Friday, Oct 23, 2020
Virtual Executive Panel Summary - IMF/WB Annual Meetings 2020
Innovative Ways to Address Climate Change and the Sustainability Agenda in the Face of COVID-19
Friday, October 16, 2020 at 9am EDT
The COVID-19 economic downturn has generated significant challenges for climate finance. Now more than ever, transformational, innovative financial investments including blended finance are needed to help industries and communities, particularly the poorest and most vulnerable, mitigate the effects of, adapt to, and recover from the effects of climate change and the COVID-19 crisis. “A key to achieving this objective is ensuring financial markets are sound, orderly, and transparent,” said Babak Abbaszadeh, CEO of Toronto Centre at the panel “Innovative Ways to Address Climate Change and the Sustainability Agenda in the Face of COVID-19” convened by Toronto Centre. The panel explored ways to address climate change in the context of COVID-19.
The panel was moderated by Aditya Narain, Deputy Director of the Monetary and Capital Markets Department of the IMF; Board Member, Toronto Centre. Tobias Adrian, Financial Counsellor of the IMF, delivered a keynote speech. The panelists were Rostin Behnam, Commissioner, Commodity Futures Trading Commission; Fernanda Nechio, Deputy Governor, Central Bank of Brazil; Conor Donaldson, Head of Implementation, International Association of Insurance Supervisors; and Joan M. Larrea, Chief Executive Officer, Convergence. The video is available here.
More than four hundred senior officials from around the world, including governors and deputy governors of central banks, financial sector supervisors/regulators, representatives from the US Treasury, the IMF, the WBG, NGOs, and various other international development agencies participated in Toronto Centre’s Virtual Executive Panel.
In his introductory remarks, Babak Abbaszadeh, CEO of Toronto Centre, underscored that sound financial supervision helps to create conditions for stronger financial systems, which in turn generate sustainable economic growth, create jobs, and reduce poverty. Because climate risk impacts financial tools, supervisors must be at the table, be aware of the risks posed by climate change, and take appropriate actions to facilitate stability. It is essential that financial sector supervisors understand how to supervise these innovative actions to ensure sustainability.
In his keynote speech, Tobias Adrian stated that climate change is macro-critical; in economic policy terms, we cannot have macro-financial stability if we are hit by repeated climate shocks. Central banks and finance ministries will be pivotal in helping mobilize green investments. Policies are also needed to help manage climate risk and help cushion climate impacts. The IMF helps member countries weigh the macro-financial transmission of climate risks and has been focusing on integrating climate risk into financial stability analysis and stress-testing, including in its Financial Sector Assessment Programs. Tobias highlighted that organizations like Toronto Centre have a constructive role to play as well by pursuing rigorous analysis, developing capacity, and keeping financial institutions focused on the challenges ahead.
The session was divided into two rounds followed by a Q&A session after each round to generate interactivity and engagement on the part of the audience.
Key highlights from the first-round of discussions
Commissioner Rostin Behnam elaborated on the recent CFTC report1 after briefly talking about the CFTC itself. He summarized that there are 53 policy recommendations in the report, and one of the major conclusions – which is not a policy recommendation – is that climate change poses a major risk to the stability of the US financial system and the ability to support the economy underneath. Commissioner Behnam highlighted that 52 out of 53 recommendations can be done by the regulatory bodies, which include the CFTC and the other market regulators, but the price on carbon has to be done by the congressional body. He underscored that disclosures are key and acknowledged the work at TCFD under the financial stability board and other private sector groups. He also emphasized the importance of international cooperation in this global issue. Commissioner Behnam noted that green finance is an opportunity to allocate capital in new ways as we are emerging from COVID-19. Climate change is a fundamental part of that conversation, and there is an eager desire, both from the retail level and the institutional level, to invest and to allocate capital and new technology so that we can build more a productive economy that will create jobs. This will ultimately create a safer global environment in light of the climate challenges we face in the decades to come.
Fernanda Nechio added that climate change and social-environmental challenges are at the heart of the central banks' mission. She started by talking about the Central Bank of Brazil and its mission, which is similar to the missions of other central banks: to ensure price stability and the soundness and efficiency of the financial sector. Climate change and other social and environmental risks are deeply affecting the ability of central banks to achieve their objectives. Fernanda continued that climate-related events are becoming more frequent and more permanent as well, and there is a lot of uncertainty associated with all these climate events. Climate risks and social and environmental risks affect the ability of central banks to conduct monetary policy and to ensure the stability of the financial sector. And in that case, we have to act and make sure that all these risks are being taken into account in the decision making, both for monetary policy, and for prudential and stability concerns. It is crucial to bring awareness and transparency to why this matters and why this is something that we have to be acting on.
Conor Donaldson said that the IAIS was one of the first standard-setting bodies to really recognize how important climate risk management, and climate risk assessment for prudential supervision is. IAIS also highlighted that as climate risk began to crystallize and the effects of climate risk were being felt, there was significant financial stability-related risk associated with changing climate. IAIS also looked at implementation of the recommendations coming out of the Task Force on Financial Disclosures (TFCD) over the course of 2019, and recognized that there was a great deal of awareness around the importance of disclosure regimes in terms of providing insight and information to the broader market in terms of climate risk. However, there was also significant variance across the globe in terms of how far jurisdictions had gone in terms of climate risk disclosures and of benchmarking off the TFCD recommendations. Conor also highlighted that despite the COVID-19 pandemic, climate risk is still the top priority on the IAIS agenda.
Joan M. Larrea briefly introduced Convergence as being the global network for blended finance, which operates and supports other firms in the developing markets. In the newer economies – setting aside transaction-specific risk for a moment – the ambient risk of those markets is still very high. But that's where a lot of the investment in climate and renewables needs to go. Joan said that that is why blended finance has a big role, and a lot of the parties who are using blended finance to get into investing are regulated institutions (e.g., banks, insurance companies, etc.). Joan emphasized that climate and renewable energy (SDG 13: Climate Action, SDG 7: Affordable Clean Energy) account for about 40% of the transactions we have ever seen in the blended finance space. Those transactions have touched on climate. There is a lot of activity in blended finance for climate, so blended finance has been used heavily by those who are trying to invest in climate-specific areas.
Key highlights from the second-round of discussions
Commissioner Rostin Behnam emphasized that the impact of the pandemic on the markets in March and April was extraordinary in terms of the way market liquidity dried up, and the price dislocations between futures markets across the globe and in the US. Commissioner Behnam further explained by comparing health crises and climate change: what could happen if we have what the CFTC report dubs sort of sub-systemic shocks? For example, if you're having a little bit of a sub-systemic shock in the California West Coast because of these fires, what happens to that localized economy in terms of employment, productivity, and the ability to live in certain areas? What happens if you have compounding weather events across a country or across the globe, that turn these sub-systemic shocks into larger systemic shocks? Given the interconnectedness of markets and the economy, we could then have a systemic shock. Commissioner Behnam highlighted that the lesson is to understand and appreciate, and just to hammer as frequently as possible, that financial markets and the economy are interrelated in our day-to-day lives. Commissioner Behnam concluded that whether it's a health crisis or a climate crisis, these things all happen together, and we have to be prepared to address them holistically. Since we don't want to have these continued fiscal and monetary policy interventions happening frequently, we have to prepare ourselves for these events regardless of how close they are to a financial crisis, as we saw in 2008, as opposed to a different crisis, such as health or climate.
Fernanda Nechio started with the relationship between the pandemic and initiatives related to sustainability and said that it became very clear across the world that the recovery coming out of this pandemic has to be inclusive and sustainable. Therefore, it is almost as if the pandemic has made us rethink how we want the world to be going forward after we get out of this crisis. Fernanda indicated that instead of pushing back the sustainability agenda, the pandemic brought it to the forefront; we keep talking about it, and we are seeing an increasing number of initiatives related to sustainability and building a better future going forward. Fernanda said that there are several people that are also drawing a parallel between pandemic events and climate events, which while we all know they happen, they are very unpredictable. Fernanda continued by saying that these are the two reasons behind the sustainability agenda, having gained some strength with the pandemic and not the other way around as some people might have expected. The Central Bank of Brazil has been taking into account structural changes in the economy and the demand from the society as climate change means a structural change in the economy. Fernanda highlighted that in September, the Central Bank of Brazil announced a set of measures and a sustainability agenda, which is still evolving across the world and covers a set of measures that have initiatives towards internal action inside the Central Bank, as well as measures targeting the financial system in Brazil. Fernanda concluded that it is very important to have a straightforward conversation and partnerships with different institutions like in NGFS and the CBI, which have already started.
Conor Donaldson said that COVID-19 has been a very difficult challenge across the globe and even for the insurance sector, it hasn't overshadowed the fact that we still need to keep climate risk and sustainability at the top of our agenda. As a matter of fact, the IAIS recently published an application paper for consultation for a 90-day period, which is looking at practical aspects of supervision and how supervisors can incorporate climate risk assessment and climate risk management into their supervisory framework – more specifically, supervisory review, corporate governance, risk management, enterprise risk management, public disclosures, and investment. Conor said that it is important that supervisors recognize that they really do have powerful tools that they can utilize in terms of making sure that the regulated entities within their jurisdiction are taking the appropriate steps to ensure their longer-term sustainability. Conor also highlighted that the IAIS has been doing a lot of work with the Sustainable Insurance Forum, which is a network of approximately 30 insurance supervisors from around the world who have committed to working together to advance climate risk understanding, climate risk assessment, and management action amongst themselves. Finally, Conor said that the IAIS is seeing significant changes in how communities are affected, both in terms of traditional food sources and biodiversity loss, and in seeing the negative impact that climate change is having on a way of life and on people.
Joan M. Larrea started by highlighting two main things and called for action: (i) need for investment: what governments can do is to set up the scene appropriately to reduce the risk as much as possible; and (ii) need for collaboration: we need the donor countries of the world to be thinking about how they can strategically use funds. Joan highlighted that only a couple percent of official donor aid is going into blended finance. Joan also claimed that the health pandemic is a climate-related event and climate will affect the next health pandemic. Further, all of this affects gender dynamics and social inequity. However, coming back to climate investment, Joan underscored that the area of blended finance that is not explored frequently enough is the strategic use of catalytic capital early in project life cycles. Joan elaborated further and said that this strategy is to bring to the market business models or sectors that are not currently investible and presenting the market with a potentially investible transaction that can be duplicated. The way this kind of blended finance works is that the catalytic capital is the only money on the scene at the early stage. It de-risks, it tests out this thesis, and it provides the capital for an investment team to take something to market where it then can be invested in institutional investors, private equity funds, or whatever the appropriate source of capital is. Joan concluded by exploring one place that perhaps more effort could be put into from those who are operating with donor funds: to put more of it into that early stage intervention where the returns are huge. She said that standardization is important in order to get blended finance and investment in climate at scale.