Climate vulnerable countries face considerable macrofinancial risks that threaten debt sustainability, worsen sovereign risk, and harm investment and development prospects. Prepared in collaboration with the SOAS Centre for Sustainable Finance and the V20 Secretariat, this paper reviews the macrofinancial implications and risks of climate change, in particular the impacts of climate vulnerability on sovereign risk and the cost of capital, with special consideration to challenges facing the V20. It also examines the International Monetary Fund (IMF)’s responsiveness to these challenges to date and recommends ten initial areas for a joint V20-IMF Action Agenda.
The IMF can play an important role in supporting climate vulnerable countries in mitigating and managing macrofinancial risks stemming from the physical and transition impacts of climate change, leveraging opportunities from climate policies to boost growth, investment and resilience. While the IMF’s attention to climate issues has increased markedly, including through research produced by IMF staff, the Fund has been rather slow to address climate-related financial risks in its operational work, comprised of surveillance, technical assistance and training, and emergency lending and crisis support.
A non-representative survey among finance ministries and central banks of V20 countries indicates the desire for more support from the IMF in addressing climate risks and vulnerabilities. The views expressed by V20 members suggest that the IMF should integrate climate risk analysis in its surveillance activities, including Article IV consultations as well as Financial Sector Assessment Program assessments and Debt Sustainability Framework analysis conducted with the World Bank; scale up technical support; and explore options for developing its toolkit for climate emergency financing.
To address the needs of climate vulnerable economies and support them in building resilience through improved mitigation and management of climate-related macrofinancial risks and enhanced conditions for critical investments in adaptation and development, the paper suggests ten potential action areas for a joint V20-IMF Action Agenda:
- Mainstreaming systematic and transparent assessments of climate-related financial risks in all IMF operations
- Consistent, systematic, and universal appraisal and treatment of physical climate risks and transition risks for all countries in Article IV consultations and Financial Sector Assessment Programs
- Advancing disclosure of climate-related financial risks and promoting sustainable finance and investment practices
- Exploring synergies between fiscal and monetary policies
- Mainstreaming of climate risk analysis in public financial management and supporting the development of a climate disaster risk financing and insurance architecture
- Supporting climate vulnerable countries with debt sustainability problems
- Developing the IMF toolkit for climate emergency financing
- Exploring options to use Special Drawing Rights (SDRs) to support climate vulnerable countries
- Supporting the design and implementation of carbon pricing mechanisms
- Institutionalizing collaboration between the Fund and the V20
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