BY YAXIN ZHU
Yaxin Zhu is a second-year MA candidate at Johns Hopkins Nitze School of Advanced International Studies concentrating in ERE.
Introduction: The impact of COVID-19
COVID-19 has dramatically worsened public finances. Many countries lack the means to finance recovery and undertake critically needed investments in climate adaptation and mitigation. The global public debt would increase to more than 100 percent of GDP this year based on the IMF’s projection. [1] Focuses seem to have shifted from climate change to the current pandemic, but it does not mean that we have completed the emission targets successfully. Global warming does not slow down with the economy under COVID-19.
In the midst of these challenges, can international financial institutions (IFIs) and multilateral development banks (MDBs) accelerate the construction of financial and climate sustainability under the stress of pandemic? To prepare for unexpected risks and deal with climate change, it is important to understand the relationship between financial sustainability and environmental risks.
With climate change predicted to increase physical risk, financial market participants appear to have started to place a greater focus on it as a potential source of financial vulnerability. Therefore, it is important to incorporate environmental criteria into economy[2], encourage green finance, and understand the connection between environment and public health. This crisis is a good opportunity to start green recovery actions and make these improvements. IFIs provided rapid reactions according to infection trajectories and financial index by financial methods and policy supports.
IFIs’ responses to COVID-19
To meet financing demands generated by the economic slowdown due to the pandemic, IFIs have approved $206.3 billion in COVID-19-related support since January 27, 2020, resulting in a $23.5 billion increase in financing since September 14, 2019.[3] IMF, World Bank, and ADB provided the largest financial and political support (see Figure 1).
Figure 1: Approved Support by Institution.
Source: IFI press releases and CSIS Economics Program
IMF’s Response
According to the data from CSIS, about half of the financial support comes from the IMF, which approved $206.3 billion funding combined with the following tools:[4]
Emergency financing: IMF has doubled the access to its emergency facilities—the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI) —enabling the Fund to provide emergency assistance to meet the expected demand of member countries of about $101 billion in financing.[5]
Grants for Debt Relief: IMF’s revamped Catastrophe Containment and Relief Trust (CCRT) is another part of the Fund’s response. This provides grants to the Fund’s poorest members to cover their IMF debt obligations for an initial phase over the next six months, and IMF is working on increasing CCRT to offer a longer extension for debt relief.
Calls for Bilateral Debt Relief: IMF called bilateral creditors to suspend debt service payments from the poorest countries. To cooperate with countries and other organizations, the Debt Service Suspension Initiative (DSSI) was built for creditors and mitigated the financial burdens for low-income countries. DSSI will enable them to apply economic resources to lessen the impact of the crisis.
Enhancing Liquidity: The Fund has approved the establishment of a Short-term Liquidity Line (SLL) to further strengthen global financial safety.
Adjusting Existing Lending Arrangements: IMF augmented existing lending programs to accommodate urgent new needs arising from the coronavirus.
Capacity Development: IMF is providing real-time policy advice and capacity development support, such as financial supervision and economic governance. It instructs countries on how to offer support for private sectors and manage debt by launching online courses on strategy making.
World Bank’s Response
The actions of the World Bank are mainly tailored to deal with the health, economic, and social shocks and included a $50 billion grant, operational support in health and social protection, and other recovery packages.
COVID-19 Fast Track Facility: It is a global effort to help strengthen the COVID-19 response from a public health perspective, including strengthening countries’ health systems and supporting research to facilitate the development of vaccines and treatments.[6]
Updating Existing Projects: The Bank is also working on improving the situation of on-going projects. This includes financial restructuring, operating emergency components, and new tools designed in the project to fight against COVID-19.
ADB’s Response
ADB works with developing member countries (DMCs) and collaborates with the World Health Organization (WHO) in combating the crisis effects.[7] The solutions come in form of financial (Asia Pacific Disaster Response Fund (APDRF)) and technical assistance.
COVID-19 Response Package: ADB tripled the package to $20 Billion and provided an additional $13 billion in regular ordinary capital resources (OCR) in countercyclical expenditure financing in 2020.
Special Policy Variation and Response Measures: To make sure the landing and effectiveness of social and economic support, ABD provides technical assistance to measure the activities that can address the economic impact of COVID-19. Policy recommendations based on members’ status quo will add flexibility and responsiveness in the political framework.
The Market of Sustainable Finance and Investment Under COVID-19
The green finance market has seen strong growth, with the green bond[8] market really starting to take off in 2014 when $37 billion was issued. In 2018 issuance reached $167.3 billion, setting yet another record (see Figure 2).[9] Innovative finance mechanisms can play a key role in catalyzing much-needed funds from private capital for a green and sustainable regional recovery. The case of Thailand is a good example to understand how IFIs tried to include green recovery measures in their crisis recovery packages.
Figure 2: Global Green Bond and Loan Issuance Increases.
Source: Climate Bonds Initiative. 2020. ASEAN Green Finance State of the Market 2019.
Cases: Building sustainability in Thailand
Background: Thailand had done well in combating COVID-19 with a quick lockdown and an efficient test method at the beginning. However, losses from tourism and trade resulted in 12.2% year-on-year contraction of the GDP in the second quarter of 2020. A temporary reopening from August to September slightly drove domestic economic up to some extent, but the government still needs to focus on long-term methods to attract foreign funds to flow into Thailand by building up expectations of the tourism boom in 2021.
Fiscal and monetary policy support:
Thailand made several plans to recover different sectors. To reopen tourism, which makes up close to 17 percent of Thailand’s GDP, the government announced a plan that includes approving Special Tourist Visas (STV)[10] for those who agree to a 14-day quarantine and easing the approval process to facilitate medical tourism. Thailand also approved nearly $1 billion stimulus package to support its farm sector and create rural jobs by extending soft loans of the Bank of Thailand (BOT) for small and medium-sized enterprises (SMEs).
IFI’s supports:
IMF: Financial Sustainability and Policy Incentives to Green Investment
IMF supported Thailand by pointing out new policy targets for a green recovery. In 2019, IMF conducted the Financial Sector Assessment Program and had a better understanding of the economic structure of Thailand before the pandemic. The Fund suggested Thailand constructing financial sustainability and building a set of climate change physical risk disclosure standards to mitigate the impact of disastrous event like COVID-19 by expanding the availability of insurance and eliminating informational asymmetry in pricing climate risk.[11]Besides, the Fund emphasized the importance of coordinated and multi‑pronged policies and policy incentives to green investment to shift to more sustainable tourism models in the medium term.[12]
ADB: Green Loan for Renewable Energy and Electric Vehicle Charging Network
ADB financed sustainable projects in Thailand with new tools under the pandemic. In July 2020, the Bank supported sustainability by financing two of Energy Absolute's operating solar and wind projects in Thailand with a 3-year green loan. It is the first green loan in Thailand certified by the Climate Bonds Initiative and the second one in Asia. The project will involve a climate mitigation component of 1.5 billion for 350 megawatts (MW) of existing solar and wind projects to meet the increasing electricity demands as well as Energy Absolute’s electric vehicle charging network to promote low-carbon transport in Thailand.[13] Through this project, ADB not only supports Thailand’s transition from a conventional automotive industry to an electric vehicle industry but increases awareness about green loans and call for investments in climate finance markets from the private sectors.
World Bank: Project for Reducing Hydrofluorocarbons (HCFCs) Consumption
World Bank stepped further on existing projects. In January 2020, the World Bank approved the second phase of the project that specifically helps Thailand to sustain the 2020 HCFC consumption phase-out obligations of the Montreal Protocol. The assistances come from four parts: investments in HCFC consumption reductions, technical assistance designed to strengthen the capacities of government agencies, project management, and strengthening of the national ozone unit. World Bank’s Ozone Projects Trust Fund which is set up for the implementation of the Montreal Protocol financed this project.[14] These activities will improve energy efficiency in cooling applications, which will contribute to reduced emissions and decreased peak demand for electricity.
Recommendations
This pandemic acts as a climate-change stress test and provides regulators with a better understanding of the size of their exposures to the associated physical risk and their readiness. Last November, G20 Debt Service Suspension Initiative confirmed that it would provide debt relief and free resources to fight the pandemic. The Summit also agreed on a recovery based on sustainable, resilient, and digital growth in line with the 2030 Agenda and Sustainable Development Goals. As we move towards the next phase of the COVID-19 crisis, governments have a special opportunity for a green and inclusive recovery that they must seize. Therefore, I will recommend adopting the following solutions.
Monitor the recovery and stimulus measures through computable environmental outcomes and indicators.[15] It is necessary to build a framework with timely environmental indicators when countries are tracking and planning economic recoveries. These indicators would show the impact of different policies both from the economic and sustainability points of view. Some of the organizations, such as OECD, have already identified a list of new indicators when they are tracking the impact of COVID-19 and countries’ contribution to Sustainable Development Goals. These include environmental official development assistance rate, relevance to air pollution, and economic instruments related to biodiversity, etc.
Build up catalytic mechanisms for green finance. New mechanisms should include green and leveraged finance approaches to create local green finance solutions and drive the growth toward low-carbon economy transformations. Green bond has already set up a solid foundation to encourage sustainable investments and bring attention to the climate finance market. Green finance solutions should take project sustainability of financial capital, impact sustainability on economic returns and social benefits, and environmental sustainability of natural capital into account.
Understand the connection between COVID-19 and environmental health. Some organizations argue that the current pandemic emphasized the link between air pollution and population health because environmental health and resilience are important components to public health. Therefore, governments should integrate health and sustainability into their infrastructure projects from now to reduce the vulnerability of countries to the pandemic and build up resilience within the industries and financial system.
References
[1] Ulrich Volz. Investing in a Green Recovery. Hoboken, NJ: John Wiley & Sons, 2020.
[2] IMF.” Global Financial Stability Report: Lower for Longer. Chapter 6: Sustainable Finance: Looking Farther”. October 2019. https://www.imf.org/en/Publications/GFSR/Issues/2019/10/01/global-financial-stability-report-october-2019#Chapter6
[3] CSIS, “International Financial Institutions’ Covid-19 Funding Rebounds in September but Remains below Earlier Levels.” October 2020. https://www.csis.org/analysis/international-financial-institutions-covid-19-funding-rebounds-september-remains-below
[4] IMF. "What is the Fund Doing to Help Countries during the Coronavirus Crisis?" June 29, Available from https://www.imf.org/en/About/FAQ/imf-response-to-covid-19#Q1.
[5] IMF.” COVID-19 Financial Assistance and Debt Service Relief.” October 2020. https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker
[6] World Bank. "World Bank Group’s Operational Response to COVID-19." Available from https://www.worldbank.org/en/about/what-we-do/brief/world-bank-group-operational-response-covid-19-coronavirus-projects-list
[7] ADB.” ADB's Comprehensive Respond to COVID-19.” 2020. https://www.adb.org/documents/adb-comprehensive-response-covid-19-pandemic-policy-paper
[8] A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects.
[9] Climate Bonds Initiative. "Rapid Growth of the Green Labelled Market.". https://www.climatebonds.net/market/explaining-green-bonds
[10] Bangkok Post. "Reopen Now or Face Collapse.". OCT 2020. https://www.bangkokpost.com/thailand/general/1997011/reopen-now-or-face-collapse.
[11] Felix Suntheim, and Jérôme Vandenbussche. "Equity Investors must Pay More Attention to Climate Change Physical Risk." MAY 2020. https://blogs.imf.org/2020/05/29/equity-investors-must-pay-more-attention-to-climate-change-physical-risk/.
[12] IMF. “IMF Staff Completes 2021 Article IV Mission to Thailand”. March 2021. https://www.imf.org/en/News/Articles/2021/03/15/pr2167-thailand-imf-staff-completes-2021-article-iv-mission
[13] ADB. “Green Loan for Renewable Energy and Electric Vehicle Charging Network”.2020.
[14] World Bank. "Thailand HCFC Phase-Out Stage II." Jan 2020. Available from https://projects.worldbank.org/en/projects-operations/project-detail/P165235.
[15] OECD. "Focus on Green Recovery." Available from https://www.oecd.org/coronavirus/en/themes/green-recovery.
PHOTO CREDIT: Free use image from Canva Pro.