Sustainable Finance and Climate-Related Financial Risks
Climate change, environmental deterioration and biodiversity loss are factors increasingly considered in both the decision-making process of consumers and companies, and the design of public policies. Since the late 19th century, the average global temperature of the Earth’s surface has not only been on the rise, but it has also been showing a growing trend as a result of the global industrialization process. As a consequence of the adverse effect of this increase on the planet, this issue has been placed on the international agenda.
World leaders at the United Nations Climate Change Conference (COP21) held in Paris in 2015 agreed that climate change and its adverse effects should be addressed (the so-called Paris Agreement). The Paris Agreement, joined by 194 jurisdictions (193 States—including Argentina—plus the European Union), sets long-term goals to guide countries in defining their own strategies and actions. At the G20 summit held in 2015, leaders agreed to address climate change and sustainable finance. According to the G20 communiqué, “the Paris agreement should be fair, balanced, ambitious, durable and dynamic. We underscore our commitment to reaching an ambitious agreement in Paris that reflects the principle of common but differentiated responsibilities and respective capabilities, in light of different national circumstances.”
In this context, Argentina contributes to the global discussion by providing the perspective that is shared with the other countries in the region and others with the same or lower degree of development. It should be noted that the aforementioned countries have been historically responsible for a very small share of all the greenhouse gas (GHG) emissions. For instance, Argentina shared 0.8% in total GHG emissions at a global level in 2020, whereas Latin American countries taken together did not exceed 6.5%. At the same time, these jurisdictions suffer more from the negative consequences of climate change. Against this backdrop, a fair transition (in terms of requirements and access to finance) to a low-GHG emission global economy is necessary, taking into account the stage of development of each country.
In order to address this issue locally, Argentina has developed a framework that ensures a cross-sectional management of long-term public policies. The aim was to device strategies, actions and instruments related to impact and vulnerability studies as well as activities that may favor climate change adaptation, and to promote strategies to mitigate and reduce GHG emissions. These goals demand increased finance to support a fair and affordable economic transition. Specifically, Law 27,520 on Minimum Standards for Global Climate Change Adaptation and Mitigation was enacted in late 2019, creating the National Cabinet on Climate Change (Gabinete Nacional de Cambio Climático) which was originally established by Executive Order 891/16. The purpose of this law was to frame policies on climate change and raise awareness.
Within the scope of sustainable finance, the Technical Group for Sustainable Finance (Mesa Técnica de Finanzas Sostenibles, MTFS), in which the BCRA takes part, was created in 2020 as an information-sharing and national coordination mechanism. The MTFS is coordinated by the Ministry of Economy. It brings together the financial sector's regulators with the purpose of developing sustainable finance in Argentina and promoting appropriate management of the risks associated with social, environmental, and governance-related factors.
In September 2021, the MTFS's efforts led to the execution of a “Joint Declaration of the Regulatory Authorities from the Banking, Insurance and Capital Markets Sectors on the Development of Sustainable Finance,” whereby the authorities undertook to foster the development of sustainable finance while addressing financial risks and assessing climate-related opportunities. Following these guidelines, the National Strategy for Sustainable Finance (Estrategia Nacional de Finanzas Sostenibles, ENFS) was adopted in 2023 to create the ecosystem and conditions required to develop sustainable finance, and to identify the risks related to climate change to which players of the financial sector are exposed.
Actions of the BCRA
The BCRA’s mandate, as stated in its Charter, is to promote monetary and financial stability, employment, and economic development with social equality. Within this framework, certain actions have been planned and adopted to gradually address various aspects connected with the potential adverse effects of climate change on the financial system. This encompasses commitments and preliminary actions taken by the BCRA to identify, measure and mitigate physical and transition risks associated with climate change, and to promote sustainable finance.
Below are some of the actions taken by the BCRA to address sustainable finance within the framework of its authority:
- Gradual plan for building and consolidating capacities to supplement/adjust policies to risks related to climate change.
- 09/07/2021 | Signing of the Joint Declaration of the Regulatory Authorities from the Banking, Insurance and Capital Markets Sectors on the Development of Sustainable Finance in Argentina.
- 05/22/2023 | Preparation of the financial institutions section in the National Survey on Sustainable Finance and Climate Change.
- 06/05/2023 | Adoption of the National Strategy for Sustainable Finance.
- Incorporation of environmental aspects into the reserves administration policy. A mechanism was added to the Manual of Policies for Investment of International Reserves, whereby an environmental profile of the BCRA’s counterparties is created to broaden/reduce the credit limit.
- Participation in international organizations and fora on climate matters: (i) working groups of the Bank for International Settlements (BIS), which are mainly concerned with micro and macroprudential monitoring and promotion of financial stability, setting standards for prudential regulations, (ii) working groups of the Financial Stability Board (FSB), which mainly focus on assessing risks for the global financial system and on promoting standards for information sharing and disclosure; promotion of macroprudential recommendations; (iii) G20 – Sustainable Finance Working Group (SFWG), which aims to mobilize/escalate sustainable finance for transition; and (iv) Network for Greening the Financial System (NGFS), which seeks to exchange experiences, provide training and offer recommendations on best practices.
- 08/28/2023 | Interaction with financial institutions. This contributes to gaining insight as to the relevance assigned by the sector to sustainability, and the way this issue is addressed. Also, this seeks to gradually narrow the data gap in terms of climate-related risk on account of methodological challenges and lack of information. In this regard, in August 2023, the BCRA promoted a survey to assess the main financial institutions' exposure and resilience to the above mentioned risks.
Publications of the BCRA
06/28/2023 | Sustainable Finance and Bond Issuance in Emerging Economies and in Argentina. Exhibit 2 of the Financial Stability Report (IEF).
06/28/2023 | Sustainable Finance: Recent Developments in Argentina. Exhibit 3 of the Financial Stability Report (IEF).
12/27/2022 | Sustainable Finance. Scope of the International Recommendations. Box 3 of the Financial Stability Report (IEF).
12/16/2021 | Progress Made in Terms of Sustainable Finance in Argentina. Box 1 of the Financial Stability Report (IEF).
06/17/2021 | Risks Faced by the Financial System Linked to Climate Change. Exhibit 3 of the Financial Stability Report (IEF).
05/21/2021 | Challenges of Climate Change for Central Banks. Exhibit 2 of the Monetary Policy Report (IPOM).
12/18/2017 | What is Sustainable Finance? Ideas de Peso.
Other Publications
International Organizations and Fora
G20 Sustainable Finance Working Group (SFWG), G20 Sustainable Finance Roadmap.
G20 Sustainable Finance Working Group (SFWG), Progress tracking.Progress reported by countries and other stakeholders in the voluntary implementation of the G20 Sustainable Finance Roadmap.
Basel Committee on Banking Supervision (BCBS), Principles for the effective management and supervision of climate-related financial risks, June 2022.
Frequently asked questions on climate related financial risks (BCBS), FAQs, December 2022.
Basel Committee on Banking Supervision (BCBS), Climate-related risk drivers and their transmission channels, April 2021.
Basel Committee on Banking Supervision (BCBS), Climate-related financial risks - measurement methodologies, April 2021.
Financial Stability Board (FSB), FSB Roadmap for Addressing Financial Risks from July 2023.
Financial Stability Board (FSB), Supervisory and Regulatory Approaches to Climate-related Risks: Final report, October 2022.
Financial Stability Board (FSB), FSB Roadmap for Addressing Climate-related Financial Risks, July 2021.
Financial Stability Board (FSB), The availability of data with which to monitor and assess climate-related risks to financial stability, July 2021.
Financial Stability Board (FSB), The implications of climate change for financial stability, November 2020.
Financial Stability Board (FSB), Recommendations of the Task Force on Climate-related Financial Disclosures, June 2017.
Network for Greening the Financial System (NGFS), Final report on bridging data gaps, June 2022.
Network for Greening the Financial System (NGFS), Guide for Supervisors: integrating climate-related and environmental risks into prudential supervision, May 2020.
IFRS International Sustainability Standards Board (ISSB), S1 General Requirements for Disclosure of Sustainability-related Financial Information, June 2023.
IFRS International Sustainability Standards Board (ISSB), S2 Climate-related Disclosures, June 2023.