The EFSD took part in a joint study of Regional Financing Arrangements on climate
EFSD staff and the key regional stabilization institutions (Regional Financing Arrangements, RFAs) published a joint report on the climate agenda.
Six major RFAs are the object of the study. These are: the Arab Monetary Fund (AMF), the Association of Southeast Asian Nations (ASEAN)+3 Macroeconomic Research Office (AMRO), which is the macroeconomic surveillance unit of the ASEAN+3 region that also supports the implementation of the Chiang Mai Initiative Multilateralisation (CMIM);2 the Eurasian Fund for Stabilization and Development (EFSD); the European Union’s Macro-Financial Assistance (MFA), which is managed by the European Commission; the European Stability Mechanism (ESM); and the Latin American Reserve Fund (FLAR).
The RFA study notes that climate change is a global challenge. Climate change may have implications for macroeconomic and financial stability. At the same time, supporting macroeconomic and financial stability is at the core of the RFAs mandate.
RFAs involvement in the climate agenda rangesfrom mobilizing climate financing to assisting in capacity building and disseminating knowledge and advice.
The EFSD works towards integration of climate agenda into the Fund's financial and analytical toolkits, develops relevant policies and standards, and participates in the financing of infrastructure that is directly linked to the climate agenda, such as hydropower, water and irrigation.
Based on the results of the study, RFA staff proposes the following considerations and avenuesfor further work:
Consideration 1: RFAs should continue leveraging on multilateral cooperation to address climate change
The RFAs should intensify their collaboration with the IMF to create synergies. The regional funds could draw lessons from the IMF’s work on climate risk analysis, contributing to having more consistent methodologies and tools, to the extent feasible and useful. Informal workshops amongst the RFAs and the IMF focused on selected topics of common interest could be held to disseminate knowledge within the IMF–RFA network. The inter-institutional dialogue could open ways to finding complementarities when supporting members. For instance, the IMF could leverage on the RFAs’ close relationship with member authorities to advance best practices on, among other items, the design of climate strategies. Finally, it would be worthwhile to explore if and how RFAs could contribute to the successful implementation of the RST, including by helping mobilise additional official and private climate finance.
The RFAs should also seek to deepen their engagement with stakeholders beyond the Global Financial Safety Net. The climate risk scenario analyses by the Financial Stability Board and the NGFS are key inputs for the RFAs’ analysis on climate change impacts in their own regions under possible futures. The work of these groups on improving the climate data infrastructure is equally relevant for RFAs given that consistent, comparable, and reliable data is of paramount importance when conducting risk analysis. The RFAs should moreover stay abreast of policy discussions at the Financial Stability Board and G20 that may result in common approaches on climate issues across jurisdictions. In addition, the RFAs could work with MDBs to help countries achieve climate objectives and ensure a more sustainable, low-carbon economy. MDBs can contribute to RFAs’ members greater macroeconomic stability in various ways. For instance, MDBs are leaders in helping low- and middle-income countries make necessary structural adjustments through investment projects, while mobilising additional private capital to that end, and can be important sources of countercyclical lending following a climate-related shock.
Consideration 2: RFAs could review their lending toolboxes to help in addressing climate-related risks
Significant financial resources globally will need to be mobilised including, where appropriate, from the Global Financial Safety Net, to successfully tackle climate change. In the coming years, governments need to invest in climate adaptation and mitigation and build fiscal space to accommodate possible future climate-related shocks. The latter is particularly relevant given that insurance coverage related to weather disasters is often limited, including in most countries of interest in this study, and will likely only offer partial financial respite.
The RFAs could assess whether they can play a role, within the remit of their mandates, in closing financing gaps or helping mobilise resources beyond what may be feasible for the RFAs already. This could require amending lending toolkits and policies in a way that it would allow the RFAs to respond more directly to the acute needs of their membership. Possible ideas for reflection include, enhancing emergency instruments to provide quick financing in response to an economic shock caused by a climatic disaster, evaluating options to support the mobilisation of affordable climate financing needed for longer-term macro-critical objectives, helping to address insurance gaps for extreme climate events through the provision of precautionary credit lines, acting as a regional sovereign backstop for the banking sector, and integrating climate policies in programme design to incentivise reforms aligned with the Paris Agreement objectives.
Consideration 3: RFAs could become important regional centres of information for their members on macrofinancial aspects of climate change
Lastly, to the extent feasible and respecting the competences of other stakeholders in their regions, the RFAs could look for ways to disseminate knowledge across their membership. Countries will not necessarily have all the answers or technical capabilities to address climate-related policy challenges. The RFAs could support them by facilitating a flow of information covering, for example, the latest research on how to manage physical and transition risks, emerging trends in green finance, and environmental taxonomies. The sharing of information should be tailored to the needs of countries in their region and could take many forms, from organisingconferences and workshops and providing technical assistance to members that may request it, to developing digital platforms that collect insights on climate change as the RFAs’ own expertise in this field grows.
The steps taken by the RFAs so far to enhance their readiness in view of the climate crisis are but the start of what will likely be a multi-year process. The RFAs should strive to have a candid dialogue with shareholders to better understand how they could best support them and assess their openness for possible future reforms. There will be scope for peer-learning, as the institutions of the global and regional layers of the Global Financial Safety Net continue to gradually build up their capacities. The regular dialogues amongst the RFAs and with the IMF will remain an important platform to share insights with each other that, as was the case during the Covid-19 pandemic, will underscore once more the value of the IMF–RFA network.
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