangko Sentral ng Pilipinas, explains the urgency of mitigating climate change in the Philippine financial system.

THE need to achieve global climate framework is essential for further milestones, plans and strategies stability is nowhere more felt than advancing local banks’ involvement for the adoption of sustainability in the Philippines, which is situated in green finance. It enables and principles in key BSP operations in the Pacific Ring of Fire and encourages them to issue green or and functions. As part of the BSP’s typhoon belt. The country must sustainability bonds to fund and sustainable investment and reserves respond and act fast to contribute refinance renewable energy and management, we have invested to halting climate change and to energy efficient projects, green $350m in the Bank for International mitigate its effects on Filipinos. buildings and other green assets. Settlements’ green bond fund. There needs to be a just Recent data show that Philippine Promoting a greener and cleaner transition to net zero, though this companies have issued 35% (or world is a shared responsibility. The makes stemming the effects of $4.2bn) of the Association of South BSP has joined with government climate change more challenging. East Asian Nations’ green, social agencies and private entities within With emphasis on environmental and sustainability bonds, worth the Philippines and across the sustainability, a just transition $12bn in total. globe to promote sustainability seeks meaningful changes across initiatives. Such engagements labour markets, global trade, include the International Finance capital-intensive technologies ‘Recent data show Corporation-supported Sustainable and the services sector. Emerging that Philippine Banking Network, the Task Force markets may be hard put to companies have on the Roles of ASEAN Central pursue a just transition due to issued 35% (or Banks in Managing Climate and cost, technical and political Environment-related Risks and considerations. It requires $4.2bn) of the the Central Banks and Supervisors stronger national commitments ASEAN green, social Network for Greening the Financial that are complemented by robust and sustainability System. international co-operation. bonds, worth $12bn The Asian Development Bank’s The Bangko Sentral ng Pilipinas in total.’ Green Infrastructure Investment is paving the way for the financial Opportunities: Philippines system in the Philippines to adopt 2020 Report has recognised the sustainable development principles As an inflation targeting central Philippine government’s efforts in and encourage investment in bank, the BSP recognises the promoting sustainable finance. It activities that advance climate- effects of climate on monetary specifically cites the BSP’s efforts resilient, green and sustainable policy. Impacts of extreme and leadership in promoting growth. The BSP has adopted weather conditions, especially sustainable finance and green a two-pronged approach: first, on the agriculture sector, are banking initiatives. increasing capacity building and incorporated in policy-making Supporting sustainable finance awareness initiatives; and second, through quantifying the effects of is an endeavour that central banks mainstreaming environmental, such conditions on the economy. can credibly undertake to help the social and governance principles. Moreover, weather disturbances transition to a low-carbon economy. On 29 April 2020, the BSP issued may also heighten credit risks Climate change has begun to affect a Sustainable Finance Framework. that may impair the transmission every country. Time is ticking and It provides for the integration of channel. we are already seeing the effects sustainable principles covering The BSP makes sure it practices of climate change with increasing environmental and social risk what it preaches. The BSP has global temperature, rising sea areas in corporate governance and embarked on its Sustainable Central levels, reduction of polar ice caps risk management frameworks as Banking programme, which forms and even the risk of pandemics. This well as in the strategic objectives part of the BSP Strategy Map for is one battle we cannot afford to and operations of banks. This 2020-23. This programme sets lose. • 12 IN CONVERSATION SPI JOURNAL_JUNE 2021

Climate change is a green swan

OMFIF’s Danae Kyriakopoulou, chief economist and director of research, spoke to Luiz Awazu Pereira da Silva, deputy general manager, Bank for International Settlements, about the crucial role of central banks and global coordination in combatting climate change.

Danae Kyriakopoulou: The one unique policy instrument that our current emissions of greenhouse transition to a low-carbon can solve global warming. They are gases. Climate change will unleash economy risks financial instability supporting green finance and playing cascading, damaging, non-linear through ‘stranded assets’, but also their role within their mandates for forces that interact with each other economic prosperity because of ensuring price and financial stability. and threaten human life. Covid-19 is ‘stranded jobs’ in carbon-intensive They are raising awareness about the related to deforestation and loss of sectors. Do you see a role for new type of systemic risk represented biodiversity. It is a tragic prediction central banks in addressing the by climate change, providing new for both advanced and emerging impact of climate change on the models, scenarios and guidance about economies if we do nothing: sudden financial system and on the real climate risks and coordinating with economic and financial interruption, economy? the private sector to enable a smooth large supply and demand shocks, Luiz Awazu Pereira da Silva: transition to net zero. forced mass migration and deep Climate change might trigger another disruption of our societies. ‘Minsky’ destructive moment for The effects of climate change will finance. But we could also make it a ‘Central banks and be more severe in poor countries and Schumpeterian creative moment, an supervisors are doing for poor households in rich countries. historic chance to change. Finance their part, but they There are important redistributive consequences of climate change is key. It played a crucial role during cannot be a substitute the 19th century, fostering the and the policies to address it. That technological transformation that led for what other policy- is because poor countries and poor to the Industrial Revolution. It could makers can do in their people in rich countries have less play a similar role for the 21st century respective areas.’ capacity to mitigate risk and to transition to net zero, combining protect themselves from increasingly progress in both green and digital frequent extreme weather events technologies. DK: Many advanced economies such as hurricanes and wildfires. The transition to net zero entails have been on the post-peak of the That is why climate change needs physical and transition risks to carbon emissions slope for some to be addressed in a coordinated way, financial stability and to various time in their journey towards at global and local level. Because sectors of the economy. But it net zero. For emerging markets, there is no ‘silver bullet’, we need should also be seen as an incredible the slope is much steeper. How better coordination between public opportunity for sustainable can we balance the need for and private sectors, within and growth and a green recovery common global goals, metrics and between public authorities (including from Covid-19. We will need vast benchmarks with understanding members of the Central Banks and amounts of investments in new different contexts? Supervisors Network for Greening green infrastructure, alternative LAPdS: At BIS, we coined the term the Financial System) and between energy sources, new research and ‘green swan’ to characterise this countries through multilateral, development and green cities. About new type of systemic risk. It is regional and institutional 50% of the technologies needed for a inspired by the concept of ‘black arrangements. successful energy transition by 2050 swan’, coined by Nassim Nicholas are only at prototype stage. All this Taleb during the 2008 financial DK: Besides global and local will need financing and quickly since crisis for rare, unpredictable and coordination, what is required we are running out of our maximum catastrophic events. However, a green to fight climate change? What carbon budget. swan is a certainty, not a rare event policy tools are needed to design a Central banks are aware that there if we do not act. Science says global transition that accounts for this? is no single agent in the economy nor warming is certain to happen with LAPdS: Coordination of countries, OMFIF.ORG/SPI 13

‘Covid-19 is a tragic prediction for both Climate change is a green swan advanced and emerging economies if we do nothing: sudden economic and financial interruption, large supply and demand shocks, forced mass migration and deep disruption of our societies.’

governments, agents and civil society will begin moving us towards sustainable development, speed up the implementation of environment-friendly policies and reinforce our approaches to climate and environmental risks. But coordination needs to encapsulate and use multiple instruments. We need new rules and regulations. Carbon pricing is paramount, but we need also prudential rules, transparent (many say mandatory) disclosure requirements, monitoring of climate risk exposure, accurate measurement of carbon emissions by firms, proper accounting standards, a homogeneous global green taxonomy, successful transition? fast scientific progress on vaccine carbon budgets with decreasing LAPdS: For the climate-related development. Therefore, we do see levels of emissions up to 2050 transition, countries need to reason for hope even if sometimes and macroeconomic frameworks work together and use the global there is insufficient coordination incorporating climate risks. Central governance system of multilateral in public health responses across banks and supervisors are doing their dialogue and international countries, especially the poor ones, part, but they cannot be a substitute institutions to make a difference. and risks of regulatory fragmentation for what other policy-makers can do There is increasing goodwill by with inconsistent definitions in their respective areas. We need governments committing to net zero. of environmental, social and to act now because it is too risky to There are public sector coalitions governance criteria. simply wait and see. such as the NGFS, the Coalition of This year offers opportunities We also need practical, concrete Finance Ministers for Climate Action with a renewed and rare alignment steps for the financial sector. and the alliance of development of goodwill on climate change and Some are being considered: green banks in the Finance in Common nature: COP15 on biodiversity, financing, mobilising capital markets, Summit. There are also coalitions COP26 on climate and committed designing portfolios aligned with the of private sector organisations G7 and G20 presidencies. There will Paris agreement, long-term venture with up to $70tn of assets under also be mounting pressure from capital for new R&D, technologies management, including Climate civil society and investors that will for carbon capture and resources to Action 100+ and Net Zero Asset request, irrespective of regulatory protect biodiversity and health. Owner Alliance. progress, more transparency and There has been a strong disclosure of the carbon footprint DK: Thinking more broadly about coordinated counter-cyclical of their investments. It is time the political economy of the response to Covid-19 by central perhaps to embed all these important transition, what needs to be done banks and treasuries. There are voluntary approaches into the formal to enhance the synergies and ambitious recovery plans with international architecture to truly balance between private sector sustainability angles in the US, achieve effective international and official sector action for a Europe and Asia. There has been coordination. • 14 SPI JOURNAL_JUNE 2021

How to make transition finance work

We need to combine approaches that consider different regions, sectors and pathways, writes Aayush Tandon, policy analyst, green finance and investment, OECD.

SUCCESSFULLY delivering bonds have had little impact on assets spread across geographies. the goals of the Paris agreement lowering emissions at corporate level. Pathways are central to transition requires using multiple approaches With rising interest in transition instruments. Transition bonds to decarbonisation. As we enter the finance it is important to identify are typically structured as vanilla decade for delivery, there is an urgent the market gap such instruments fixed-coupon or key performance need to not only scale up zero or low- seek to fill, their distinguishing indicator-linked securities. In emitting technologies and businesses, features, drivers of return and pricing either case, commitment to a but also support emission reduction structures to ensure they make a transition trajectory by the issuer is a efforts in high-emitting and hard-to- tangible contribution to the low- prerequisite. However, more guidance abate sectors. carbon transition. and consensus is required on what a Many governments and market The focus on transition-themed credible corporate transition strategy participants have cautioned against instruments and definitions in a looks like, and how to translate focusing solely on green activities whole-of-economy approach to the national and regional strategies and excluding sectors that, though low-carbon transition is a welcome credibly at issuer level. carbon-intensive, are key to economic development. However, outstanding As countries and regions devise development in certain countries questions must be addressed to ensure their transition pathways, they need and regions. Some argue that an transparency, impact and coherent to consider international climate understanding of sustainable finance and development commitments, the that qualifies only zero or low- impact of the transition on societal emission technologies and businesses inequalities, environmental issues could exclude large areas of the ‘Different socio- beyond emission reduction and the economy from capital markets. In this economic priorities and functioning of the system as a whole. context, ‘transition finance’ is gaining domestic capabilities will Given the scale and pace traction among governments and dictate the specifics of of emission reduction needed market participants. the low-carbon transition to achieve global climate and There has been a proliferation development objectives, it is crucial of sustainable finance taxonomies in different countries.’ at this initial stage to find a common and definitions. A report by the understanding of the transition Organisation for Economic Co- process. To this end, the OECD operation and Development points market development. For instance, has launched a project called Low- to a rapidly diversifying landscape what are transition instruments carbon Transition Finance: Emerging for such definitions, and the risk adding? Is there need for another Approaches, Needs and Ways of global fragmentation that may label? Which sectors and technologies Forward. hinder the flow of capital. A similar should qualify for such finance and The project will run from 2021-22 trend can be observed in transition why? And which transition pathway(s) and include analytical deliverables finance. A range of taxonomies, should be used as a benchmark? and stakeholder events. The principles and guidance have been Transforming economies to first output involves a stocktake proposed by governments, investors low- and net-zero carbon is an of transition finance-related and industry associations to channel unprecedented challenge. Different taxonomies, principles, guidance and capital towards high-emitting sectors. socio-economic priorities and financial instruments. The paper, to Financial markets have also seen the domestic capabilities will dictate the be published by summer 2021, will emergence of ‘transition bonds’. specifics of the low-carbon transition identify similarities and differences Despite successes in expanding in different countries. This implies in approaches to determine the core the sustainable debt market, research variance in transition pathways characteristics of transition finance. suggests labelled bonds may not be among countries, posing challenges It will form the basis of a series of contributing to climate mitigation for capital allocation and portfolio discussions and deliverables to drive objectives as much as hoped. Green alignment especially by investors with consensus and convergence. • OMFIF.ORG/SPI 15

Ensuring a just transition for SMEs in Asia

Peggy Pui Kei Tse, chief strategy officer, Good City Foundation, explains what a just transition to a green economy looks like and why we need to pursue it for developing markets.

THERE are two reasons for pursuing adopted a two-step approach to only thrive when the local habitat a just transition to a green economy. facilitate a just transition for SMEs. thrives. Local sustainability is a First, we have to proactively address To start, we spend extensive time core interest of SMEs in Asia. On the costs of undertaking the most and resources understanding the other hand, we should not forget ambitious climate agenda in history the local context. Many business how vulnerable SMEs are: they face and learn from previous failures to owners in Asia are aware of the extremely intense competition, have mitigate climate impacts. sustainability challenges the world disproportionately few resources Second, the concept of a faces today. However, there is severe and operate on very thin margins. just transition has evolved into disconnect between the global Therefore, governments need something larger and more complex. narrative and nuanced local issues to create sufficient boosters and In the 1990s, trade unions in North that require specific solutions to safeguards (such as re-skilling, America urged labour support resolve. access to financing and transfer programmes for those who lost jobs To bridge the gap, the next step payment schemes) for this group. due to environmental protection is to connect local governments At present, our world’s climate policies. In 2021, a just transition and SMEs through projects and transition may seem to have dimmer will depend on how people handle partnerships, such as urban renewal prospects than before. But when climate change at a global scale, in and zone developments. Identifying demand, trade and investment conjunction with a post-pandemic a tangible project that can put the recover, SMEs will be motivated economy, new international conversation into context is very to help bring climate change dynamics and a technology useful for helping governments and mitigation back on track or even revolution. SMEs envision what a just transition make up for lost time. An important question is actually looks like. The mutual A transition is rarely smooth whether small and medium-sized exchange of insights supports or clear. It is often bumpy and enterprises have a practical and strategic alignment of both parties difficult. Nonetheless, establishing equitable pathway towards a and feasibility assessment of good principles and a reasonable low-carbon and resilient future. transition options. framework to facilitate a just SMEs are the backbone of Asia’s Good City Foundation recognises transition remains a critical task for economy. According to the Asian SMEs are often committed to taking us because this will not be our last Development Bank, they make up positive climate actions as they can transition. • more than 96% of all businesses and provide two-thirds of private sector jobs on the continent. Most SMEs ‘According to the Asian engage in wholesale, retail, food and Development Bank, SMEs agribusiness, light manufacturing make up more than 96% of all and services sectors. businesses and provide two- Most cities in Asia do not have thirds of private sector jobs on adequate tools to help SMEs through a just transition, although the continent.’ SMEs have been a key driver of local economic growth, particularly for many developing countries. Given the significance of this group of businesses, it is unwise to forgo the opportunity to engage SMEs in the transition conversation. Good City Foundation has 16 SPI JOURNAL_JUNE 2021

Covid-19 could accelerate energy transition

The transition to net zero must include workers and industries, write Philip Gass, lead, transitions, energy programme, and Lourdes Sanchez, senior policy adviser and lead, Indonesia, International Institute for Sustainable Development.

TO achieve government net-zero workers. In many cases, the pandemic charging facilities) are also essential. pledges, the energy sectors need to has accelerated trends or added Governments should pursue a just be transformed. The transition to a strain to sectors where jobs are being energy transition, assessing potential greener future is going to affect our impacted. Since the onset of Covid-19, impacts and embedding its principles economies and societies, and impacts there have been increasing concerns across sectors and policies. Delaying will be felt by industries, workers around work security and managing the inevitable energy transition and communities. To mitigate risks the outsized impacts of economic and prolonging the life of sectors and present opportunities for all, disruption on vulnerable groups, that are not viable in the long term these groups need to partner with including families, workers and young (for example, through inefficient governments in developing solutions people. subsidies) could have significant and achieving net zero. It is therefore critical that social, economic and environmental This is possible through the governments ensure economic consequences. concept of a just transition recovery is work-focused, prioritising Above all, conversations – an idea that has developed health and safety and good working about diversification within over time, pioneered by labour conditions in sectors that will be the energy sector must occur organisations. The International sustainable over the long term. Active through engagement with relevant Labour Organization defines it as employment and labour market stakeholders so that employment, contributing to ‘the goals of decent policies, including the creation of social and environmental priorities work for all, social inclusion and alternative jobs in other sectors are fully considered in industrial the eradication of poverty’, as well aligned with net-zero plans, support policy. The energy transition, which as ‘an environmentally sustainable for skills development, retraining for starts with Covid-19 recovery plans, economy’. workers and strong social protection/ needs a worker-focused approach Just transitions have two main social insurance services are all that contributes to the reduction of elements: first, social dialogue essential to maintaining livelihoods. inequality. Solutions that are jointly that includes representatives Measures to de-risk investment developed and implemented are most of governments, industries and opportunities in green sectors and likely to be broadly supported and workers to raise concerns, identify develop infrastructure that supports succeed in guiding us to a low-carbon, priorities and build broad support clean energy (such as electric vehicle resilient economy. • for policies. Second, meaningful and strong engagement with non- tripartite stakeholders affected by the transition. This may include civil society groups, consumer ‘It is critical that associations, local communities and non-governmental organisations governments ensure who will be affected by a changing economic recovery is energy sector. It is critical to recognise work-focused, prioritising that energy transitions are strongly health and safety and driven by local dynamics in regions good working conditions where transition impacts are felt most directly. in sectors that will be The recovery from the Covid-19 sustainable over the long pandemic and the public funds term.’ injected into the economy will have an important impact on the energy transition, but also on employers and OMFIF.ORG/SPI 17

The expensive cost of inaction

Matt Lobner, head of international markets, Asia, HSBC, explains why Asia and other emerging markets must be involved in the transition to a net-zero global economy.

TRANSITIONING to a net-zero global average green bond issue last year was It is important that Asia has a economy is going to be expensive: oversubscribed 5.7 times, and the larg- significant voice in this process. The the price is rising as the measures est exchange-traded fund launch so continent is not only going to drive required to limit global warming to far this year was Blackrock’s $1.25bn global economic growth and innova- 1.5°C become more urgent and more US Carbon Transition Readiness Fund. tion in coming years, it has also been extensive. But the cost of not transi- But there are stumbling blocks to responsible for 87% of the incremen- tioning will be even higher. green finance that banks cannot solve tal growth in total greenhouse gas Capital is already shifting to favour on their own. Investors struggle to emissions over the past 30 years. It is green solutions as society demands systematically price risk and managers vital that the taxonomies are broad action. The shift will happen with or are increasingly wary of falling victim and flexible enough to accommodate without government support. Banks to ‘greenwashing’ – the practice of dis- countries at each stage of develop- and other financial institutions have a honestly describing environmentally ment while preventing abuse by more critical role to play in channelling the destructive projects as sustainable to privileged nations. They must ac- funds to pay for the global economic access the pool of green investment knowledge that emerging markets may transition to net zero. capital. not have the resources to implement Years of feet-dragging have added The solution is a transparent best practice solutions immediately, to the urgency of addressing global system that defines and rates envi- but if the world is to achieve net zero warming. If we had wanted to limit ronmental risk in the same way that by 2050, they need to be an integral global warming to 1.5°C 10 years agencies like Moody’s and Standard part of the green finance ecosystem to ago, we would have had to cut global & Poors categorise and rate financial improve their sustainability perfor- emissions by 3.3% each year. Today, risk. mance. we need to cut emissions by 7.6% each Work is being done on creating Once these are in place, banks can year to hit that target, according to these systems – or ‘taxonomies’ – fulfil their role of turning savings the United Nations Environment Pro- around the world. The European into investments. They can recycle gramme’s Emissions Gap Report 2019. Union led the way, but other jurisdic- the excess capital of both developed There is little consensus on how much tions are also developing guidelines, economies and the growing wealth it will cost to keep climate change in including the Association of South in emerging economies, particularly check beyond that it will be expen- East Asian Nations, Hong Kong and in Asia, into a sustainable future for sive. The Intergovernmental Panel on elsewhere. everyone. • Climate Change calculated a figure of just under $3tn a year to limit warming to under 2°C, but other estimates vary from $600bn to $5tn a year. Even at the low end, these sums are barely within reach of even the richest governments, let alone being accessible to emerging markets where the impact of financing reductions in emissions and other environmental degradation is greatest. Over the past decade there has been a sea-change in attitudes to paying to limit climate change. Now, ‘It is vital that the taxonomies are broad and flexible both the money and investor appetite is there. Banks and other financial enough to accommodate countries at each stage institutions are the link between cap- of development while preventing abuse by more ital and sustainable investment. The privileged nations.’ 18 IN CONVERSATION SPI JOURNAL_JUNE 2021

A marathon, not a sprint

Henner Asche, deputy director general markets, Deutsche Bundesbank, speaks to OMFIF’s Danae Kyriakopoulou, chief economist and director of research, about what central banks can do to help ensure a just transition to a low-carbon economy.

Danae Kyriakopoulou: Central To this end, we are already taking future lending, relative to a banks’ involvement in the climate concrete first steps. The Bundesbank benchmark. Such features could be agenda has so far been aimed at is promoting the disclosure of a transformation or decarbonisation safeguarding financial stability climate-related risks. From mid- strategy, for instance. from climate-related risks. But 2022, we will disclose climate-related We need to keep in mind, some also have responsibilities risks for our non-monetary policy however, that there are considerable as public institutions to support portfolio. In addition, we aim to foster differences in terms of mandates and the economic policies of their market transparency more broadly. institutional set-ups across central respective governments. How do In fact, the Eurosystem should get to banks all over the world. Green you see the evolution of central a point where, for monetary policy targeted lending – by offering lower banks’ thinking in this area and purposes, it only purchases securities interest rates to banks with larger how can they support the financial or accepts them as collateral if their shares of green lending – would sector in making the best use of issuers meet certain climate-related come close to directly steering the opportunities? reporting obligations. Moreover, we credit provision. That might be more Henner Asche: Climate change are exploring how climate-related suitable for institutions whose role affects all aspects of monetary policy: information could feed into our own is comparable to that of promotional output and inflation, long-term internal credit risk assessment. banks or agencies, like the KfW Group interest rates and policy transmission. in Germany. A comprehensive analysis, combined For central banks with full with in-depth debate, is crucial for a independence, introducing a targeted better understanding of how climate- ‘Central banks are already green lending scheme could be related risks interact with our primary contributing to reaching difficult to reconcile with level objective of price stability, and how net zero by fulfilling their playing field considerations. we may adequately incorporate them core tasks: preserving With regard to the role of into our monetary policy framework. price stability, ensuring promotional banks, in Germany These debates are part of our the KfW serves as the primary monetary policy strategy review. The financial stability and federal promotional bank. It was discussions are still ongoing in the supervising financial founded in the post-war years, with Governing Council, and we expect intermediaries.’ the explicit aim to support public to conclude them in the second half policy objectives through dedicated of this year. It would be premature funding, like infrastructure and to draw any firm conclusions, but DK: What role can central banks housing initiatives on a large scale. In climate issues will be more prominent play in the wider financial that context, the KfW was set up to in our future framework. ecosystem in scaling up green ensure a clear line between the role Central banks clearly need to finance? Some institutions such as of the central bank and the role of a play their role in the global efforts the European Central Bank have promotional entity. to curb climate change. We cannot developed or enhanced targeted assume the role of governments, but lending instruments in response DK: The Eurosystem has been neither can we be mere bystanders to the crisis. Can some of these be criticised for carbon bias in its in the transition towards a carbon- ‘greened’? asset purchase portfolio. How does neutral economy. We are publicly HA: The option to introduce some this stand against its objective to accountable institutions, and we sort of green targeted lending would address climate risks and what serve our societies. Therefore, it is entail adjustments to the pricing have been some of the challenges our responsibility to take up that of lending facilities by making it faced in decarbonising monetary challenge that will deeply affect all conditional on climate-related policy? of us. features in the counterparty’s HA: Climate change also has a OMFIF.ORG/SPI 19

‘When it comes to the question of a ‘just transition’, politicians have the most effective and efficient instruments at their disposal to spur such transition of our economies in a targeted manner. Carbon taxes or emission certificates could be powerful tools.’

bearing on the financial risks embodied in our portfolios, both for monetary policy and non-monetary policy purposes. In this regard, the EU taxonomy for sustainable activities is a welcome step in the right direction, as it is necessary for a proper understanding of the risks in these portfolios. Regardless of regulatory developments in that field, the claim of a carbon bias in our private sector monetary policy portfolios, in particular in the corporate sector purchase programme, has been discussed in the last few months. Let me stress that we conduct the purchases in the CSPP with the aim about lack of asset supply. The ECB Central banks are already of avoiding price distortions of bonds already holds around a fifth of contributing to reaching net zero of similar characteristics coming eligible green bonds, but there are by fulfilling their core tasks: from different issuers or market pressures on it to decarbonise and preserving price stability, ensuring segments. Purchases are orientated green its portfolio further. Some financial stability and supervising towards a benchmark, where issuers of these actions may have negative financial intermediaries. These are weighted according to the market side effects –at least in the short three pillars of our work are essential capitalisation of their outstanding term – for employment in certain preconditions for a just transition (eligible) bonds. This allows for a level sectors. How should central banks since a transformation of the playing field. consider these issues around a ‘just economy will require considerable So far, we have no mandate to transition’ when designing climate long-term investments. This requires systematically overweight ‘green’ policies? planning certainty for companies and issuers or industries. At the same HA: When it comes to the question governments, reliable information on time, we do not have a carbon bias of a ‘just transition’, politicians prices and stable financial markets. A either: the actual share of green have the most effective and efficient more volatile inflation rate makes it bonds in our CSPP portfolio is very instruments at their disposal to spur more difficult to extract price signals. close to the respective share in the such transition of our economies Price signals for carbon emissions eligible universe. in a targeted manner. Carbon taxes can only work if market participants or emission certificates could be notice them. In a nutshell, central DK: The Bundesbank is leading powerful tools. banks can make price signals the Central Banks and Supervisors At the same time, central banks effective by preserving price stability. Network for Greening the Financial can make an important contribution Having said that, central banks System’s workstream in scaling up in the fight against climate change as can and should do more. That is green finance. This is still a very well. Climate protection is certainly our conviction and we are already small segment of the market with one of the most pressing tasks of our stepping up our efforts. Ahead of us investors frequently complaining time, and we must act quickly. lies a marathon rather than a sprint. • FORTHCOMING omfif.org/spi MEETINGS

9 Jun: The role of central banks in greening 30 Jun: Designing policies for efficient, portfolios and sustainable investment inclusive and sustainable housing Benoit Mojon, head of economic analysis, Bank Luiz de Mello, director of the policy studies branch, for International Settlements, discusses the role Organisation for Economic Co-operation and of central banks in driving sustainable investing Development, discusses the recent OECD report and portfolio transition through green monetary examining how to design policies for efficient, policy. Other key points of discussion will include inclusive and sustainable housing. Key topics transition credibility, brown portfolio exclusion and of discussion will include how to build housing incentivising shareholders. resilience, promoting affordability and driving wealth redistribution in housing. 16 Jun: Developing green bankable projects in capital markets: Driving 8 July: Channelling capital towards greener investment renewable energy technology Kosintr Puongsophol, financial sector specialist, This panel will examine the policies and frameworks economic research and regional co-operation required to channel capital towards renewable department, Asian Development Bank, and Paneeya energy technology. Key topics will include the role of Nitiwanakun, assistant director, bond department, taxonomies and carbon pricing, the requirements for Securities and Exchange Commission Thailand, developing a pipeline of investment grade projects discuss how to identify and grow bankable projects and the opportunities and challenges involved, as in capital markets. They explore the tools required, well as the risks of transitioning to a low-carbon the impact on portfolios and the challenges and economy versus remaining stagnant. Panellists will opportunities for central banks. also examine the level of capital and asset allocation required to achieve the 2030 targets. 24 Jun: Fed week, day 4 – Rebuilding sustainably and equitably 14 July: Transition taxonomy and new Following a year of unparalleled disruption, loose capital markets monetary and fiscal policies have become the new Robert Youngman, principal policy analyst, normal and many long-term economic and societal Organisation for Economic Co-operation and changes remain uncertain. OMFIF and the Federal Development Environment Directorate, and Irene Reserve Bank of Philadelphia are hosting a series of Espinosa-Cantellano, deputy governor, Banco de seminars to discuss the Federal Reserve’s priorities. México, discuss transition taxonomy in carbon- Day four will include discussions on how three crises heavy jurisdictions. Topics will include developing – health, economic and social – are converging into standards, credit solutions, transitioning to greener one difficult moment in American history, protecting capital markets and the risks, challenges and the economically vulnerable communities that are opportunities involved. least equipped to cope and managing the physical risk climate change poses to the US financial infrastructure. 22 July: Circular economy: Challenging traditional monetary finance models In this panel discussion, speakers will discuss the 25 Jun: Bridging the data gaps: An update role that the circular economy can play in mitigating on the NGFS workstream climate change and driving just transition to net zero. Fabio Natalucci, deputy director, monetary and Key points of discussion will include asset usage and capital markets department, International Monetary challenging traditional monetary finance models. Fund, and Patrick Amis, director general, European Central Bank, are the co-chairs of the workstream on bridging the data gaps, set up by the Central Banks and Supervisors Network for Greening the Financial System. They discuss the latest workstream report, Sustainable key findings of the research and latest developments Policy on data usage and availability for sustainable finance. Institute