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NEW ECONOMICS FOUNDATIONGREEN CENTRAL BANKINGIN EMERGING MARKET ANDDEVELOPING COUNTRY ECONOMIESEXECUTIVE SUMMARYIn emerging and developing countries(EMDCs), however, the story isdifferent. Here, in many cases, centralbanks have begun to play an importantrole in addressing the risks posed byclimate change and the need for greeninvestment.Central banks haveplayed an increasinglyprominent role inadvanced economiesover the last decade.They have creatednew money on a hugescale with quantitativeeasing programmes,forced banks to holdmore capital, and begunconstraining credit tocertain sectors of theeconomy. Yet none ofthese policies have takenin to account the urgentchallenge of climatechange and the need toshift our economies toa low-carbon trajectory.This is despite theaccepted fact that thereis still a huge carbonfinance gap to be filledand that climate changeposes major financialstability risks.EMDCs are more exposed to theimmediate challenges of climatechange. Many face greater physicalrisks, including more frequent, climatechange-related, severe weather events.They also recognise the need torapidly shift their economies on to asustainable ‘green growth’ path for theirfuture prosperity and energy security.Excluding China, around 70% of globalprojected sustainable infrastructureinvestment needs ( 3.5–4.0 trillion peryear on average) will be required inEMDCs.iThis report examines the mostsignificant green policies that EMDCcentral banks and related publicfinancial institutions have adoptedover the last ten years. We examinesix different large EMDCs, coveringalmost half the world’s population:Bangladesh, Brazil, China, India,Indonesia, and South Korea.In contrast to advanced economieswhere central bank mandates arepredominantly focused on pricestability, many of the central banksin EMDCs have a wider remit tosupport sustainable development andthe government’s economic policyagenda. Three different categories ofintervention are regularly used in thesecountries to address the challenge ofgreen finance and climate change: Green credit allocation instrumentsthat have the objective of allocatingcredit to green sectors. Green regulatory (prudential andmacroprudential) instruments forsafeguarding financial stability.2

NEW ECONOMICS FOUNDATIONGREEN CENTRAL BANKINGIN EMERGING MARKET ANDDEVELOPING COUNTRY ECONOMIES Other green central bankingactivities, such as developing greenfinance guidelines or setting upgreen bond markets.including E&S risk management, greenbond markets, retail banking, andinsurance.Inter-agency cooperation also appearsto be an important factor. China’sGreen Credit Policy has involvedcollaboration between the central bankand the Ministry of EnvironmentalProtection to create a national databasewhich records the environmentalcompliance of non-financial firms.Banks are required to restrict loansto firms that violate environmentalcompliance rules. Countries where oneagency alone has the responsibility forgreen financial policy, tend to have aweaker record of implementation.With regard to green growth andcredit allocation, existing traditionsof financial intervention shape thecountry’s approach. Central banksthat have in the past been engaged incentralised credit allocation policies –India and Bangladesh most obviously –have added categories to their existingpriority loan programmes for greenprojects, in particular renewable energyprojects. In Bangladesh, for example,it is estimated that around 10% of thepopulation has been supported bythe central bank’s green refinancingprogramme in installing home-solarpower systems.Assessing the implementation andimpact of green financial policy inthe countries of interest has beenchallenging. In some countries,governmental institutions haveissued comprehensive regulation,guidelines, or policy roadmaps, buthave failed to present evidence ofthe implementation and impact oftheir green initiatives. Recent greeninitiatives have been mostly marketled and not policy-guided, with ratherdisappointing results, as privatemarkets have remained risk averse inthe face of policy uncertainty.In other countries, such as Korea,Brazil, and China, nationaldevelopment banks have played amore important role in supportingcredit to green sectors with the centralbank focusing more on suppressingcredit to brown sectors. In Brazil, thecentral bank requires commercial banksto stress test their lending againstenvironmental and social (E&S) riskcriteria and hold additional capitalagainst these risks. In most countries,however, green macroprudential policyis still in its infancy, although it isincreasingly recognised that climatechange poses systemic financial risks.In other cases, however, central bankshave taken action to improve things.For example, the Reserve Bank ofIndia was criticised for its definitionof renewable energy projects andthe Chinese banking regulator wasalso criticised for shortcomings inits definition of green credit. In bothinstances, the institutions respondedand implemented new measures asa result. This illustrates that greenfinance is likely to be an exploratorypolicymaking process – where policyplatforms can be gradually built uponover time.There are also a wide range of differentpolicy initiatives in which not only thecentral bank, but also other financialregulatory institutions play a centralrole. Green guidelines of varioustypes have been issued in nearly allEMDCs we examined. Green bondsare taking off in several countries, oftenwith the support of the central bank,including China, India, and Korea. Ingeneral, the more successful greenfinance initiatives tend to addressseveral aspects of the financial system,3

NEW ECONOMICS FOUNDATIONGREEN CENTRAL BANKINGIN EMERGING MARKET ANDDEVELOPING COUNTRY ECONOMIESIn general, central banks and otherregulatory institutions in our casestudies are seriously engaged in greenfinance issues to a greater extent thancentral banks in advanced economies.Now that is recognised that privatemarkets in both advanced and EMDCeconomies are not investing sufficientfinancing in green infrastructureand green innovation, there maybe valuable lessons for advancedeconomies to learn from the earlyexperiments in green central bankingreviewed in our case studies. We hopethat this report aids knowledge transferand engagement both between EMDCsand between them and advancedeconomy monetary policymakers andfinancial regulators.TABLE 1. SUMMARY OF CASE STUDY FINDINGSCountryBangladesh(BangladeshBank, BB)Green credit allocationpoliciesGreen prudential andmacroprudential policiesOther green financialinterventions Commercial banks andnon-bank financialinstitutions (NBFIs) arerequired to allocate5% of their total loanportfolio to greensectors. There are lower equitymargin requirementsfor Environmental &Social (E&S) favourableprojects Issuance of E&S riskmanagement guidelinesto be incorporated in tocredit risk assessmenton banks’ lending. Banks and NBFIs arerequired to issue 10%of CSR budgets to aClimate Risk Fund. There is a range ofgreen re-financinglines subsidising greenlending, including torenewable energyand energy-efficiencyprojects. Banks are also requiredto educate borrowerson environmentalregulations. Banks’ greenmanagement practicesare part of assessmentof supervisoryevaluations.Brazil(Banco doBrazil, BCB) Restrictions existon lending inenvironmentallysensitive areas in theAmazon. National DevelopmentBank (BNDES) is amajor investor in greensectors. Banks are required to Detailed guidelinesengage in E&S stressin place for thetesting and incorporateimplementation of theE&S risk in to capitalSocial-Environmentalrequirements in lineResponsibility Policywith Internal Capital(PRSA) by all financialAdequacy Assessmentinstitutions authorisedProcess (ICAAP)/Baselto operate by theAccords Pillar 2. BCB setscentral bank.a general framework fortypes of risk that should Banks are required tobe this in to theirgovernance structure Banks must submit anand collect data onannual report to BCBactual financial lossesoutlining ICAAP fordue to environmentalvalidation.damages for a period of5 years.4Impact/lesson learnedCB interventionsuccessful: Around 10% of thepopulation is supportedby a green refinancingprogramme in regard tosolar home systems. Banks employmainstreamed E&S riskmanagement practisesin bank lending throughguidelines. Less attention is given tomacroprudential policy. Macroprudential andprudential policiesappear to have beenlargely effective. The majority ofmajor banks are nowincorporating E&S riskin to their reportingand risk managementstrategies. There is less evidence ofwhether this is affectingreal economy lending.

NEW ECONOMICS FOUNDATIONCountryChina(People’s Bankof China, PBC)GREEN CENTRAL BANKINGIN EMERGING MARKET ANDDEVELOPING COUNTRY ECONOMIESGreen credit allocationpoliciesGreen prudential andmacroprudential policiesOther green financialinterventions The ChineseDevelopment bank is amajor global lender forgreen energy. E&S risk management isassessed on prudential,individual bank- andloan-based levels The China GreenFinance taskforcerecommendsestablishment ofa China EcologicalDevelopment Bankpartially funded by PBC. The China BankingRegulatory Commission(CBRC) has issuedguidelines seekingto repress credit tocarbon- and energyintensive industries andencourage lending togreen projects. Chinese green creditpolicy has beenadopted by all relevantagencies, includingthe central bank, thebanking regulator, thesecurities regulator, theinsurance regulator,and the Ministryof EnvironmentalProtection (MEP). Preferential interestrates are provided ongreen loans in FujianProvince. The central bank isconsidering greenrefinancing lines forcommercial banks.Impact/lesson learned Evidence says that by2010 banks had begunto reduce loans topolluting and dirtyenergy projects andto increase loans toenergy-efficiencyfollowing green creditpolicies and interagency coordination. Evidence also says PBC has collaboratedthat not all bankswith the MEP tohave adopted thecreate a nationalguidelines and that atdatabase for discloseda local level the focusinformation on credit,remains on growth overadministrative penalties,environmental concerns.and informationon environmental A better definitioncompliance of nonof green credit in thefinancial firms. Banks2013 guidelines mayare required to restricthave improved theloans to firms thatsituation – by 2015violate environmentalmost commercialcompliance rules.banks appeared tohave adopted E&S risk Voluntary green creditmanagement policies.guidelines have beenissued by the CBRCto encourage banksto build E&S riskgovernance standardsand to identify areas forgreen credit PBC is also working onthe development ofgreen bond markets toattract long-term capitalto green investment – ithas issued criteria forprojects that shouldqualify.India(Reserve Bankof India, RBI) Loans to renewableenergy companieshave been included inthe RBI’s Priority SectorLoans scheme; 40% ofnet commercial bankcredit must supportpriority sectors. RBI is consideringincluding environmentalrisks in the assessmentof agricultural pricedevelopments whenassessing financial andmonetary stability.5 Industry-led voluntary Lending to renewablegreen lending guidelinesenergy projects hasmainly used.grown at a higher ratethan overall creditgrowth in the 2009–2014 Green bonds have beenperiod.issued to support greenenergy since 2015. However, the impact ofthe RBI’s PSL has beenmixed because manybanks fall short of theirannual PSL targets andthere has also beenseveral non-performingloans.

NEW ECONOMICS ServicesAuthority,OJK)GREEN CENTRAL BANKINGIN EMERGING MARKET ANDDEVELOPING COUNTRY ECONOMIESGreen credit allocationpoliciesGreen prudential andmacroprudential policiesOther green financialinterventions ‘Roadmap forSustainable Finance inIndonesia 2015-2019’outlines ambitious plansto green commercialbank lending.However, no concreteinterventions havebeen made yet despitesupport for SMEs. OJK is consideringincluding E&S risk in toits macroprudentialframework as nonmandatory efforts havenot proven effective inchanging bank lending. Voluntary green lendingguidelines have beenissued. Bank Indonesia andOJK have engagedin capacity buildingworkshops on E&S riskand green lending withthe financial sector.Impact/lesson learned No evaluation ofthe impact of greenguidelines or otherinterventions. Little evidence existsthat commercial banksare engaging with E&Srisk or green lending. Mandatoryrequirements maybe needed to makeprogress.South Korea(Bank ofKorea, BOK) Fiscal policy is mainlyused to support greenfinance includingsubsidies for lowinterest-rate loansfor energy-efficiencyprojects and renewableenergy. The BOK has had nopublic discussions orengagement with greenfinancial policy or E&Srisk management ingeneral or on a systemiclevel. The BOK has appliedE&S risk assessments toits loans. The state-owned Korea Financial regulationDevelopment Bank (KDB)and the greening ofbegan to invest in greenthe financial systemindustries in 2009 andare currently not at thehas recently started tocentre of Korea’s stillpromote green bonds.ambitious green growthstrategy, perhapsbecause the central The government isbank has not beenproviding variousinvolved.subsidies for greeninvestment, includinggreen export credits. Fiscal policy and statedevelopment bankshave played a dominant The public Exportrole.Import Bank of Koreais the first financialinstitution in Asia toissue green bonds.i Bhattacharya, A., Oppenheim, J., Stern, N., Meltzer, J.P. & Qureshi, Z. (2016). Delivering on sustainableinfrastructure for better development and better climate, Brookings global working paper series. BrookingsInstitution, Washington DC.6

NEW ECONOMICS FOUNDATIONGREEN CENTRAL BANKINGIN EMERGING MARKET ANDDEVELOPING COUNTRY ECONOMIES1. INTRODUCTIONThere is a variety of explanations asto why central banks in advancedeconomies have not done more. Themost apparent is that it not viewed aspart of their mandate, which generallyfocuses on price and financial stability,with support for specific sectorsviewed as the job of government. Theoperational independence of advancedeconomy central banks to pursue theirmandates – which became the norm inthe 1990s – shields them from shortterm political influence.Since the 2007/2008financial crisis, centralbanks in advancedeconomies have playedan increasingly influentialmacroeconomic role.This has involvedmajor interventions infinancial markets – viaquantitative easing –to achieve monetarypolicy objectives andin credit markets viaMacroprudential Policy toachieve financial stabilityobjectives. However,the need to transition toa low-carbon economy– formalised in thesigning of the Paris Treatyon Climate Change inFebruary 2016 – has notplayed a part in thesepolicy developments.But it has become increasingly clearthat much of the investment neededfor a low-carbon transition will needto come from private financial sources,including capital markets but also thebanking sector, which is responsiblefor the creation of new money andcredit via lending.1,2 Central banks,with their regulatory oversight overmoney, credit, and the financial system,are in a powerful position to green thefinancial system and thereby growthby incentivising or directing resourcesfrom traditional carbon-intensivesectors towards green investment.It is also the case that climate changeand environmental policies posesubstantial threats to financial stabilityand economic growth. In particular, thetransition to a low-carbon economymay not be a smooth one and couldinvolve, for example, a potential rapidfall in the value of carbon-intensiveassets. The central bank, withresponsibility for financial stability,is uniquely positioned to implementgreen macroprudential instruments tomitigate such risks.3,4Nevertheless, most national andinternational initiatives in the ‘greenfinance’ sector have overlookedthe potential role of central banks,focusing mainly on mobilising existingprivate capital from institutionalinvestors, predominantly via marketled initiatives, such as subsidies orattempts to create carbon markets. So7

NEW ECONOMICS FOUNDATIONGREEN CENTRAL BANKINGIN EMERGING MARKET ANDDEVELOPING COUNTRY ECONOMIESfar, the results have been disappointingand a huge low-carbon investment gapremains.5–7The purpose of this report is toexamine in greater depth the mostsignificant green policies that EMDCcentral banks have adopted, mainlyfocusing on the last decade. The reportbrings together existing researchon green activities in EMDC centralbanks, usually set within the broaderframe of green finance. It also bringsto light new policy interventions thatpreviously had received little, if any,international coverage outside theirown country and language.There are signs emerging that someadvanced economy central banks,in particular the Bank of England8,9and the Dutch National Bank,10 arebeginning to consider incorporatingclimate change risks into their policies.However, most of these initiatives – forexample, the international FinancialStability Board (FSB) – are focusedon voluntary disclosure of businesses’exposure to carbon-intensive assets tosupport better capital allocation.11Our definition of green finance isbased on that used by the UnitedNations Environment Programme6and includes financing of sustainableinvestments that has a positiveenvironmental impact. In addition,we also examine the way in whichEMDC central banks have dealtwith emerging environmental riskat both the prudential level (risks toindividual financial institutions) andthe macroprudential level (systemicfinancial and economic risk across thewhole domestic economy).In emerging market and developingcountry (EMDC) economies, however,the story is different. Here, in manycases, central banks have begunto play an increasingly importantrole in addressing the challenges ofclimate change and environmentalsustainability more generally. Centralbank independence is not as stronglyenshrined and central banks play abroader role in supporting economicdevelopment and industrial policygenerally, usually cooperating closelywith ministries of finance and otherrelevant government departments.This was the model that also applied inadvanced economies for much of the1935–1980 period, until the fashion forinflation targeting emerged.12A summary of our case studies isprovided in Table 1.The rest of the report is laid outas follows. Section 2 introduces ataxonomy for green central bankingpolicies and embeds them withina historical and theoretical context.The main body of the report, Section3, analyses case studies of greencentral banking in some of the mostimportant developing and emergingmarket economies: Bangladesh, Brazil,China, India, Indonesia, and SouthKorea (covering just under half of theworld’s population). For each country,we examine the role of the centralbank and related public agencies inboosting green growth and mitigatingenvironmental and social (E&S) risks.In each case study, a concludingsection assesses the effectiveness of thepolicies in achieving change. Finally,It is also the case that EMDCs are moreexposed to the immediate challengesof climate change, facing both greaterphysical risks – more frequent, climatechange-related, severe weather events.Thes

central bank, but also other financial regulatory institutions play a central role. Green guidelines of various types have been issued in nearly all EMDCs we examined. Green bonds are taking off in several countries, often with the support of the central bank, including China, India, and Korea. In general, the more successful green finance initiatives tend to address several aspects of the .

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