Davide FORCELLA started this session by stating that climate change is a reality and that financial stability and inclusion are in peril. The financial sector needs to define a path towards solutions and mitigating risks. The risks stem from vulnerability to climate change and this vulnerability depends on three factors:
The inclusive finance sector has a large role to play in improving the adaptive capacity of their target population: poor households, smallholders, micro, small and medium enterprises, and in particular women amongst them. The big question is how to improve their adaptive capacity.
Forcella then introduced the topic of green inclusive finance and mentioned important developments in this area. While the EU taxonomy provides guidance, there is still a need to address the threat of green washing. In 2021, the Green Index 3.0 was published. The Green Index 3.0 provides best practices for risk management to ensure integration of environmental risks into financial and non-financial risks processes. It helps financial institutions to identify risks, analyse risks, respond to risks by improving processes and respond to risks by improving products and services. A major improvement in this version is the alignment to international initiatives, such as existing standards, initiatives and regulations.
Babak ABBASZADEH started his presentation by stressing the relation between financial stability and financial inclusion and describing the context of current challenges for supervisors in the global financial sector:
Supervisors need to lead the financial sector through these turbulent times, and they should focus on financial stability and financial inclusion, both being equally important according to Abbaszadeh. To illustrate this, he quoted IMF: “investing in high quality supervision can pay big dividends as financial inclusion expands”. Abbaszadeh advocated for more financial inclusion and good supervision in response to the increasing number of people in poverty.
Climate change is materializing as credit risk in the financial sector and is increasingly recognized as a threat to financial stability. Supervisors have a large responsibility in building the risk management capacity of financial institutions to improve the resilience of the entire financial system. However, they also still need to be educated on climate change risks themselves. The topic of transition risks requires particular attention. More knowledge and education is needed to properly address this type of risk. Finally, there is a need to look at climate change and financial inclusion from a holistic perspective, which will require more coordination between organisations to exchange knowledge and align initiatives.
Jeanette MOLING focused her presentation on financial inclusion and green finance. She mentioned that green and inclusive finance is a relatively new policy area. The Alliance for Financial Inclusion (AFI) mapped out policy examples that can help policy makers to better respond to climate change. The research shows that regulators have mostly focused on mitigation, while they must also provide attention to adaptation and resilience building. Another conclusion of the research was that regulators in developing countries are lagging behind in terms of policy development to address climate change.
To improve the regulatory response to climate change, there is a clear need for definitions for green finance. These definitions need to take country context into account, but also need to be aligned with international definitions. In addition, there is a need for market side data, supply side data, disclosures and risk data. To access these data and develop better policies, regulators need to work together with practitioners and implementers.
Next, Margarita HERNANDEZ explained why climate change is such an important topic for the supervisor in Ecuador. Ecuador is a megadiverse country with a high degree of biodiversity and is experiencing several effects of climate change including higher temperatures and changing rain patterns.
In Ecuador, the financial sector working with the groups of people affected most by climate change is called the popular and solidarity sector. This sector makes up 30% of the national financial system. Regulation of this sector requires deep knowledge of green finance and financial inclusion and the supervisor is participating in workshops organised mainly by the Alliance for Financial Inclusion (AFI) to build this knowledge. Among the latest achievements by the supervisor in the area of green and inclusive finance was the draft standard for green finance from 2019. This standard contains definitions of green products such sustainable resource management and conservation of biodiversity. In the meantime, the supervisor worked on guidelines for management of social and environmental risks, which were published in 2021. For development of these guidelines, they worked closely together with cooperatives in the popular and solidarity sector, which have valuable knowledge on social and environmental risk management.
After the presentations by the panellists, Forcella took questions from the audience. Abbaszadeh responded to the first question “How to establish definitions of green finance?” by saying that there is a need for more knowledge on the impact of green financing, and that the sector needs to disclose more data on such impacts. To quote Abbaszadeh: “What can be measured, can be managed”. In addition, disclosures will help to reduce greenwashing. Moling stressed the importance of an inclusive approach to development of definitions of green finance. The role of regulators here is to coordinate the discussions between different sectors.
To another question from the audience: “Should we use interest rates as incentive for green finance?”, Hernandez replied that lower interest rates should not be the only incentive for taking green products. The financial sector needs to raise awareness about the need for green products. Moling added that lower interest rates can incentivise clients to take up green finance products and then explained that lending quota provide another possibility to promote green finance.