At the recently concluded COP28 in Dubai, the sustainable finance forum, “Global Climate Action Through Fostering Sustainable Finance,” took the centre stage. Organised by the International Monetary Fund (IMF) and the Central Bank of the United Arab Emirates, the event brought together global leaders from key international financial institutions to address pressing issues hindering the realisation of climate change goals.

Sustainable finance, defined as the integration of environmental, social, and governance (ESG) factors into financial decision-making, has emerged as a critical factor in achieving economic growth, while minimising negative impacts on the environment and society. The urgency to factor climate change into macroeconomic analysis and funding choices is intensifying, with the effects of climate change becoming more visible and impactful worldwide.

As the Managing Director of the IMF, Kristalina Georgieva, aptly noted, “If you don’t move fast, you will be left behind.” Despite the consensus on aligning the banking sector with the goals of the Paris Agreement, fossil fuel financing persists. Major commercial and investment banks globally have committed over $3.8 trillion to the fossil fuel industry, highlighting the need for a fundamental shift in investment strategies.

To fulfil the 2030 Agenda for Sustainable Development and the Paris Climate Accord, investment redirection away from carbon-intensive activities is imperative. Central banks and regulators, responsible for financial and macroeconomic stability, must address climate-related concerns systematically. The International Monetary Fund’s Resilience and Sustainability Trust (IMF’s RST) stands as one of the mechanisms facilitating financial support for low and vulnerable middle-income countries that are addressing climate change impacts.

Central banks and financial regulators in Africa have been actively implementing policies to support sustainable finance and global climate action. Several African states, including Nigeria, South Africa, Egypt, Ghana, Kenya, Botswana, and Senegal, have sustainable banking principles in place that guide banking operations and activities, which are aimed at aiding the green economy. For instance, the Central Bank of Egypt has established an independent department for sustainability and sustainable finance within each bank, binding them to integrate policies and procedures for sustainable finance within their credit and investment policies.

Notwithstanding the foregoing, central banks and financial regulators in Africa still have huge responsibilities to ensure that the future of Africa is preserved. The absence of a clear guideline for distinguishing between funds for adapting to and mitigating climate change has hindered the progress of projects in numerous African countries. This emphasises the importance of central banks taking a more proactive role in addressing climate change issues….

In addition, the Central Bank of Nigeria (CBN) has joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the Taskforce on Nature-related Financial Disclosure (TNFD) to address climate-related and environmental risks and also support the transition to a sustainable economy. This affiliation underscores the CBN’s commitment to fortifying the financial system’s resilience and facilitating the mobilisation of financial resources that are crucial for transitioning towards a sustainable economy. The African Union, through the African Development Bank, has endorsed the Africa Adaptation Acceleration Plan, which calls for investments in resilient infrastructure, climate-adaptive agriculture, digitalisation, trade reforms, and a broadening of safety nets. These efforts demonstrate a strong commitment to integrating sustainable finance and its principles, while addressing critical climate-related issues in Africa.

Notwithstanding the foregoing, central banks and financial regulators in Africa still have huge responsibilities to ensure that the future of Africa is preserved. The absence of a clear guideline for distinguishing between funds for adapting to and mitigating climate change has hindered the progress of projects in numerous African countries. This emphasises the importance of central banks taking a more proactive role in addressing climate change issues and ensuring that different funds are utilised for the intended purposes.

Furthermore, most central banks in Africa are devoid of tailored policy responses to support a green economy. These responses should be territorially nuanced and take into account different economic conditions, financial infrastructures, and monetary policy frameworks.

The absence of climate change considerations in monetary policy is a significant oversight of the responsibilities of central banks. This is particularly crucial, as the unpredictability introduced by climate change, both in the short term through extreme weather events and in the long term through a general loss of stability, could undermine the ability of central banks to accurately forecast economic variables. Such a scenario could have severe implications for the broader economy, increasing the likelihood of recessions and financial crises. In Sub-Saharan Africa, for instance, climate change could lead to a reduction in the gross domestic product (GDP) by up to three per cent by 2050. Given that central banks often use GDP as a key indicator when setting policy, this could have significant implications for monetary policy.

Financial regulators must be acutely aware of transition risks by formulating policies that mitigate potential adverse effects. In Africa, central banks can spearhead sustainable finance by aligning policies with the Paris Agreement and Sustainable Development Goals. Collaboration with governments, financial institutions, civil society, and the international community is vital to creating an enabling environment for sustainable finance in Africa.

Central banks and financial regulators play a crucial role in the transition to a low-carbon economy, not only through financial stability measures but also via proactive monetary policy actions. Developing monetary operations with green elements, adopting climate strategies, and integrating environmental, social, and governance (ESG) considerations into policies are essential steps.

Financial regulators must be acutely aware of transition risks by formulating policies that mitigate potential adverse effects. In Africa, central banks can spearhead sustainable finance by aligning policies with the Paris Agreement and Sustainable Development Goals. Collaboration with governments, financial institutions, civil society, and the international community is vital to creating an enabling environment for sustainable finance in Africa.

Central banks must incorporate climate-related risks and opportunities into macroeconomic and financial policies and develop specific mitigation, adaptation, and transition plans. The global journey to net-zero emissions hinges on the committed involvement of central banks, given their pivotal role in shaping financial systems. A substantial shift in financial policies, investments, and regulations is crucial, with central banks playing a fundamental role in driving necessary changes across the financial sector. Navigating the financial landscape towards climate concerns encapsulates the critical role of central banks in steering the global financial system towards a sustainable and resilient future. This is a call to action, and the aim is to leave no one behind.