Ravi Menon: The work of the NGFS in four emerging issues in climate
change
Opening remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of
Singapore and Chairman, Network for Greening the Financial System (NGFS), at the
NGFS Workshop, Singapore, 26 April 2023.
* * *
Good morning, ladies and gentlemen. I am delighted to welcome you to the inaugural
NGFS Workshop in Singapore.
We held our annual NGFS Plenary meeting yesterday. We discussed how the NGFS
can continue to push the envelope in greening the financial system:
to strengthen the resilience of the financial system to climate and environmental
risks and;
to encourage financing flows to support the transition to a net-zero world.
The NGFS is well-placed to do this - we are a coalition of 125 central banks and
financial regulators from over 90 jurisdictions. Our size enables us to make an impact
globally and our diversity enables us to harness multiple perspectives.
The work we do is not only important but urgent. Climate change is already happening
- its physical manifestations are becoming increasingly evident - especially here in
Asia. We are already seeing unprecedented heat waves, floods, and agricultural
degradation.
One of the key roles of the NGFS is to build capacity and capabilities among central
banks and supervisors to deal with the climate challenge. This inaugural NGFS
Workshop, with more than 150 participants from over 60 institutions, will discuss
cuttingedge economic and financial issues related to climate change and nature loss.
We will be hearing from leading voices in the field on:
Macroeconomics of Climate Change
Blended Finance
Transition Planning
Nature-Related Risks
Let me briefly share what the NGFS is doing in each of these areas, to set the backdrop
for today's Workshop.
Macroeconomics of climate change
Both the physical and transition dimensions of climate change will significantly impact
output, inflation, labour markets, and the long-term growth potential of economies.
The NGFS is seeking to develop the tools necessary for central banks and
regulators to make sense of how climate change will affect the macroeconomy
and financial system. This includes work on:
identifying relevant climate-related data;
developing analytical frameworks and models;
understanding the implications for monetary policy; and
designing climate scenarios for stress testing.
The NGFS has brought together an expert network of statisticians and data
scientists on climate-related data.
They will help member central banks and supervisors build up capacity on
climaterelated data such as adverse climate events, carbon emissions, energy intensity,
and so on.
This will include building climate data directories and setting up green finance
data hubs in central banks.
The NGFS is developing theoretical frameworks and quantitative models to
evaluate the impact of climate change on the macroeconomy.
Policymakers need to better understand the channels by which physical risks and
transition efforts can affect the economy.
For example, physical risks could negatively affect consumption demand if there
is an adverse climate event, while the transition could positively induce investment
in climate adaptation technologies, thereby affecting aggregate supply.
The NGFS is seeking to better understand how climate change can potentially
affect the transmission of monetary policy.
Climate change could put pressure on banks' balance sheets due to higher credit
risk or an abrupt repricing of assets, and ultimately constrain central banks' ability
to influence credit conditions in the economy.
We need to assess how climate change may affect the neutral rate of interest. A
decline in productive capacity could pull the neutral rate down, while large
investment outlays for greening the economy could push rates up.
The influence of monetary policy on inflation expectations may also weaken, as
physical and transition risks intensify and raise underlying price pressures.
The climate scenarios developed by the NGFS has allowed more robust
assessments of financial stability.
Given uncertainty around the severity and frequency of climate-related shocks, we
need to augment traditional analysis with climate scenarios.
More than 30 central banks have used or referenced the NGFS climate scenarios.
The IMF has also begun to use them to assess the impact of climate change on
banking sector stability risks under the Financial Sector Assessment Programme.
The NGFS aims to make three enhancements in the next iteration of its climate
scenarios.
increased sectoral granularity and geographical coverage, especially in emerging
economies;
inclusion of short-term scenarios, incorporating more adverse tail-risk events such
as a sudden policy shock; and
improved representation of acute physical risk.
Blended finance
To get to net-zero by 2050, we have to close a large financing gap.
According to McKinsey, net zero by 2050 will require about US$9.2 trillion of
investment per year, but only about US$5.7 trillion per year is being invested
today.
We are more than 35% short of the annual investment required for net-zero.
Blended finance will be crucial to unlocking more capital for green and transition
projects, particularly in emerging economies.
Blended financing structures can alter the risk-return profile of many marginally
bankable projects.
This can be done through catalytic and concessional funding from the public
sector, multilateral development banks, and philanthropic sources to crowd in
multiples of private capital.
By mitigating a portion of project risks, providing technical assistance, and lending
their reputation and expertise, the public sector can help to attract private capital
which may otherwise be hesitant to invest.
We need to mobilise the financial system to deploy blended finance at scale. The
NGFS will contribute to this effort in three ways.
We will use our convening power to raise awareness of blended finance and help
to bring the relevant parties into the room.
We will seek to identify potential regulatory, market or policy barriers that hamper
the scaling up of blended finance.
We will provide guidance to central banks and supervisors on how they could
potentially address these barriers.
The NGFS is working on two blended finance deliverables by COP28.
First, a handbook on blended finance . It will draw on key lessons from past
case studies on blended finance projects and provide practical guidance on how
such projects can be scaled up.
Second, demonstrative blended finance projects . The aim is to spotlight
projects that have incorporated mechanisms to promote the scaling of blended
finance. We will also categorise the key pain points in some of these projects and
draw lessons on how they could be addressed.
Transition planning
Across the financial industry, the focus is gradually shifting from commitment to
action. This means going beyond high-level net zero commitments to designing
credible transition plans that will get us there by 2050.
Drawing up a credible transition plan requires financial firms to do several things:
their financed emissions;
baseline
set interim targets based on appropriate science-based sectoral pathways ;
engage clients on their own corporate transition plans; and
monitor portfolio and client progress over time.
Transition plans need to be adaptive to changing circumstances while
maintaining ambition.
There is uncertainty over the path of various decarbonisation technologies as well
as climate-related policies such as carbon taxes and emission standards.
The assumptions used in transition plans would need to be continually monitored
and adjusted as necessary.
The NGFS is examining the role of supervisors in assessing financial institutions'
transition plans as well as their transition planning processes.
We have done a stock-take of current supervisory frameworks on transition plans.
We will share the results of the stocktake with the Basel Committee on Banking
Supervision and the Financial Stability Board, to facilitate coordination in the
development of transition planning standards.
The next phase of work will examine the relevance of transition planning to
supervisors' mandates, toolkits, and prudential frameworks.
Recognising that there is a spectrum of supervisory mandates, such guidance will
be flexible and based on a building block approach.
Nature-related risks
The world is facing a crisis of biodiversity loss, which is no less threatening than
the climate crisis. The loss of biodiversity not only has serious ecological and social
consequences, but also significant macroeconomic implications.
Biodiversity and so-called ecosystem services underpin a significant portion of
global GDP.
The World Economic Forum has estimated that US$44 trillion of economic value
generation, or more than half of global GDP, is moderately or highly dependent on
nature.
For example, over three-quarters of the world's food crops rely on insect and
animal pollination. One can imagine the consequences for food supply if this
process of pollination is disrupted.
Sectors like consumer goods, real estate, and transportation depend on
ecosystem services such as water availability, minerals, natural fibres, and the
protections that natural habitats provide.
This dependence is sometimes direct but very often indirect through supply chain
dependencies.
Our response to the nature-related crisis should therefore be as ambitious as our
response to the climate-related one. The world needs to account for, manage, and
mitigate the financial risks posed by biodiversity loss.
The NGFS has set up a task force to mainstream the consideration of
naturerelated risks across all its work. A key focus of this effort is to develop a conceptual
framework for nature-related risks that central banks and supervisors can utilise to
develop policies and actions on nature-related issues.
The financial industry can also play a positive role in addressing the degradation
of nature.
First, do no harm.Financial institutions should disincentivise production processes
that are harmful to biodiversity and proactively manage the risks that would arise
from biodiversity loss.
Second, provide the necessary funding to develop resilient and sustainable
production systems that factor in the interdependence of food, water, and energy
systems.
Let me conclude.
The financial industry working together with central banks and financial regulators can
make a decisive difference in addressing climate change and environmental
degradation. To enable this collaboration, the NGFS aims to be a pathfinder for
emerging initiatives to strengthen the climate resilience of the financial system and to
facilitate financing flows for the transition to a net-zero world.
I encourage you to participate actively in today's Workshop, so that we can collectively
advance our understanding of the issues we need to tackle. I wish you fruitful and
productive discussions.