Green-Central-Banking in Emerging Markets and Developing Country Economies

GREEN CENTRAL BANKING
IN EMERGING MARKET
AND DEVELOPING
COUNTRY ECONOMIES
NEW ECONOMICS FOUNDATION GREEN CENTRAL BANKING
IN EMERGING MARKET AND
DEVELOPING COUNTRY ECONOMIES
CONTENTS
EXECUTIVE SUMMARY 2
1. INTRODUCTION 7
2. GREEN CENTRAL BANKING POLICY: A TAXONOMY 13

2.1 GREEN CREDIT ALLOCATION POLICY INSTRUMENTS 13
2.2 GREEN MACROPRUDENTIAL POLICY INSTRUMENTS 15
2.3 OTHER GREEN CENTRAL BANKING INITIATIVES AND ACTIVITIES 16
3. GREEN CENTRAL BANKING IN PRACTICE: COUNTRY CASE STUDIES 18

3.1 BANGLADESH BANK 18
3.2 BANCO CENTRAL DO BRASIL 23
3.3 PEOPLE’S BANK OF CHINA 26
3.4 RESERVE BANK OF INDIA 31
3.5 BANK INDONESIA 34
3.6 BANK OF KOREA 38
4. CONCLUSIONS 43
ENDNOTES 46
EXECUTIVE SUMMARY In emerging and developing countries

(EMDCs), however, the story is
Central banks have different. Here, in many cases, central
banks have begun to play an important
played an increasingly role in addressing the risks posed by
prominent role in climate change and the need for green
advanced economies investment.
over the last decade. EMDCs are more exposed to the

They have created immediate challenges of climate
change. Many face greater physical
new money on a huge risks, including more frequent, climate-
scale with quantitative change-related, severe weather events.
easing programmes, They also recognise the need to
rapidly shift their economies on to a
forced banks to hold sustainable ‘green growth’ path for their
more capital, and begun future prosperity and energy security.
Excluding China, around 70% of global
constraining credit to projected sustainable infrastructure
certain sectors of the investment needs ($3.5–4.0 trillion per
economy. Yet none of year on average) will be required in
EMDCs.i
these policies have taken
in to account the urgent This report examines the most
significant green policies that EMDC
challenge of climate central banks and related public
change and the need to financial institutions have adopted
shift our economies to over the last ten years. We examine
six different large EMDCs, covering
a low-carbon trajectory. almost half the world’s population:
This is despite the Bangladesh, Brazil, China, India,
Indonesia, and South Korea.
accepted fact that there
is still a huge carbon- In contrast to advanced economies
where central bank mandates are
finance gap to be filled
predominantly focused on price
and that climate change stability, many of the central banks
poses major financial in EMDCs have a wider remit to
support sustainable development and
stability risks. the government’s economic policy
agenda. Three different categories of
intervention are regularly used in these
countries to address the challenge of
green finance and climate change:
• Green credit allocation instruments

that have the objective of allocating
credit to green sectors.
• Green regulatory (prudential and

macroprudential) instruments for
safeguarding financial stability.
2
• Other green central banking including E&S risk management, green

activities, such as developing green bond markets, retail banking, and
finance guidelines or setting up insurance.
green bond markets.
Inter-agency cooperation also appears
With regard to green growth and to be an important factor. China’s
credit allocation, existing traditions Green Credit Policy has involved
of financial intervention shape the collaboration between the central bank
country’s approach. Central banks and the Ministry of Environmental
that have in the past been engaged in Protection to create a national database
centralised credit allocation policies – which records the environmental
India and Bangladesh most obviously – compliance of non-financial firms.
have added categories to their existing Banks are required to restrict loans
priority loan programmes for green to firms that violate environmental
projects, in particular renewable energy compliance rules. Countries where one
projects. In Bangladesh, for example, agency alone has the responsibility for
it is estimated that around 10% of the green financial policy, tend to have a
population has been supported by weaker record of implementation.
the central bank’s green refinancing
programme in installing home-solar Assessing the implementation and
power systems. impact of green financial policy in
the countries of interest has been
In other countries, such as Korea, challenging. In some countries,
Brazil, and China, national governmental institutions have
development banks have played a issued comprehensive regulation,
more important role in supporting guidelines, or policy roadmaps, but
credit to green sectors with the central have failed to present evidence of
bank focusing more on suppressing the implementation and impact of
credit to brown sectors. In Brazil, the their green initiatives. Recent green
central bank requires commercial banks initiatives have been mostly market-
to stress test their lending against led and not policy-guided, with rather
environmental and social (E&S) risk disappointing results, as private
criteria and hold additional capital markets have remained risk averse in
against these risks. In most countries, the face of policy uncertainty.
however, green macroprudential policy
is still in its infancy, although it is In other cases, however, central banks
increasingly recognised that climate have taken action to improve things.
change poses systemic financial risks. For example, the Reserve Bank of
India was criticised for its definition
There are also a wide range of different of renewable energy projects and
policy initiatives in which not only the the Chinese banking regulator was
central bank, but also other financial also criticised for shortcomings in
regulatory institutions play a central its definition of green credit. In both
role. Green guidelines of various instances, the institutions responded
types have been issued in nearly all and implemented new measures as
EMDCs we examined. Green bonds a result. This illustrates that green
are taking off in several countries, often finance is likely to be an exploratory
with the support of the central bank, policymaking process – where policy
including China, India, and Korea. In platforms can be gradually built upon
general, the more successful green over time.
finance initiatives tend to address
several aspects of the financial system,
3
In general, central banks and other be valuable lessons for advanced

regulatory institutions in our case economies to learn from the early
studies are seriously engaged in green experiments in green central banking
finance issues to a greater extent than reviewed in our case studies. We hope
central banks in advanced economies. that this report aids knowledge transfer
Now that is recognised that private and engagement both between EMDCs
markets in both advanced and EMDC and between them and advanced
economies are not investing sufficient economy monetary policymakers and
financing in green infrastructure financial regulators.
and green innovation, there may
TABLE 1. SUMMARY OF CASE STUDY FINDINGS
Green credit allocation Green prudential and Other green financial

Country Impact/lesson learned
policies macroprudential policies interventions
Bangladesh • Commercial banks and • There are lower equity • Issuance of E&S risk CB intervention
(Bangladesh non-bank financial margin requirements management guidelines successful:
Bank, BB) institutions (NBFIs) are for Environmental & to be incorporated in to
• Around 10% of the
required to allocate Social (E&S) favourable credit risk assessment
population is supported
5% of their total loan projects on banks’ lending.
by a green refinancing
portfolio to green
programme in regard to
sectors. • Banks and NBFIs are
solar home systems.
required to issue 10%
• There is a range of of CSR budgets to a
• Banks employ
green re-financing Climate Risk Fund.
mainstreamed E&S risk
lines subsidising green
management practises
lending, including to • Banks are also required
in bank lending through
renewable energy to educate borrowers
guidelines.
and energy-efficiency on environmental
projects. regulations.
• Less attention is given to
macroprudential policy.
• Banks’ green
management practices
are part of assessment
of supervisory
evaluations.
Brazil • Restrictions exist • Banks are required to • Detailed guidelines • Macroprudential and
(Banco do on lending in engage in E&S stress in place for the prudential policies
Brazil, BCB) environmentally testing and incorporate implementation of the appear to have been
sensitive areas in the E&S risk in to capital Social-Environmental largely effective.
Amazon. requirements in line Responsibility Policy
with Internal Capital (PRSA) by all financial • The majority of
• National Development Adequacy Assessment institutions authorised major banks are now
Bank (BNDES) is a Process (ICAAP)/Basel to operate by the incorporating E&S risk
major investor in green Accords Pillar 2. BCB sets central bank. in to their reporting
sectors. a general framework for and risk management
types of risk that should • Banks are required to strategies.
be included. build this in to their
governance structure • There is less evidence of
• Banks must submit an and collect data on whether this is affecting
annual report to BCB actual financial losses real economy lending.
outlining ICAAP for due to environmental
validation. damages for a period of
5 years.
4

China • The Chinese • E&S risk management is • Chinese green credit • Evidence says that by
(People’s Bank Development bank is a assessed on prudential, policy has been 2010 banks had begun
of China, PBC) major global lender for individual bank- and adopted by all relevant to reduce loans to
green energy. loan-based levels agencies, including polluting and dirty
the central bank, the energy projects and
• The China Green • The China Banking banking regulator, the to increase loans to
Finance taskforce Regulatory Commission securities regulator, the energy-efficiency
recommends (CBRC) has issued insurance regulator, following green credit
establishment of guidelines seeking and the Ministry policies and inter-
a China Ecological to repress credit to of Environmental agency coordination.
Development Bank carbon- and energy- Protection (MEP).
partially funded by PBC. intensive industries and • Evidence also says
encourage lending to • PBC has collaborated that not all banks
• Preferential interest green projects. with the MEP to have adopted the
rates are provided on create a national guidelines and that at
green loans in Fujian database for disclosed a local level the focus
Province. information on credit, remains on growth over
administrative penalties, environmental concerns.
• The central bank is and information
considering green on environmental • A better definition
refinancing lines for compliance of non- of green credit in the
commercial banks. financial firms. Banks 2013 guidelines may
are required to restrict have improved the
loans to firms that situation – by 2015
violate environmental most commercial
compliance rules. banks appeared to
have adopted E&S risk
• Voluntary green credit management policies.
guidelines have been
issued by the CBRC
to encourage banks
to build E&S risk
governance standards
and to identify areas for
green credit
• PBC is also working on

the development of
green bond markets to
attract long-term capital
to green investment – it
has issued criteria for
projects that should
qualify.
India • Loans to renewable • RBI is considering • Industry-led voluntary • Lending to renewable

(Reserve Bank energy companies including environmental green lending guidelines energy projects has
of India, RBI) have been included in risks in the assessment mainly used. grown at a higher rate
the RBI’s Priority Sector of agricultural price than overall credit
Loans scheme; 40% of developments when • Green bonds have been growth in the 2009–2014
net commercial bank assessing financial and issued to support green period.
credit must support monetary stability. energy since 2015.
priority sectors. • However, the impact of
the RBI’s PSL has been
mixed because many
banks fall short of their
annual PSL targets and
there has also been
several non-performing
loans.
5

Indonesia • ‘Roadmap for • OJK is considering • Voluntary green lending • No evaluation of

(Bank Sustainable Finance in including E&S risk in to guidelines have been the impact of green
Indonesia/ Indonesia 2015-2019’ its macroprudential issued. guidelines or other
Financial outlines ambitious plans framework as non- interventions.
Services to green commercial mandatory efforts have • Bank Indonesia and
Authority, bank lending. not proven effective in OJK have engaged • Little evidence exists
OJK) However, no concrete changing bank lending. in capacity building that commercial banks
interventions have workshops on E&S risk are engaging with E&S
been made yet despite and green lending with risk or green lending.
support for SMEs. the financial sector.
• Mandatory
requirements may
be needed to make
progress.
South Korea • Fiscal policy is mainly • The BOK has had no • The state-owned Korea • Financial regulation
(Bank of used to support green public discussions or Development Bank (KDB) and the greening of
Korea, BOK) finance including engagement with green began to invest in green the financial system
subsidies for low- financial policy or E&S industries in 2009 and are currently not at the
interest-rate loans risk management in has recently started to centre of Korea’s still
for energy-efficiency general or on a systemic promote green bonds. ambitious green growth
projects and renewable level. strategy, perhaps
energy. • The government is because the central
• The BOK has applied providing various bank has not been
E&S risk assessments to subsidies for green involved.
its loans. investment, including
green export credits. • Fiscal policy and state
development banks
• The public Export- have played a dominant
Import Bank of Korea role.
is the first financial
institution in Asia to
issue green bonds.
i Bhattacharya, A., Oppenheim, J., Stern, N., Meltzer, J.P. & Qureshi, Z. (2016). Delivering on sustainable
infrastructure for better development and better climate, Brookings global working paper series. Brookings
Institution, Washington DC.
6
1. INTRODUCTION There is a variety of explanations as

to why central banks in advanced
economies have not done more. The
Since the 2007/2008 most apparent is that it not viewed as
financial crisis, central part of their mandate, which generally
banks in advanced focuses on price and financial stability,
with support for specific sectors
economies have played viewed as the job of government. The
an increasingly influential operational independence of advanced
economy central banks to pursue their
macroeconomic role. mandates – which became the norm in
This has involved the 1990s – shields them from short-
major interventions in term political influence.
financial markets – via But it has become increasingly clear

quantitative easing – that much of the investment needed
for a low-carbon transition will need
to achieve monetary to come from private financial sources,
policy objectives and including capital markets but also the
in credit markets via banking sector, which is responsible
for the creation of new money and
Macroprudential Policy to credit via lending.1,2 Central banks,
achieve financial stability with their regulatory oversight over
money, credit, and the financial system,
objectives. However, are in a powerful position to green the
the need to transition to financial system and thereby growth
a low-carbon economy by incentivising or directing resources
from traditional carbon-intensive
– formalised in the sectors towards green investment.
signing of the Paris Treaty
It is also the case that climate change
on Climate Change in and environmental policies pose
February 2016 – has not substantial threats to financial stability
played a part in these and economic growth. In particular, the
transition to a low-carbon economy
policy developments. may not be a smooth one and could
involve, for example, a potential rapid
fall in the value of carbon-intensive
assets. The central bank, with
responsibility for financial stability,
is uniquely positioned to implement
green macroprudential instruments to
mitigate such risks.3,4
Nevertheless, most national and

international initiatives in the ‘green
finance’ sector have overlooked
the potential role of central banks,
focusing mainly on mobilising existing
private capital from institutional
investors, predominantly via market-
led initiatives, such as subsidies or
attempts to create carbon markets. So
7
far, the results have been disappointing The purpose of this report is to
and a huge low-carbon investment gap examine in greater depth the most
remains.5–7 significant green policies that EMDC
central banks have adopted, mainly
There are signs emerging that some focusing on the last decade. The report
advanced economy central banks, brings together existing research
in particular the Bank of England8,9 on green activities in EMDC central
and the Dutch National Bank,10 are banks, usually set within the broader
beginning to consider incorporating frame of green finance. It also brings
climate change risks into their policies. to light new policy interventions that
However, most of these initiatives – for previously had received little, if any,
example, the international Financial international coverage outside their
Stability Board (FSB) – are focused own country and language.
on voluntary disclosure of businesses’
exposure to carbon-intensive assets to Our definition of green finance is
support better capital allocation.11 based on that used by the United
Nations Environment Programme6
In emerging market and developing and includes financing of sustainable
country (EMDC) economies, however, investments that has a positive
the story is different. Here, in many environmental impact. In addition,
cases, central banks have begun we also examine the way in which
to play an increasingly important EMDC central banks have dealt
role in addressing the challenges of with emerging environmental risk
climate change and environmental at both the prudential level (risks to
sustainability more generally. Central individual financial institutions) and
bank independence is not as strongly the macroprudential level (systemic
enshrined and central banks play a financial and economic risk across the
broader role in supporting economic whole domestic economy).
development and industrial policy
generally, usually cooperating closely A summary of our case studies is
with ministries of finance and other provided in Table 1.
relevant government departments.
This was the model that also applied in The rest of the report is laid out
advanced economies for much of the as follows. Section 2 introduces a
1935–1980 period, until the fashion for taxonomy for green central banking
inflation targeting emerged.12 policies and embeds them within
a historical and theoretical context.
It is also the case that EMDCs are more The main body of the report, Section
exposed to the immediate challenges 3, analyses case studies of green
of climate change, facing both greater central banking in some of the most
physical risks – more frequent, climate- important developing and emerging
change-related, severe weather events. market economies: Bangladesh, Brazil,
These countries also recognise the China, India, Indonesia, and South
need to rapidly adjust their economies Korea (covering just under half of the
on to a sustainable green-growth path world’s population). For each country,
for their future prosperity and energy we examine the role of the central
security. A recent estimate found that, bank and related public agencies in
excluding China, around 70% of global boosting green growth and mitigating
projected sustainable infrastructure environmental and social (E&S) risks.
investment needs ($3.5–4.0 trillion per In each case study, a concluding
year on average) will be required in section assesses the effectiveness of the
EMDCs.13 policies in achieving change. Finally,
8
TABLE 1. SUMMARY OF CASE STUDY FINDINGS

Bangladesh • Commercial banks and • There are lower equity • Issuance of E&S risk CB intervention
(Bangladesh non-bank financial margin requirements management guidelines successful:
Bank, BB) institutions (NBFIs) are for Environmental & to be incorporated in to
• Around 10% of the
required to allocate Social (E&S) favourable credit risk assessment
population is supported
5% of their total loan projects on banks’ lending.
by a green refinancing
portfolio to green
programme in regard to
sectors. • Banks and NBFIs are
solar home systems.
required to issue 10%
• There is a range of of CSR budgets to a
• Banks employ
green re-financing Climate Risk Fund.
mainstreamed E&S risk
lines subsidising green
management practises
lending, including to • Banks are also required
in bank lending through
renewable energy to educate borrowers
guidelines.
and energy-efficiency on environmental
projects. regulations.
• Less attention is given to
macroprudential policy.
• Banks’ green
management practices
are part of assessment
of supervisory
evaluations.
Brazil • Restrictions exist • Banks are required to • Detailed guidelines • Macroprudential and
(Banco do on lending in engage in E&S stress in place for the prudential policies
Brazil, BCB) environmentally testing and incorporate implementation of the appear to have been
sensitive areas in the E&S risk in to capital Social-Environmental largely effective.
Amazon. requirements in line Responsibility Policy
with Internal Capital (PRSA) by all financial • The majority of
• National Development Adequacy Assessment institutions authorised major banks are now
Bank (BNDES) is a Process (ICAAP)/Basel to operate by the incorporating E&S risk
major investor in green Accords Pillar 2. BCB sets central bank. in to their reporting
sectors. a general framework for and risk management
types of risk that should • Banks are required to strategies.
be included. build this in to their
governance structure • There is less evidence of
• Banks must submit an and collect data on whether this is affecting
annual report to BCB actual financial losses real economy lending.
outlining ICAAP for due to environmental
validation. damages for a period of
5 years.
China • The Chinese • E&S risk management is • Chinese green credit • Evidence says that by
(People’s Bank Development bank is a assessed on prudential, policy has been 2010 banks had begun
of China, PBC) major global lender for individual bank- and adopted by all relevant to reduce loans to
green energy. loan-based levels agencies, including polluting and dirty
the central bank, the energy projects and
• The China Green • The China Banking banking regulator, the to increase loans to
Finance taskforce Regulatory Commission securities regulator, the energy-efficiency
recommends (CBRC) has issued insurance regulator, following green credit
establishment of guidelines seeking and the Ministry policies and inter-
a China Ecological to repress credit to of Environmental agency coordination.
Development Bank carbon- and energy- Protection (MEP).
partially funded by PBC. intensive industries and
encourage lending to
green projects.
9

China • Preferential interest • PBC has collaborated • Evidence also says

(continued) rates are provided on with the MEP to that not all banks
green loans in Fujian create a national have adopted the
Province. database for disclosed guidelines and that at
information on credit, a local level the focus
• The central bank is administrative penalties, remains on growth over
considering green and information environmental concerns.
refinancing lines for on environmental
commercial banks. compliance of non- • A better definition
financial firms. Banks of green credit in the
are required to restrict 2013 guidelines may
loans to firms that have improved the
violate environmental situation – by 2015
compliance rules. most commercial
banks appeared to
• Voluntary green credit have adopted E&S risk
guidelines have been management policies.
issued by the CBRC
to encourage banks
to build E&S risk
governance standards
and to identify areas for
green credit
• PBC is also working on

the development of
green bond markets to
attract long-term capital
to green investment – it
has issued criteria for
projects that should
qualify.
India • Loans to renewable • RBI is considering • Industry-led voluntary • Lending to renewable

(Reserve Bank energy companies including environmental green lending guidelines energy projects has
of India, RBI) have been included in risks in the assessment mainly used. grown at a higher rate
the RBI’s Priority Sector of agricultural price than overall credit
Loans scheme; 40% of developments when • Green bonds have been growth in the 2009–2014
net commercial bank assessing financial and issued to support green period.
credit must support monetary stability. energy since 2015.
priority sectors. • However, the impact of
the RBI’s PSL has been
mixed because many
banks fall short of their
annual PSL targets and
there has also been
several non-performing
loans.
in the conclusion, we reflect on the of other state agencies, including

achievements and challenges of these national investment banks, ministries
policies. of finance, or environmental agencies
except where doing so provides a
This report focuses on the activities useful historical context for the role of
of agencies with a remit to manage central banks. Neither does this report
price stability, financial stability, and examine the emerging role of capital
credit creation and allocation by the markets in EMDCs, other than when
commercial banking sector. For the the central bank is directly involved
most part we do not analyse the role in influencing their development. In
10

Indonesia • ‘Roadmap for • OJK is considering • Voluntary green lending • No evaluation of

(Bank Sustainable Finance in including E&S risk in to guidelines have been the impact of green
Indonesia/ Indonesia 2015-2019’ its macroprudential issued. guidelines or other
Financial outlines ambitious plans framework as non- interventions.
Services to green commercial mandatory efforts have • Bank Indonesia and
Authority, bank lending. not proven effective in OJK have engaged • Little evidence exists
OJK) However, no concrete changing bank lending. in capacity building that commercial banks
interventions have workshops on E&S risk are engaging with E&S
been made yet despite and green lending with risk or green lending.
support for SMEs. the financial sector.
• Mandatory
requirements may
be needed to make
progress.
South Korea • Fiscal policy is mainly • The BOK has had no • The state-owned Korea • Financial regulation
(Bank of used to support green public discussions or Development Bank (KDB) and the greening of
Korea, BOK) finance including engagement with green began to invest in green the financial system
subsidies for low- financial policy or E&S industries in 2009 and are currently not at the
interest-rate loans risk management in has recently started to centre of Korea’s still
for energy-efficiency general or on a systemic promote green bonds. ambitious green growth
projects and renewable level. strategy, perhaps
energy. • The government is because the central
• The BOK has applied providing various bank has not been
E&S risk assessments to subsidies for green involved.
its loans. investment, including
green export credits. • Fiscal policy and state
development banks
• The public Export- have played a dominant
Import Bank of Korea role.
is the first financial
institution in Asia to
issue green bonds.
general, more attention has been given out of fashion in advanced economies,
to these institutions in the academic the financial crisis made it clear that
and policy literature. In contrast, most a simple laissez-faire approach to
of the studies of central banks are credit and capital allocation could
of single countries or are set in the lead to the build-up of systemic risk
broader context of green finance more with disastrous consequences. The
generally. embracing of interventions in credit
markets in advanced economies – via
This purpose of this report is to aid macroprudential policy in particular –
knowledge transfer between EMDC demonstrates that policy is opening up
central banks, ministries of finance, and to new approaches. Given the current
other relevant bodies regarding green failure of market-driven solutions
finance and environmental financial to generate sufficient investment to
risk and to share some of the lessons meet the challenge of climate change,
learned from EMDC central banks as well as the financial stability risks
with advanced economy central banks. posed by climate change, the activities
Whilst many of the types of policies of EMDC central banks could provide
discussed in this report – such as credit useful insights for how to better align
guidance and sectoral-specific capital the financial system with a low-carbon
and liquidity requirements – have fallen transition.
11
12
2. GREEN CENTRAL In developing our taxonomy of green

BANKING POLICY: instruments, we distinguish between
three different areas of central bank
A TAXONOMY activity:
Central banks in • Green credit allocation instruments

that have the objective of allocating
EMDCs have been credit to green sectors.
active in their response
• Green macroprudential instruments
to the calls to green the for safeguarding financial stability.
financial system and
growth. In many cases, • Other green central banking
activities, such as developing green
the policy instruments finance guidelines or setting up
they have used to green green bond markets.
the financial system and
2.1 GREEN CREDIT ALLOCATION
respond to systemic POLICY INSTRUMENTS
environmental risks Credit allocation or credit guidance
are adaptations of tools policies have historically played an
that have been present important role in developing and
emerging economies, especially in the
in developing countries 1950s, 1960s, and 1970s. They remain,
for at least the last 60 to a lesser extent, a widespread form
of financial control – or financial
years. These tools have
repression as it is termed in the
been recalibrated with mainstream economics literature –
a green focus, as well as exercised by central banks to guide
lending to prioritised sectors deemed
new instruments in the essential for economic development.
area of macroprudential More recently, these policies have been
regulation. designed to help achieve sustainable
and green growth. We outline four
different policy instruments that
involve the explicit direction of credit.
Targeted refinancing lines

Targeted refinancing lines offer
refinance for commercial banks at
preferred terms for specified asset
classes. By creating what is effectively
an ongoing subsidised loan rate, the
central bank incentivises lending into
these prioritised sectors. Targeted
refinancing lines have been a common
policy tool used by many central
banks in EMDC economies since the
1950s,14 but they have become less
prevalent since the 1980s. This policy
tool has mostly been used in countries
13
with underdeveloped secondary determining minimum credit quotas

bond markets and where there is a that have the objective of greening
lack of other refinancing options for growth by requiring commercial banks
commercial banks. to lend a specific percentage of their
overall lending to green projects.
The main criticism of targeted
refinancing lines and related loan- In contrast to other credit guidance
pricing instruments is the potential loss instruments where incentives are set
of control over the cash base,15 as well to guide lending to prioritised cause, in
as historical experience that differential the case of minimum credit quotas the
interest rates can lead to distortions central bank sets ‘hard’ quotas, thereby
in the financial system in the long potentially creating stronger market
run.16 A benefit, on the other hand, distortions than by creating incentives
is that by implementing preferential for banks to allocate their lending.
refinancing windows, the process of Priority sector lending programmes
loan origination stays with commercial have a long history in developing and
banks. Through refinancing lines, credit emerging economies. General lending
is extended at preferred terms but quotas used by the Bank of Japan
commercial banks still decide which and other Easter Asian economies
projects to lend to, as the default risk proved very successful17,18 in promoting
remains with them. economic development, but in other
cases there were more mixed results.16
Differential reserve requirements
Compulsory reserve requirements – In contrast, maximum credit ceilings
the share of deposits that commercial or quotas are used to limit bank
banks must hold vis-à-vis their assets lending to less economically desirable
– have been completely abolished in sectors or industries of the economy.
many advanced economies today, but Thus, in contrast to minimum credit
are still part of the policy framework quotas for lending to renewable energy
in EMDC economies. A green reserve projects, maximum credit quotas would
requirement policy would allow banks limit lending to carbon-intensive
to hold fewer reserves – which bear sectors. Currently this instrument
zero or low interest – against green is commonly used in advanced
loans. Again, the result would be to economies to suppress credit to certain
align the profitability of their lending sectors (in particular, the real estate
activities with the policy target of sector) following the financial crisis
greening finance and growth. This of 2007/2008; it is more commonly
instrument lacks a strongly repressive referred to as macroprudential policy.
attribute for which other forms of credit It is less often used in developing
allocation were criticised in the 1980s.16 economies where the need for growth
is stronger.
Minimum and maximum
credit quotas Central bank assistance to
Mandatory or minimum credit quotas development banks
require banks to allocate a fixed In developing and emerging
percentage of their loan portfolio to a economies, especially in Latin
specified sector, area, or cause. They America,14 central banks have
traditionally supported the proliferation
are also called credit floors, lending
of specialised financial institutions
requirements, and window guidance. by subscribing to their equity, buying
They are most often implemented in their bonds, or creating markets for
the form of a priority sector lending their bonds. Development banks to
programme, with the central bank help finance the green transition of the
14
economy and to overcome the absence central banks and regulators to guide
of long-term patient capital in the credit and more actively promote green
sector have been widely advocated19 growth and finance. To inform the
and the role of central banks in case studies which follow in Section
supporting development banks in this
3, we draw on Schoenemaker and
task has been discussed by, among
others Stern20 and the UNEP Inquiry.21 Tilburg3 to present a brief overview of
It is argued that the presence of macroprudential policy instruments as
development banks in EMDC markets part of our taxonomy of green central
reduces risk and helps leverage private banking policy.
capital. Furthermore, they can play a
market-shaping role by implementing Stress testing
green finance standards and by issuing A first step to evaluate and calibrate
green bonds that can be traded in green macroprudential policy
newly established markets. With
instruments is to stress test various
sufficient capital from governments,
these institutions can play an important financial instability scenarios based
role alone, but with central bank on, for example, a sudden re-pricing
financing their lending capacity and of carbon-intensive assets. So-called
legitimacy could be significantly carbon stress tests can be used to
increased. identify and quantify the exposure
of financial institutions to carbon-
2.2 GREEN MACROPRUDENTIAL intensive assets. Based on the identified
POLICY INSTRUMENTS vulnerabilities, capital buffers, risk
weights, and caps could then be set
Increasing environmental risk
accordingly to mitigate systemic risk
stemming from more frequent
and reduce the threat to financial
severe weather events has important
instability.
implications for financial markets,
especially for the insurance sector and Counter-cyclical capital buffers
therefore for overall financial stability. Counter-cyclical capital buffers are
In addition, more challenging carbon designed to reduce the financial cycle
emission targets, as well as expected and feedback loops in times of boom
stringent environmental regulations and bust. Regarding environmental
will necessitate tighter restrictions on risk, counter-cyclical capital buffers
carbon-intensive sectors and thereby could be used to mitigate potentially
lead to a re-pricing of certain carbon- adverse effects of the seemingly
intensive assets. The potential burst inevitable pricing-in of the so-called
of this so-called asset-price carbon carbon bubble in the wake of stricter
bubble is expected to generate systemic emission targets and environmental
risks and therefore has important policy. Increasing capital requirements
implications for macroprudential to respond to credit growth for carbon
policy (Bank of England’s response investment seems justified, if a systemic
to climate change). The term impact were expected.
macroprudential in this context refers
to the role of regulators to address and Capital instruments:
reduce systemic risk to prevent the leverage ratio by sector
macroeconomic costs associated with Assigning carbon-intensive assets
financial instability. higher risk weights to take into account
the fact that future environmental
Furthermore, some macroprudential policies might reduce their value is
policy tools also have allocative another risk-mitigating response
consequences that can be utilised by measure. Assigning higher or lower
15
risk weights according to the carbon Identification of systemically

intensity of the sector would also important financial institutions
give this instrument a credit-guiding (SIFIs) and capital surcharges
element by setting incentives for SIFIs (e.g. very large universal banks)
investors to disinvest from carbon- have been required to hold additional
intensive assets. Schoenmaker and levels of capital given the increased
Tilburg3 consider these instruments systemic risk they pose to economies.
appropriate for pricing in additional Exposure to carbon-intensive assets
carbon risk in the overall assessment of could be added to the selection criteria
risk and return. used to identify SIFIs.
Loan-to-value (LTV)/loan-to-income
2.3 OTHER GREEN CENTRAL
(LTI) caps
BANKING INITIATIVES AND
Loan-to-value and loan-to-income
ACTIVITIES
caps limit the amount of financing
extended to customers of commercial Green finance guidelines
banks to specific levels based on the In their capacity as financial market
value of the asset being purchased or regulators at the centre of the financial
the borrower’s earnings. Regarding system, central banks are in the
greening the financial system and position to develop green banking
growth, caps could be used to limit guidelines, such as mandatory or
lending to sectors or companies whose voluntary industry initiatives for
business models involve carbon- green bond guidelines, E&S risk
intensive activities likely to become management, or general green
unprofitable in the near future, given banking finance guidelines, either by
either new regulations or innovations creating them or by supporting them.
in green technology. In most EMDC economies, there
now exist either industry-led green
Large exposure restrictions (by finance guidelines or central-bank-
counterparty, sector, geographic) led policy initiatives. The former tend
Exposure restrictions based on the to be voluntary standards, while the
counterparty, the sector, or the latter tend to be mandatory. There are
geographic area are instruments that also cases where central banks have
limit exposure to certain high-risk supported industry-led initiatives by
assets and therefore restrict lending banking associations, thereby rendering
by financial institutions. The main them mandatory or quasi-mandatory.
objective behind the implementation
of this instrument in the context of Active development of
green finance is to limit exposure to green bond markets
carbon-intensive assets that would Central banks can take several
lose value in the event of a shock such steps to support the development
as the burst of a carbon bubble. In of financial markets and especially
addition, there is an allocative aspect of bond markets.22 With regard to
that is stressed in the literature and is developing green bond markets and
comparable to the effect of maximum encouraging the issuance of these
credit quotas. While creating caps bonds as a means of financing green
might be rather arbitrary, Schoenmaker projects, central banks and other
and Tilburg3 point out that this governmental agencies can issue
instrument would allow a certain green bond guidelines and define
amount of fine-tuning of lending criteria for projects that qualify as
restrictions. green bonds, the use of proceeds, and
16
standards for disclosure. Policy-directed

development banks have often been
the first financial institutions to issue
green bonds, thereby creating an initial
market for green bonds.
Research on green growth and finance

Central banks are uniquely positioned
to conduct research on green finance
and growth. With well-established
research departments and access to
market data, publications by central
banks have always played a central role
in conducting research in green growth.
Offering capacity building

workshop for bankers
Central banks can further support
the greening of the financial system
by offering workshops and seminars
for bankers on environmental risk
assessment and green finance. A lack
in expertise for assessing E&S risk is
especially seen as a general hurdle
for the further proliferation of green
lending.
Participation in the International

Finance Corporation’s Sustainable
Banking Network
The Sustainable Banking Network
(SBN) is a voluntary community of
financial regulatory agencies and
banking associations that promotes
sustainable finance and is hosted by
the International Finance Corporation
(IFC).
17
3. GREEN CENTRAL For each case study, the mandate

and objective of the central bank are
BANKING IN first discussed to assess the policy
PRACTICE: COUNTRY space under which the central bank
could develop measures for greening
CASE STUDIES the financial system. Secondly, the
major governmental actors in green
In this section, we financial policy are identified and
examine in greater depth inter-agency cooperation is explored.
The analysis of the country case
the green financial policy studies then moves on to investigate
initiatives of central banks activities and initiatives in the three
and related financial areas of green credit allocation policy,
green macroprudential policy, and
authorities in six EMDCs other green central banking policy.
– Bangladesh, Brazil, Initiatives in these three areas that do
not originate from the central bank
China, India, Indonesia, alone are also included. Finally, the
and South Korea – implementation and impact of the
drawing on the taxonomy described green policy initiatives are
assessed.
laid out in Section 2.
Our selection has been 3.1 BANGLADESH BANK
driven by the country’s Bangladesh Bank, the central bank
size (all have populations of Bangladesh, was founded in 1971
and has been known in its 45-year
over 50 million) and
history to be one of the world’s more
the availability of good interventionist central banks. The
quality information bank’s green central banking activities
focus on the three policy initiatives
on the central bank’s of green refinancing, green credit
activities regarding green quotas for loans, and green banking
finance and climate guidelines.
change. The case studies Mandate and objectives

draw on an update of The main objectives of Bangladesh
Bank are laid out by the Bangladesh
existing research in Bank Order in 1972, mandating
some cases, whilst in the central bank to maintain, first
others new material is and foremost, price stability of the
Bangladesh Take (BDT), but also
presented. to support economic growth and
development. The former governor of
Bangladesh Bank, Atiur Rahman, has
expressed that in his interpretation,
it lies within the bank’s mandate to
support economic growth, poverty
eradication, and employment
generation. He has defended the
bank’s ‘developmental approach to
central banking’23 and the significance
18
of environmental issues for the central are required to allocate 5% of their total
bank.24 Bangladesh Bank has also loan disbursement/investment to green
stated that it is within its mandate sectors.27
to green the financial system in an
economy that is highly vulnerable to The use of green refinancing has
the physical effects of climate change; it been in place for many years. Green
has been engaged in climate mitigating refinancing lines were launched in 2009
policies since 2011.25 The overall as a revolving refinancing scheme to
responsibility for banking regulation promote green finance amounting to
lies also with the central bank as stated BDT2 billion (US$25 million) under
by the mandate. which Bangladesh Bank refunds
commercial banks at a reduced interest
Inter-agency cooperation and shared rate for loans extended in six specific
responsibility for green policy products.27 The initial focus of the
Overall, Bangladesh Bank has played refinancing lines has been on solar
a central role in taking the first steps energy, biogas, and waste-treatment
to greening the financial system projects but has subsequently been
and supporting sustainable growth. expanded and covers 47 items today,
Cooperation between Bangladesh Bank which are eligible for preferential
and other governmental agencies or rediscounting at the central bank. These
regulators as well as with the financial green refinancing lines are part of a
and microfinance industry is limited broader re-financing policy initiative
and remains an area for further which includes priority sectors such as
expansion.23 Bangladesh’s capital agriculture and garment exporters.ii
market regulator, the Securities and
Exchange Commission, has not been In September 2014, Bangladesh
publicly active in this area yet. Bank initiated a further green credit-
refinancing scheme funded through the
Green macroprudential policy excess liquidity of Sharia-based banks
The central bank has not yet and non-banking financial institutions
explicitly addressed the issues of by identifying 50 items eligible for
green macroprudential policy as refinancing at preferred terms under
a response measure to systemic this scheme.29 In February 2015, the
E&S risk. However, according to a bank’s overall refinancing scheme was
report by the International Finance extended with a BDT40 billion (US$500
Corporation,26 Bangladesh Bank million) refinancing window of which
has initiated macroprudential policy BDT16 billion (US$200 million) is
instruments, such as lower equity earmarked for refinancing green
margin requirements for socially and initiatives, such as projects that aim
environmentally favourable projects in at improving water and energy usage
order to incentivise green initiatives. efficiency in the textiles industries.23
Green credit allocation policies The most recent sustainable finance

Bangladesh Bank has created initiative by Bangladesh Bank was
refinancing lines at preferential terms the announcement of the Green
for green loans and uses restrictive Transformation Fund (GTF) in February
minimum green credit quotas. With 2016 under which it creates another
regard to the latter, from January 2016 long-term refinancing window worth
onward, commercial banks, as well as BDT16 billion (US$200 million). This
non-bank financial institutions (NBFIs), fund is aimed at export-oriented textile
ii.
The Asian Development Bank (ADB) also offered another refinancing programme in Bangladesh in
2012 that refinances US$50 million worth of loans and targets brick kilns with the aim of making them
more sustainable and efficient.28
19
and leather industries with the purpose A further initiative was concerned with
of greening this part of the economy the creation of Climate Risk Funds to
by providing access to funds in foreign be used in emergencies due to severe
currencies that can be used to import weather events. Banks and NBFIs
machineries for environmentally were asked to allocate at least 10% of
friendly projects.27 their CSR budget to the fund by either
providing grants or lending at reduced
Other green central banking policies interest rates.27 Financial institutions
Greening the banking system became were also asked to introduce green
a central issue for Bangladesh Bank marketing practices and online
starting in 2010.30 Bangladesh Bank banking, and to disclose all green
issued Policy Guidelines for Green banking activities on their websites.
Banking25 in February 2011 requiring
commercial banks and NBFIs to take The second phase, which was due
environmental considerations into to be completed by December 2012,
account when providing new loans focused on requiring banks to design
for projects or working capital. The policy strategies for environmentally
comprehensive guidelines also address sensitive sectors of the economy and
corporate social responsibility (CSR), to define specific green targets for
and ask banks to implement CSR at green financing and reducing loans to
their highest corporate level. NBFIs are carbon-intensive industries, as well as
also asked to consider environmental allocating a fixed percentage of loans
factors when engaging with borrowers, to green projects and introducing
and particularly to evaluate the green financial products. In addition,
environmental or social impact of banks were required to introduce green
projects. branches, as well as to further improve
in-house environmental management.
The Policy Guidelines for Green
Banking included a three-phased Banks were also required to develop
implementation strategy. In the first specific E&S risk guidelines for
phase, which had to be completed by the standardised assessment and
the end of 2011, a central issue was management of general and working-
the requirement for commercial banks capital loans. Educating bank clients
to include E&S risk management into on environmental regulation, as well
their existing credit risk assessment as enhanced reporting and disclosure
methodology for prospective standards through mandatory
borrowers. With the broader aim of publishing of independent Green
mainstreaming E&S risk assessment, Banking and Sustainability Reports,
banks were asked to include were also part of the second phase.
environmental risk into all checklists,
audit guidelines, and reporting formats. The third phase focused on the
Furthermore, banks were required introduction of innovative green
to initiate ‘in-house environment financial products and actively
management’ and to issue a ‘Green offering support for green projects
Office Guide’ to reduce electricity and on further enhancing disclosure
and paper usage. Banks were also and reporting standards by requiring
asked to preferentially extend loans to banks to publish independent Green
environmentally friendly businesses Annual Reports to be verified by an
and energy-efficient industries. independent agency.
20
Additional support is offered by the 2010 stood at BDT5 million (US$62

central bank through the publication 000) and rapidly increased to BDT506.1
of Guidelines on Environmental Risk million (US$6.29 million) by 201332
Management, as well as Environmental (Figure 1).
Due-diligence Checklists, to enable
commercial banks to appropriately At the time, 9 different categories
assess risk and finance environmentally were eligible for refinancing, covering
sensitive projects.23 Throughout the renewable energy, energy efficiency,
implementation phase, banks were solid waste management, liquid waste
asked to report on a quarterly basis to management, alternative energy,
Bangladesh Bank on their initiatives fire burnt brick, non-fire block brick,
and activities. recycling and recyclable product,
and miscellaneous. From FY 2015
Bangladesh Bank also designed a (BDT393.5 million (US$4.89 million))
mechanism to incentivise banks’ to FY 2016, total annual refinancing
compliance with the implementation increased strongly by over 130% to
of these guidelines by offering them BDT919.7 million (US$11.4 million)
preferential treatment in three different due to the introduction of a new
regards. First, through taking green category eligible under the scheme
management practice into account called Green Industry that alone
when computing the annual Capital received BDT400 million (US$5 million)
Adequacy, Asset Quality, Management, in refinanced funds.27 The cumulative
Earnings, Liquidity, and Sensitivity amount refinanced at preferential rates
to Market Risk (CAMELS) rating, a under the green refinancing scheme up
supervisory tool according to which to June 2016 stood at BDT2.8117 billion
banks are assigned a rating reflecting (US$35 million).27
their compliance with regulation
and overall ‘soundness’.31 Second, by Regarding the composition of the
publicly announcing the ten banks underlying projects for which loans
that were most active in implementing are refinanced under the scheme,
green banking practices on an annual data from FY 2012 and FY 2016 show
basis. And, third, by taking green growing diversification of project
banking activities into account when categories over time. In FY 2012, 52%
granting permission for new bank of refinanced loans financed solar
branches. assembly plants and 27%, the second-
largest share, went into biogas. Today
Implementation and impact (FY 2016), through a gradual shift over
Bangladesh Bank’s annual reports the years and the introduction of a
and independent research offer new category, Green Industries make
some insight into how successful the up the biggest share at 43%, financing
implementation of the different policy efficiency improvements in brick-kiln
initiatives on green finance have been. technology make up the second-largest
share with 19% and Solar Home
With regard to the preferential green Systems is third largest at 12%.
refinancing scheme, the 2015 annual
report provides a dedicated chapter Exploring the question of how many
on sustainable banking, and updates banks had implemented the green
on the cumulative amount that guidelines in 2013,31 we found that out
was refinanced annually under the of 56 banks, 45 banks had formulated
scheme initiated in 2009. The amount policy for green banking, 46 had
refinanced in the financial year (FY) formed a green banking unit, and 41
21
FIGURE 1. TAKE-UP OF BANGLADESH BANK'S GREEN REFINANCING LINES

1,000
900
800
700
Millions of BDT
600
500
400
300
200
100
0
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Source: Bangladesh Bank Annual reports.
had introduced a Green Office Guide. On Conclusion

E&S risk management and compliance Bangladesh Bank has clearly played
with green banking guidelines, almost a major role in helping to green the
all banks had established green Bangladeshi banking system and
banking units and policies by 2015.23 therefore the financial system overall.
Bangladesh Bank announced in Its green refinancing policy has been
2016 that all banks were conducting successful and its involvement in
environmental risk rating.27 several green policy initiatives goes
well beyond rhetoric as it monitors
Environmental risk rating their implementation and publicly
standards require banks to disclose announces results regularly in the
environmental due diligence carried annual reports, where it has introduced
out in the loan origination process a dedicated chapter on sustainable
for environmentally sensitive sectors. banking. While the central bank has
In FY 2014, banks financed 30,540 put strong allocative measures in
projects worth BDT 1,580 billion place to ensure that green projects are
(US$19.6 billion) after assessing an sufficiently financed, it has also helped
environmental risk rating.32 In FY 2016, mainstream E&S risk management
these numbers increased to 52776 rated practices through the green banking
projects of a combined disbursed value guidelines. The only area where the
of BDT 2,243 billion (US$27.9 billion).27 central bank appears to have paid less
attention is green macroprudential
In regard to assessing the actual policy and the extent to which there
impact on greening the economy, are systemic risks to financial stability
UNEP Inquiry (2015) attests the green posed by climate change.
financing efforts ‘considerable’ success
and stresses that by the end of 2014,
15.5 million people or around 10% of
the population had been reached by
the programme for refinancing solar
home systems.
22
3.2 BANCO CENTRAL DO BRASIL system and shares responsibility with

the Brazilian Securities Commission.
Historically, the central bank of
The Brazilian Monetary Council,
Brazil, Banco Central do Brasil (BCB),
together with BCB, is responsible for
has been engaged in a variety of
implementing the Basel Accord and
interventionist policies to support
detailed regulation.
economic growth. Today, regarding
greening the financial system, the
Green macroprudential policy
bank’s approach is less interventionist
BCB is among the first central banks
and strategies for greening growth
to issue regulation that addresses E&S
and finance are industry-led in some
risk on a systemic level and requires
policy areas and policy-supported
commercial banks to act accordingly in
in others. However, the central bank
the process of assessing and calculating
has been very active in the field of
capital needs.34
green prudential and macroprudential
policy, playing a key role in getting In July 2011, BCB issued a document35
commercial banks to address E&S establishing procedures on commercial
risk via guidelines and sectoral capital banks’ Internal Capital Adequacy
requirements. Assessment Process (ICAAP) and
requiring them to take risk of exposure
Mandate and objectives
to environmental damage into account.
The central bank was established as
ICAAP, a result of Pillar 2 of the Basel II
an independent federal body in 1964,
accords, was established in June 201136
under Law no. 4,595.33 In Brazil, the
and became part of the mandatory
tri-partite National Monetary Council
banking regulation, requiring banks to
(NMC) – consisting of the Minister
assess the sufficiency of capital held by
of Finance; the Minister of Planning,
the institution.
Development and Management; and
the Governor of the Central Bank of Building on this, BCB35 requires a bank
Brazil – is responsible for designing to evaluate and consider risks to which
overall monetary and credit policy the bank is exposed during the year,
aimed at monetary stability and the via stress testing, and to demonstrate,
promotion of economic and social in the process of assessing its capital
development. The central bank is needs, that it has covered the risk
Executive-Secretary of the NMC and arising from exposure to social and
organises and advises the sessions. environmental damages, alongside
other types of risk. The BCB sets the
The Constitution of the Federative
general framework, listing the types of
Republic of Brazil (2010) states that
risks that a bank has to consider when
the financial system, which the central
deciding itself how much additional
bank regulates and supervises, should
capital to hold after submitting its
promote the balanced development
ICAAP for independent validation.
of the country, and serve the
Banks subject to ICAAP regulation
collective interest, thereby implying a
are also required to submit an annual
sustainability objective for the central
report to BCB, outlining how they
bank.
assess and calculate risks, explore
implications for capital adequacy, and
Inter-agency cooperation and shared
furthermore, consider the exposure
responsibility for green policy
to social and environmental damages
Most green banking policy originates
generated by the institution’s
from BCB, which is also the main
activities.37
regulatory agency for the banking
23
Green credit allocation policies This publication establishes detailed

Directly allocating resources to green guidelines for the implementation
projects has not been part of BCB’s of the Social-Environmental
approach to promoting green finance Responsibility Policy (PRSA) by all
and growth. However, through financial institutions authorised
environmental regulation, the central to operate by the central bank.
bank is repressing funding for some Furthermore, it requires listed
specified industries and areas. Starting institutions to take into account the
in 2008, it issued regulation restricting degree of exposure to E&S risk of
lending, as well as all other kinds of the activities and operations of their
support to companies that operate in institutions.38
certain environmentally vulnerable
geographic areas such as the Amazonas The resolution specifies the key points
region (Resolution 3,545/2008, that must be part of the PRSA for
Resolution 3,813 Resolution 3,896/2010 each financial institution. Institutions
and Resolution 4,008/2011). are required to establish guidelines
on strategic actions related to their
It should also be noted that Brazil has governance, including for socio-
a major publicly owned investment environmental risk management.
Bank – the Banco Nacional de Regarding internal governance, the
Desenvolvimento Economico e Social resolution calls on banks to set up
(BNDES; National Bank of Social structures to monitor the compliance
and Economic Development), which with rules established under the PRSA,
has become a major funder of green to evaluate the effectiveness of the
sectors. According to the Bank, its applied measures, to check whether
disbursements for the green economy E&S risk management practices are
and climate and environmental appropriate, and to identify potential
protection sectors had increased deficiencies in the applied measures.
10-fold between 2000 and 2013,
amounting to over $US7 billion, of With regard to the specifics of
which half was supporting renewable managing E&S risk, the resolution
energy projects.19 defines E&S risk as the ‘possibility
of occurrence of losses for financial
Other green central banking policies institutions due to environmental and
The second key policy initiative of social damages’, and requires banks
BCB aiming at greening the financial to embed this notion of risk into their
system and growth is the promotion broader risk assessment framework
of green banking guidelines. This and to evaluate E&S risk and potential
started as a voluntary market-led negative environmental impact of new
initiative by the Brazilian Banking financial products and services, as well
Association (FEBRABAN), which as to collect data on actual financial
was first adopted in 2008 by five losses due to environmental damages
Brazilian state-owned banks and for a period of 5 years.38
then in 2009 by commercial banks. In
2014, BCB then issued the mandatory Regulated institutions were required
guidelines Social and Environmental to implement ICAAP by February
Responsibility for Financial Institutions, 2015 and all other institutions by July
thereby announcing the National 2015. They were furthermore asked
Monetary Council’s decision to to appoint a director responsible for
require institutions to incorporate compliance with the PRSA, to formalise
E&S risk factors into their governance internal and external disclosure in
frameworks.38 regard to PRSA, and to make the
documentation of the process available
to BCB.38
24
Implementation and impact disclosure levels in regard to PRSA of

The Brazilian banking federation, the nine largest banks in the Brazilian
FEBRABAN34 reports that most financial system and investigates
Brazilian banks have developed whether there are differences in the
comprehensive policies for level of disclosure depending on
incorporating E&S risk for new the type of listing of the financial
clients, including a credit limit institution. The report concludes that
evaluation, as well as with regard to 70% of financial institutions include
the loan origination and monitoring information on the PRSA subcategory
process. Banks ask their customers and that E&S risk management
for documentation in regard to practices were present as a subcategory
environmental and social aspects, in 58.33% of reports. There was no
such as environmental licencing, and significant difference in reporting on
scrutinise projects in regard to so-called these categories, whether institutions
slave labour black lists.34 On banks’ were private or publicly controlled or
compliance with regulation based listed.
on Resolution 4,327/2014, the report
notes that all institution investigated Conclusion
for a survey have an E&S risk analysis BCB would appear to be at the
approach in place.34 international forefront of green
prudential and macroprudential policy
The study furthermore estimates that implementation. It has successfully
in 2013, out of the BRL2,715 billion mainstreamed E&S risk management
(US$859 billion) that form the balance through binding regulation and by
of credit operations in the Brazilian requiring banks to conduct stress
financial system, BRL170.98 billion tests, simulating the impact of
(US$54.13 billion) were subject to E&S environmental damages on their
risk policies and processes. On a micro balance sheets, and then assessing
level, the survey shows that BRL37.347 capital adequacy based on E&S risk
billion (US$12 billion) in contracted exposure. Whilst the dangers of relying
amounts and BRL31.396 billion (US$10 on banks’ own assessment of risk in the
billion) in disbursed amounts were implementation of capital requirements
allocated to renewable energy, energy was strongly illustrated during the
efficiency and sustainable transport, financial crisis, BCB is now in a much
but also states that collected data does stronger position to see the emergence
not represent the total industry and of systemic risks across the economy
that these are therefore conservative resulting from exposures to brown
estimates. sectors than most other central banks.
While the BCB’s Annual Report does In the case of BCB’s initiatives for
not feature any specific information on greening the financial system, it
green finance, E&S risk management, remains difficult to assess the impact
or compliance with green banking these policies have had on lending
guidelines, the Financial Stability Report practices and the real economy. An
201737 includes a chapter researching obvious step in rectifying this would be
the disclosure and reporting practices for BCB to report on green lending and
of commercial banks in regard to the credit flows in its annual report, as do
implementation of the PRSA and E&S some of the other central banks in this
risk in general.iii The report analyses review.
iii.
Resolution 4,327, BCB requires banks that are subject to ICAAP and whose assets and balance sheet
is therefore larger than BRL100 billion to disclose PRSA practices.
25
3.3 PEOPLE’S BANK OF CHINA Inter-agency cooperation and shared

responsibility for green policy
Established in 1948, the People’s
In China, initiatives for greening the
Bank of China (PBC) has become
financial system and growth are subject
a central agent in mainstreaming
to close dialogue between different
green finance in China by working
governmental institutions. Prior to
together with other governmental
the cooperation between different
organisations on various measures to
governmental agencies, which started
develop comprehensive green banking
around 2007, individual departments
guidelines, as well as internationally
or ministries, such as the PBC or the
through the cooperation with the
Ministry of Environmental Protection
UNEP Inquiry and with other
(MEP), launched relevant green
governments under the G20.
policy initiatives. The joint publication
Mandate and objectives of the Opinions on Implementing
The PBC draws its legal status as Environmental Protection Policies and
China’s central bank from the Law of Rules and Preventing Credit Risk, by the
the People’s Republic of China on the PBC, the MEP and the China Banking
People’s Bank of China,39 adopted in Regulatory Commission (CBRC) in July
1995 and amended in 2003. The law 2007 marks the starting point of wider
includes, as a first objective, financial inter-agency cooperation. The multi-
stability and enhanced macroeconomic agency cooperation involved in the
management, in addition to preventing document gave it powerful impact and
and mitigating financial risk and authority.41
thirdly, the overreaching objective to
As outlined by Aizawa and Yang,42
maintain price stability and thereby
the three agencies worked together
promote economic growth. The strong
on the green credit initiative by
emphasis on financial stability and risk
taking formal responsibility for their
would appear to provide policy space
individual fields and by augmenting
for the inclusion of E&S risk.
their individual tasks through close
The PBC is required to implement cooperation among each other. The
the orders of the State Council,39 a PBC took on the role of developing
paragraph that is widely interpreted green financial information systems
as enabling the government to and took the lead in developing new
issue legislation with far-reaching green financial products. The focus of
policy initiatives that can also the MEP has been on the development
involve the central bank,40 which is of information on the environmental
formally independent of government performance of firms. The CBRC is
intervention in performing its responsible for guiding banks towards
functions. Regarding policy complying with environmental
implementation instruments, the standards of firms as a separate
PBC is mandated to use reserve criterion in the loan origination
requirements, the central bank base process and credit review process. It is
interest rate, rediscounting, lending, also tasked with enhancing E&S risk
and open market operations, as well management practices by encouraging
as other instruments that are specified training for bankers and by helping
by the State Council. It therefore has a to establish E&S risk assessment
wide range of tools at its disposal. The organisations.
PBC is also the financial system’s main
regulator.
26
Responsibility for financial regulation Green credit allocation policies

in China lies with the PBC as the Direct intervention and the guidance
overall financial regulator, the China of credit has not been at the centre of
Securities Regulatory Commission the PBC’s green finance and growth
(CSRC) that serves as main regulator strategy. However, the China Green
for the securities industries, the CBRC, Finance Taskforce’s recommends
and the China Insurance Regulatory the creation of a China Ecological
Commission (CIRC) that oversees the Development Bank which would
insurance sector. The relation between issue green bonds and asset-backed
these four agencies and their close securities on a large enough scale
working relationship was further to initiate trading in green finance
formalised in 2014 by the State Council markets.45 The report recommends
General Office, stating that the PBC, that the PBC could provide initial
the CBRC, the CSRC, and the CIRC low-interest equity funding.45 It has
should work closely together with also been reported that the PBC is
other relevant government agencies to already investing into policy-directed
develop in coordination environmental investment vehicles.40,46
policy.41
The Chinese Development Bank (CDB)
International initiatives, in which has also been playing a major role
especially the PBC has taken part, in supporting green credit, making
include the Green Finance Task Force available almost CNY >>>>> ($50
that was set up by the central bank billion) in credit lines for Chinese
in cooperation with UNEP Inquiry wind and solar energy companies and
to develop a plan for the promotion another CNY >>>> ($US30 billion) for
of green finance in China and the clean energy activities19
Green Finance Study Group that was
launched under China’s Presidency of Further initiatives on credit allocation
the G20 and works in cooperation the are the CBRC’s Guidance on Credit
United Kingdom and UN Environment. Provision to Energy Saving and Emission
Reduction, launched in 2007. This seeks
Green macroprudential policy to repress credit to carbon- and energy-
While the PBC has a strong mandate intensive industries and encourage
for maintaining financial stability, lending to green projects. On a local
most green finance initiatives thus level, the Guidelines on Financial Support
far approach the issue of E&S risk for Energy Conservation and Emission
management on prudential, individual Reduction in Fujian involved preferential
bank- and loan-based levels. Having interest rates and prioritised credit
said this, according to Volz43 the Green support measures to reduce carbon
Finance Committee established by emissions.47 According to Alexander,48
the PBC in 2015 also developed the PBC is also considering using its
environmental stress testing for the financing operations to make short-
banking sector to engage with the term liquidity available to commercial
issue of climate or green policy-related banks for green projects.
systemic risks.
Other green central banking policies
Furthermore, the PBC is considering The first initiatives engaging with the
adding ‘banks' qualified green credit issue on environmental protection
into collateral for monetary policy and credit in China were launched in
operations and to include institutions' the 1980s by the MEP and the PBC.49
green credit performance in the central However, the most comprehensive
bank's macroprudential assessment’. 44 green finance initiative to this day
27
has been the Green Credit Policy, These voluntary recommendations

launched in 2007 addressing all encourage banks to adopt E&S risk
three sectors of the financial system, governance standards and to increase
including banking, securities, and support for green and low-carbon
insurance. In 2006, in a first step, the projects by asking banks to identify
PBC created a countrywide credit priority areas for green credit. The
database for disclosing information document asks banks to customise the
on credit, administrative penalties, as credit granting process and to develop
well as information on environmental criteria for the dynamic assessment and
compliance of firms. In July 2007, classification of client E&S risk and to
against the background of rising energy use this information for, among other
intensity and pollution in the industrial areas, credit ratings.51 A shortcoming
sector, the PBC, the MEP (SEPA, at of the guidelines is the lack of a clear
the time) and the CBRC jointly issued definition of green credit.47
Opinions on Implementing Environmental
Protection Policies and Rules and The PBC has also been involved in the
Preventing Credit Risk, thereby formally development of a green bond market.
launching China’s Green Credit Policy. Following the recommendation of
the Green Finance Task Force (PBC &
With the overall aim of reducing credit UNEP 2015), which encourages the
to high-polluting, energy-intensive PBC, the CBRC, and the CSRC to issue
firms and towards greener projects, industry guidelines on green bonds,
the document recommended banks the PBC established the Green Finance
to include environmental compliance, Committee (GFC) to investigate
as well as E&S risk assessment as how to promote green bond finance
criteria to be considered in the loan in China.52 In accordance with the
origination process.47 The initiative recommendations of the GFC, the
furthermore prohibits banks from PBC issued a notice in December 2015
lending to firms blacklisted by the MEP introducing the first official green bond
for environmental violations, as well guidelines in China, providing financial
as to projects that violate other green institutions with channels for debt
regulation,50 thereby strengthening financing to support green projects.53
cooperation between environmental The notice also includes a catalogue
protection and the allocation of credit. of projects supported by green bonds,
outlining criteria for projects and loans
To enhance the disclosure and to qualify as green bonds, as well
availability of environmental as guidelines for the management
information, the PBC collects structure and the disclosure of
information on environmental proceeds.
violations in the corporate sector
and provides Local Environmental In January 2016, the National
Protection Bureaus. This information Development and Reform Commission
is integrated into the credit record (NDRC) issued its own less-detailed
system and the CBRC is tasked with green bond guidelines because it lies
overseeing commercial banks’ practice within the agency’s responsibility to
in applying the information to restrict regulate corporate bond issuance.52 The
loans to violators.42 corporate bond market is substantially
smaller than the interbank bond
In 2012, the CBRC issued Green Credit market, which is regulated by the PBC
Guidelines51 along with a monitoring and accounts for 93% of outstanding
framework for their implementation. bonds in China.
28
A further area where the central bank Overall, by 2010, banks had begun to
has been active is the organisation of reduce loans to high-pollution and
capacity-building workshops as well high-energy projects and increase
as conducting further research. The investment into energy-efficient and
MEP, the PBC, and the CBRC, starting environmentally friendly projects.
in autumn 2007, began to offer green These activities were already reflected
finance training workshops for the staff in quantitative terms in the Social
of governmental agencies, as well as for Responsibility Report of China’s Banking
bankers, thereby also involving foreign Sector, which was published by the
consultancy firms and experts from the China Banking Association in 2008.42
IFC.42 In 2007, 2.7% of the total bank loans
of the 53 banks reporting their lending
Implementation and impact to the China Banking Association
The collaboration between the PCB were allocated to 2,715 green projects,
and the MEP to share information amounting to CNY341.1 billion
on the environmental performance (US$51.3 billion). In 2008, the same
of companies and make it accessible sample of banks had allocated CNY371
to commercial banks would appear billion (US$55.8) or 3.11% of their total
to have been a success. By 2010, the lending, to 2,931 green projects.
database included 40,000 entries on
environmental violation and, by 2012, By 2011, Aizawa54 concluded that
the database had information on accessibility to environmental
penalties for 600 million individuals compliance data had been enhanced;
and 16 million firms in China, with local and provincial governments,
information provided and added to the as well as the financial sector,
database by the MEP.50 Aizawa and were actively participating in the
Yang42 reported that banks are actively implementation process; and
using the system to restrict loans to partnerships with the international
certain enterprises. community, as well as collaboration
with the media had been strengthened.
The overall positive response of the
financial sector to the Green Credit In a more critical account, Zadek and
Policy is perhaps unsurprising given Chenghui49 describe how adherence
the involvement of central, provincial, to the green credit guidelines varies
and all major regulatory agencies, such within the banking community.
as the MEP, the CBRC, and the PBC. Citing the Policy Research Center
These agencies took steps to coordinate for Environment and Economy, an
the implementation with cities and institution affiliated to the MEP, and
provinces, leaving the financial sector referencing its 2013 China Annual
no other choice than to accept the Green Credit Report, it ranks the top
plans. Aizawa and Yang42 observe 50 banks in China according to their
that the early response measures by adherence to the green policy measures
the financial industries focused in and concludes that out of the 50 banks,
particular on the two areas of internal only 12% had fully implemented the
systems, data collection on instances green credit guidelines. Furthermore,
of loan restriction and the allocation of 42% did not sufficiently, or rather
credit to environmentally friendly green had only superficially, adopted green
projects. Several banks also announced policy measures and 18% had not
that they had begun to set up internal provided any data on green policy
units to oversee the implementation of implementation at all.
the green policy measures.
29
The International Institute for On a more general note, it would

Sustainable Development (IISD) and appear that most commercial banks
the Development Research Center of had adopted E&S risk management
the State Council (FRI DRC)47 report practices by 201548 and that green
that the national strategy for greening finance has also been implemented
growth and finance has not been into the overall environmental
effectively implemented in financial economic policy. With regard to the
policies and that local governments potential impact of the PBCs green
still regard economic growth as bond guidelines, the Research Centre
more important than environmental for Climate and Energy finance
compliance. The report claims that estimates that green bonds valued at
local governments pressure banks and CNY300 billion (US$45 billion) will be
regulatory agencies to disregard the issued annually in China by 2020.52
environmental regulation compliance
criterion when granting allowance Conclusion
for initial public offerings (IPOs). As In international comparison, China’s
proof, the report references data on approach to greening the financial
the approval rate of IPOs by provincial system and the wider economy is
environmental authorities, which was one of the most comprehensive and
at 100% at the time. ambitious of the six countries studied.
Green finance has been promoted
A point of ongoing discussion had through impressive coordination of
been the shortcoming of the 2012 different government bodies that
CBRC’s Green Credit Guidelines have each addressed their areas of
to define green credit.47 However, responsibility but worked closely
in 2013 the CBRC issued the Green together on implementation, thereby
Credit Statistics System that outlines a initiating a broad approach that
comprehensive definition and classifies addresses both credit and capital
in its appendix green credit as loans markets and all levels of governance.
extended to 12 different categories, Most green finance policy initiatives
among them matters of environmental stress both the reduction of emissions
protection, such as water saving and through the restriction of funding for
environmental protection, conservation, certain parts of the economy, and the
ecological restoration and disaster provision of loans to finance the green
prevention, and waste treatment infrastructure.
and pollution prevention, as well as
categories for new green developments Some concerns remain about the
such as renewable and clean energy effectiveness of implementation
and green traffic and transportation47. of policies, in particular at local
government level. It is encouraging
Regarding the insurance sector and that the CBRC issued the Green
green insurance, the critique remains Credit Statistics System in response
that the definition of green insurance to shortcomings in the definition of
in China is narrow in international green credit. This demonstrates that the
comparison and falls short of including transition to green finance is going to
climate change and long-term E&S be somewhat of an ‘exploratory process’
risk because it mainly focuses on that develops over time.
environmental pollution liability
insurance.
30
Another open question is whether the Inter-agency cooperation and shared

PBC, with its strong financial stability responsibility for green policy
mandate, is considering E&S risk as a In India, there have been numerous
systemic threat to financial stability. climate-change-related environmental
initiatives by various governmental
3.4 RESERVE BANK OF INDIA agencies addressing a wide range
of issues.57 However, with regard to
Historically, the Reserve Bank of greening the financial system, the
India (RBI), established in 1935, has RBI has taken the lead, especially
taken an interventionist approach to through the allocation of credit to
credit allocation focusing on priority environmentally friendly or other
sectors but has also supported the green projects. Regarding green bond
development of capital markets for market initiatives, the RBI has worked
the provision of credit. Over the past in cooperation with the Securities
decade and regarding greening finance and Exchange Board of India (SEBI),
and growth, the RBI has maintained India’s security regulator. There
a dual approach by guiding credit to has also been cooperation between
priority sectors but also relying on national development banks and
industry-initiatives for green finance international development agencies
guidelines. in the area of green finance, such as
the cooperation between the Small
Mandate and objectives Industries Development Bank of India
The Reserve Bank of India Act, issued (SIDBI) and the German Corporation
in 1934, amended up until 2016, for International Cooperation on
mandates the RBI with the objective developing National Voluntary
of maintaining price stability while Guidelines on Responsible Finance for
keeping in mind the objective of financial institutions in India.
growth.55 This is not dissimilar to
many advanced economy mandates Green macroprudential policy
but the RBI has interpreted ‘growth’ There has been no mention of green
as providing it with the policy space macroprudential policy initiatives in
for much more interventionist India thus far. However, the RBI is
policy stances. With regard to the considering including environmental
environmental responsibility of risks in the assessment of agricultural
the RBI, the deputy governor K.C. price developments when assessing
Chakrabarty, has voiced his opinion on financial and monetary stability.58
environmental issues not being part
of a central bank’s primary concerns, Green credit allocation policies
which are primarily price stability, The bank’s Priority Sector Lending
growth, and financial stability, but Programme (PSL) has the objective of
admitting that while there might not be allocating credit to vulnerable sections
a direct impact of such issues, indirectly of society59 and is based on the Banking
and in the long term, environmental Regulations Act from 1949, which gives
questions have an impact on a the RBI the legal grounds to intervene
central bank’s primary objectives.56 in commercial banks’ lending practices
Furthermore, the RBI has the regulatory and the allocation of credit. The PSL
responsibility for private sector banks has traditionally focused on enabling
and shares oversight over public banks access to finance for agriculture,
with the Ministry of Finance. infrastructure, education and micro,
small, and medium enterprises
(MSMEs). Through different measures
of banking regulation and guidelines,
31
and by setting sector-specific interest For individual household borrowers,

credit quotas, the RBI ensures that 40% the limit for eligible renewable energy
of commercial bank lending flows to loans has been set at INR1 million
priority sectors.60 (US$15,600). The revised guidelines
also establish updated practices for
In 2012, the RBI reviewed the priority monitoring the implementation of the
sectors and concluded that access to PSL sectoral targets. The document
clean energy, as a critical necessity promises more frequent checks of
for households, should be added. PSL compliance by introducing
It mandated that loans for off-grid quarterly checks instead of the annual
renewable energy solutions, including checks previously in place. The RBI
solar and other clean energy solutions, furthermore introduced revised
should be included in the PSL.61 The disclosure standards for the quarterly
RBI concluded that doing so could supply of data on banks’ PSL operation
contribute to sustainable economic
development within local communities The RBI’s greening of the PSL can be
and improve income levels and the seen in the context of the Twelfth Five-
overall quality of life. Year Plan, titled Faster, More Inclusive
and Sustainable Growth,62 which covers
In 2015, the PSL was further extended the period 2012–2017. It establishes
to include two new categories and a focus on sustainable development
address sustainable development and addresses the threat of climate
through one of the first green finance change and the necessity of supporting
initiatives in India by giving priority the transition to renewable energy
to lending to social infrastructure sources. Widely referenced by central
and renewable energy projects.60 The bankers in India,56 the Twelfth Five-
revised guidelines maintain the original Year Plan played a substantial role in
structure of the PSL under which 40% establishing the issue of sustainable
of adjusted net bank credit or credit green development.
equivalent amount of off-balance sheet
exposure, whichever is higher, has to One critique of the RBI’s definition
be allocated under the PSL with 18% of renewable energy is that not all
earmarked for the agricultural sector, sustainable projects, such as energy
10% for ‘advances to weaker sections’, efficiency and green building loans,
and 7.5% to micro enterprises. are included in the PSL.57 In a step to
further establish market mechanisms
In all, the updated PSL includes eight into the PSL programme and to
categories: agriculture, MSMEs, export encourage lower interest rates and
credit, education, housing social costs of loans originated under the
infrastructure, renewable energy, and PSL programme, the RBI recently
others. In regard to renewable energy,’ introduced a market for trading priority
the new seventh category specifies sector obligations.63
bank loans not exceeding INR150
million (US$2.35 million) per borrower, Other green central banking policies
used to finance projects for ‘solar based General green lending guidelines in
power generators, biomass based India, such as the National Voluntary
power generators, wind mills, micro- Guidelines for Responsible Financing,
hydro plants and for non-conventional launched in 2015 by the Indian
energy based public utilities viz. street Banking Association are industry-led
lighting systems, and remote village initiatives and not central-bank-led.
electrification’,60 as credit that can be The RBI discusses green banking in
included in banks’ PSL loans. two dimensions. First, the way in which
32
banking operations are conducted, Furthermore, the Small Industries

whereby the central bank issues Development Bank of India (SIDBI),
guidelines on e-banking and paperless in cooperation with the German
banking; and secondly, the question Corporation for International
of the selection criteria for loans, Cooperation (GIZ), issued National
where the RBI is not issuing specific Voluntary Guidelines for Responsible
regulations or guidelines.56 Finance for financial institutions in
India. The guidelines aim to integrate
In the timeline of sustainability environmental, social, and corporate
initiatives in the financial sector governance (ESG) principles into
in India, the first initiative is the lending and investment decisions
RBI’s circular on Corporate Social by banks and are expected to further
Responsibility, Sustainable Development improve lending practices and
and Non-Financial Reporting – Role of environmental due diligence.23
Banks (Reserve Bank of India, 2007),
issued in December 2007. The circular In 2015, the RBI and the Securities
lacks any specific recommendations Board of India collaborated to help
or guidelines on green finance and launch a green bond market. This
introduces the concepts of Corporate initiative included Yes Bank, Export-
Social Responsibility (CSR), non- Import Bank of India, CLP Wind Farms,
financial reporting and sustainable and IDBI Bank and by 2016 had issued
development.64 Chakrabarty56 suggests a combined US$1.1 billion worth of
the aim of the circular has been to green bonds.63
familiarise financial institutions with
these issues and to encourage them Implementation and impact
to implement CSR measures on a The evaluations of the impact of the
voluntary basis. RBI’s PSL have been mixed because
many banks fall short of their annual
In 2015, the working group of the PSL targets.57 There has also been
Indian Banking Association issued a number of non-performing loans
the sector-specific National Voluntary under the PSL programme which has
Guidelines for Responsible Financing, led to rising criticism of the targets.57
thereby combining the best practice Furthermore, including the category
approach from existing national of loans for off-grid renewable energy
and international initiatives.23 The projects in the PSL programme has
guidelines comprise 8 core principles, not necessarily resulted in increased
including considering the issues of lending to this sector because whether
ethical conduct and E&S governance, banks choose to lend to a particular
integrating E&S risk management in sector within the PSL, for example
business activities; minimising the renewable energy or sustainable
environmental footprint in internal infrastructure, depends only on the
operations; developing environmentally bank’s internal preferences and
friendly products, services and risk assessment policies and is not
investment; enabling inclusive human mandatory.65
and social development; engaging
stakeholders, upholding a commitment The RBI’s annual report for 201659
to human rights, as well as employing confirms that bank lending to
disclosure.23 renewable energy projects has been
uneven. However, reflecting some
33
success of the various green lending 3.5 BANK INDONESIA

initiatives, lending to renewable energy
Bank Indonesia, established in 1953,
projects has grown at a higher rate
shares responsibility for the regulation
than overall credit growth during 2009
of the financial system with the
to 2014.59
Financial Services Authority – Otoritas
Jasa Keuangan (OJK) – and plays a
Regarding the share of credit that is
secondary role to OJK in greening the
provided by different bank groups,
financial system in Indonesia.
nationalised banks provided over 70%
of overall renewable energy lending
Mandate and objectives
in 2014, with the State Bank of India
The new Central Bank Act that
seeing its share decrease from 27% in
established Bank Indonesia as a
2009 to 12% in 2014 as private sector
formally independent central bank
banks emerged as the second biggest
in 1999 and amended in 2004, gives
lender, financing 15%. In response to
the central bank the single objective
the inclusion of renewable energy in
of achieving and maintaining price
the PSL programme, the RBI reports an
stability of the Indonesia Rupiah
average growth of 21.8% in renewable
(IDR) against goods and services, as
energy bank credit, but stresses again
well as against other currencies.66 To
that the overall share remains low.59
achieve this objective, the act tasks
Bank Indonesia to conduct monetary
With regard to the green bonds
policy, ensure payment system stability,
initiative, a recent report concludes
and regulate and supervise banks.
that green bonds have emerged as a
Furthermore, the Act also outlines the
way to finance green and sustainable
policy implementation tools to be used
infrastructure.57
to achieve the monetary targets as open
Conclusion market operations, stipulation of the
The RBI’s contribution to green finance discount rate and reserve requirements,
has so far focused mainly on its PSL. and the ‘management of credit and
To green its central instrument used to financing’ but does explicitly not limit
allocate credit to priority sectors, the the central banks toolbox to these
RBI has added social infrastructure and instruments, thereby giving the central
renewable energy to its programme, yet bank the freedom to potentially engage
has fallen short of implementing its full in a wide range of activities.66
quotas for these two sectors.
The amendment to the Central Bank
Regarding spreading E&S risk Act in 2004 extended the central bank’s
management and addressing it on single objective of price stability to
a systemic level, the central bank’s also include the support of the general
approach has been muted and the economic policies of the government,
issue has not been addressed in recent thereby creating policy space for the
publications. central bank to potentially justify a
more developmental approach to
Green banking guidelines addressing greening the financial system.
E&S risk, such as the voluntary
Guidelines for Responsible Financing have Inter-agency cooperation and shared
been industry-led initiatives. The first responsibility for green policy
steps in to the Green Bond market look While Bank Indonesia takes
to have been successful. responsibility for monetary policy
and macroprudential regulation,
OJK, newly created in 2011, took over
the responsibility of regulating and
34
supervising financial services, thereby level. Yet, since initiatives on E&S

replacing the function of the Capital risk assessment are not mandatory in
Market and Financial Institutions Indonesia, financial institutions are not
Supervisory Agency. OJK’s objective engaging with the issue of systemic
is sustainability regarding the growth E&S risk, forcing OJK to consider green
of the financial system. It gives weightings on capital requirements.67
institutions the authority to regulate Furthermore, Bank Indonesia, as a
the banking sector, the capital markets, macroprudential regulator in Indonesia,
and the insurance, pension fund, is considering, under the Roadmap for
and other financial institution sector Sustainable Finance, to include E&S risk
(Republic of Indonesia, 2011). into its macroprudential framework in
order to secure monetary and financial
With regard to inter-agency stability.67
cooperation, Volz67 highlights the
Memorandum of Understanding Green credit allocation policies
signed by the Governor of Bank The OJK’s Roadmap document declares
Indonesia and the State Minister of sustainable growth as a central pillar
the Environment on the joint effort for future economic development
of strengthening green finance and promises to give priority to the
by increasing the role of banks in development of renewable energy
environmental conservation efforts, and energy conservation. However, it
offering joint workshops for bankers identifies only generally agriculture,
on E&S risk assessment and the manufacturing, infrastructure, SMEs,
overall promotion of green finance. and energy as explicit priority sectors.
OJK’s Roadmap for Sustainable Finance
in Indonesia 2015-2019 (2014) builds In its Master Plan for Indonesia’s
on the central banks previous work Financial Service Sector (MPSJKI)
and also addresses inter-agency for the period 2015–2024, OJK
cooperation, stressing the cooperation promises increased funding through
between OJK and the Ministry of banking and capital markets for these
Environment – Kementerian Lingkungan sectors.68 Furthermore, the Roadmap
Hidup (KLH) – and outlining the also discusses regulatory support
necessity for future cooperation with, for priority sectors and mentions
among others, various ministries, the possibility of requiring banks
the Indonesia Stock Exchange, and to lend a fixed percentage of their
Law Enforcement Agencies.68 Bank portfolio. The document also outlines
Indonesia and OJK are members of the an implementation plan on Green
IFC’s Sustainable Banking Network, Lending Models for Priority Sectors
thereby also engaging in international with the aim of providing funds,
green finance initiatives. starting in 2015. OJK has conducted
further research on the matter of
Green macroprudential policy channelling credit to priority sectors,
Regulatory financial institutions identifying the sectors of agriculture,
in Indonesia have not yet issued maritime, mining exploration,
green macroprudential regulation, construction, and the processing
but are engaging with the issue on industry as promising and dropping
different levels. According to Volz,67 any reference to green sectors.69
there is general agreement among
investors that the investments in Nonetheless, until today, neither the
environmentally damaging projects OJK nor Bank Indonesia has publicly
in Indonesia expose the financial stated that they are involved in any
system to E&S risks on a systemic green credit allocation policy initiatives.
35
The OJK, however, has started to addresses E&S risk management,

support financing to the maritime and the identification and promotion
fishery sector70 and introduced in 2013 of sustainable priority sectors, ESG
regulation to increase bank lending to reporting standards, and capacity
SMEs, requiring them to allocate 20% enhancement and human resources.
of their lending portfolio to SMEs.67 OJK uses the document to define
sustainable finance in the context
Other green central banking policies of the financial services industry’s
The broader political framework for effort to address climate change,
green finance and growth policy move to a low-carbon economy and
initiatives was set in 2005 with promote environmentally friendly
Indonesia’s National Long-Term investment. The objectives outlined
Development Plan (RPJPN) 2005–2025, in the Roadmap, are first, to improve
which addresses climate change and the resilience of financial institutions
global warming as major challenges and enhance the development of
that require the government’s green financial products; second, to
intervention. Volz67 outlines how, provide the financial resources for the
starting in the late 1990s, Bank National Long-Term Development
Indonesia and later OJK have a long Plan, and, third, to contribute to
history of addressing environmental climate change mitigation. On the
sustainability. With the Bank Indonesia implementation side, OJK highlights
Act 10/1998, Bank Indonesia issued the necessity of increasing the supply
a first policy initiative requiring of green financing and products and
banks to assess the environmental increasing the supervision of green
impact of large or risky loans. In 2005, policy implementation by financial
with Regulation No. 7/2/PBI/2005, institutions.
Bank Indonesia further enhanced
environmental impact assessment An area where Bank Indonesia has
practices by requiring banks to assess shown some engagement with the
measure taken by potential clients to issue of greening the financial system
protect the environment. In 2012, it is capacity-building workshops
issued Regulation No. 14/15PBI/2012 for bankers that cover E&S risk
requiring banks to take borrowers’ assessment, risk mitigation of
environmental conservation efforts into renewable energy investment, and
account when their business prospects. green finance in general, which it
organised in cooperation with the
A first step in the direction of Ministry of the Environment in 2010.67
developing overall lending guidelines Bank Indonesia organised further
can be seen in Bank Indonesia’s discussion groups and seminars in 2011
cooperation with USAID and the to raise awareness of environmental
Ministry of Environment in 2013, based issues as well as capacity-building
on which voluntary Green Lending workshops for commercial bank
Model Guidelines for Mini Hydro Power personnel on E&S risk assessment in
Plant Projects were issued in order to cooperation with the UNEP Financial
encourage banks to enhance green Inquiry and together with USAID on
lending practices.67 renewable energy financing. Further
capacity-enhancing events for bankers
In taking the lead role on greening were organised jointly with the
the financial system, OJK has since Ministry of Environmental Affairs and
broadened its approach by addressing Forestry in 2013 and in collaboration
the financial services industry with the Ministry of National
as a whole. In its Roadmap, OJK Development Planning, the Ministry of
36
Environment, USAID, and the GIZ in In regard to flows of green finance,

2014.67 In collaboration with the IFC in 2011, banks were investing IDR6.4
and USAID, OJK also published a Clean trillion (US$480 million) or 1.19% of
Energy Handbook for Financial Service their lending portfolio in green projects,
Institutions in 2015.71 slowly increasing the share to 1.29%
and IDR9.3 trillion (US$697 million) in
Implementation and impact 2012 and 1.37% and IDR10.2 trillion
Assessing the most recent efforts by (US$765 million) in 2013 and investing
Bank Indonesia and OJK, to promote the biggest share in 2012 in renewable
green finance and growth based energy projects, with 26.1% in mini
on the institutions’ annual flagship hydro projects and 26.7% in geothermal
publications appears to be rather projects.67
difficult. After releasing the Roadmap in
December 2014, OJK did not engage In a research project on green
with green finance in its annual report banking conducted by Bank Indonesia
for 201570 and does not mention any in cooperation with the German
green credit or bond initiatives, E&S Development Institute in 2013, a
risk management, or provide any data survey found that 94% of banks had
on any green finance. Furthermore, no unit responsible for green finance
the report does not list any green or at the time, but also showed that most
environmental regulatory initiative on banks (49 out of 68) considered green
the provided list of all initiatives for finance a promising area for the future.
2015. Regarding E&S risk management, the
survey showed that 77% of responding
Regarding the support for priority banks felt that they lacked the staff to
sectors, a topic that featured conduct E&S risk assessment. Another
prominently in the Roadmap, the report survey conducted in 2015 showed that
mentions in its outlook for 2016 that in most institutions still did not consider
the context of promoting the maritime E&S risk factors in their lending and
sector, OJK would support inter-bank investment decisions.
working groups on renewable energy.
Conclusion
Bank Indonesia does not engage with Overall, the Roadmap for Sustainable
the topic of green finance or related Finance in Indonesia has been judged
issues in its recent flagship reports. The as an innovative and comprehensive
central bank’s Financial Stability Review approach to greening the financial
201672 that discusses comprehensively system. Yet, since its publication,
various types of risk in the financial there is little evidence of its objectives
system, also falls short of mentioning being implemented on the ground.
E&S risk or climate change. Its annual The experience of Indonesia shows
report for 2016,73 Bank Indonesia also that voluntary initiatives and non-
does not engage with environmental binding governmental roadmaps
issues, climate change, or green finance. have their limits regarding their effect
and implementation. The survey of
Volz67 comes to the conclusion that Indonesian banks suggests they might
the banking industry has thus far been welcome mandatory regulation on E&S
insufficiently engaged with green risk management because it would level
finance. Based on research conducted the playing field and not disadvantage
by Bank Indonesia between 2011 and those banks implementing voluntary
2013, he finds the majority of financial guidelines first.
institutions in Indonesia did not
consider E&S factors in their lending
and investment process.
37
3.6 BANK OF KOREA Historical context

To understand green finance in Korea,
The Bank of Korea, created in 1950,
it is necessary to first take a closer
has played an important role in South
look at the bigger policy framework
Korea’s fast economic growth over the
for greening the economy and at the
last 60 years by helping to manage
reasons of why it was implemented.
the allocation of credit and supporting
Over its 60-year history of fast
priority sectors for economic
economic development, South Korea
development.18 With regard to Korea’s
has relied heavily on fossil fuels. The
comprehensive Green Growth Strategy,
country entered a new era when
which has been widely discussed
President Lee Myung-Bak launched
and praised as the first initiative of
the national Green Growth Strategy in
its kind worldwide and has elevated
August 2008 by declaring low-carbon
the country to become a global leader
green growth as the central pillar of
in low-carbon economic growth, the
the country’s future growth strategy.
central bank has played a surprisingly
Following the publication of the broad
muted role. A possible explanation
framework, the government issued
for this can be found in the design of
the Five-Year Plan for Green Growth
the Green Growth Strategy, in which
(2009–2013), as part of the National
finance plays only a secondary role.
Strategy for Green Growth (2009–2050),
Mandate and objectives that outlines the government’s
The Bank of Korea Act74 gives the commitment of 2% of the annual GDP
central bank the objective of supporting to green growth, amounting to U$D97
economic development by pursuing billion over the period 2009–2013.75 The
price stability and to furthermore strategy addresses regulatory as well
safeguard financial stability. The as fiscal and financial reforms and lists,
Act also addresses explicitly the among others key policy initiatives, the
independence of the central bank establishment of an emissions trading
by stressing that its monetary and system, the promotion of investments
credit policy shall be formulated in green industries, public guarantees
independently. While the development for loans to green industries, the
of the national economy is already promotion of green bonds, and the
mentioned in the first article of the creation of a green fund to support
Act, the Act also establishes the SME’s access to credit.76
legal ground for the Bank of Korea’s
However, Lee’s successor, President
support of key government policy
Park Geun-hye, who took office in
initiative by stating that monetary and
2013, sought to distance herself from
credit policies should be carried out
the Green Growth Strategy. She
in coordination with the economic
changed the language of the initiative
policy of the government, as long as
that was closely associated with her
such objectives would not conflict with
predecessor, by replacing the term
the primary goal of price stability.74
‘green growth’ with ‘sustainable
The Bank of Korea could therefore
development’ and asking ministries
have the legal grounds to support the
to delete any reference to ‘green
government’s green growth policy
growth’ from websites and reports.75
initiatives.
The Park government later returned to
committing to green growth and was
keen to promote its own Green Growth
2.0 strategy and distance itself from the
previous administration.
38
Inter-agency cooperation and shared Green credit allocation policies

responsibility for green policy The Bank of Korea has not publicly
The Bank of Korea and the Financial announced any engagement in green
Services Commission (FSC) share credit guiding activities through
authority for financial regulation credit quotas or targeted refinancing
and supervision in South Korea and lines. Policies aiming at allocating
oversee in cooperation the Financial credit at preferential terms to priority
Supervisory Service (FSS) that sectors appear to be run by fiscal
examines and supervises financial agencies through dedicated funds
institutions directly. However, and not by the central bank through
regarding greening the financial monetary operations. The government
system, these institutions’ approach started using fiscal funds to enhance
has been rather muted. A fourth energy conservation following the
financial governmental agency, that second oil crisis in the late 1970s and
plays a role in the promotion of green subsequently established an Energy
finance, is Korea Development Bank Use Rationalisation Fund in 1980 that
(KDB), a state-owned policy-directed was financing low-interest rate loans
investment vehicle that started to for energy saving projects.79
invest in green industries in 200977 and
has recently started to promote green With the launch of the Green Growth
bonds. Strategy, the government created a
renewable energy policy initiative
Regarding international cooperation, aimed at supporting SMEs, non-profit
South Korea is hosting the Green organisations, and public institutions
Climate Fund (GCF)iv that launched by providing them with low-interest
in 2013. The GCF is a new global loans to encourage investment in
fund, mainly financed by advanced energy efficiency and conservation-
economies, that helps developing enhancing equipment.79 Financing was
countries particularly vulnerable to limited to new energy equipment and
climate change to limit or reduce their extended by commercial banks that
greenhouse gas (GHG) emissions would usually charge higher interest
and adapt to climate change. The than targeted under the low-interest-
Korean government developed a legal rate programme. Commercial banks
framework that allows the GCF to were then reimbursed through the
operate in South Korea and supported government subsidy for the difference
its establishment and operations between the two interest rates. By
through the creation of the GCF 2015, 18 commercial banks were taking
headquarters, by providing equipment part in the initiative administered
and helping to cover operational by the Korea Energy Management
costs.78 Corporation (KEMCO), which is tasked
with verifying the implementation
Green macroprudential policy as well as with project supervision.
With the mandated objective of Eligible loans under the government’s
safeguarding financial stability, the policy loan scheme included
Bank of Korea has the responsibility investments into renewable energy,
for macroprudential policy yet has not energy saving, agriculture, tourism, and
publicly discussed any engagement environmental industries.79
with green financial policy or E&S
risk management in general or on
a systemic level.
http://www.greenclimate.fund/who-we-are/about-the-fund
iv.
39
The FSC’s Financial Policy Roadmap announced in 2008, it is targeting

80 addressed the issue of allocating green industries and is furthermore
credit to productive industries, yet providing export credits for green
only stressed that channelling funds corporations. Green policy guarantees
to innovative businesses working on were implemented by various, mostly
new technologies would be essential governmental, financial institutions,
and did not mention green industries such as the Export–Import Bank
or renewable energy. The FSC thereby of Korea through the provision of
falls in line with the recent trend of guarantees at favourable terms for
regulatory financial institutions in liabilities concerning investment in
South Korea that do not mention or green projects by covering potential
engage in any green finance activities. losses that could occur. These
guarantees have been most relevant in
In the context of central bank the SME sector.79
engagement in supporting priority
sectors, Volz43 lists the Bank of Korea’s In a joint statement in 2009 with the
Bank Intermediate Lending Support Ministry of Strategy and Finance,
Facility that is aimed at allocating the FSC addressed the government’s
increased lending to the SME sector, plans to promote investment in
yet does not include any green lending green industries and announced
guidelines. a certification system to verify the
eligibility of green projects and
Other green central banking policies companies for funds under such a
The Bank of Korea also does not seem scheme.
to be involved in any other green
central banking policies. However, in In 2010, the government issued the
its most recent annual report,81 it lists Basic Act on Low Carbon Green
the goal of strengthening research on Growth,82 outlining measures to
sustainable development in general, enhance green finance. The Act is
as well as investigating constraining one of the few documents on green
factors that hold back sustainable growth that explicitly addresses and
growth. As mentioned before, after the proposes green financial policy by
Park government’s initial distancing outlining the government’s plan
from the Green Growth Strategy, to raise funds to support the green
government agencies were also advised economy, develop new green financial
to use the term ‘sustainable’ rather than products, encourage private investment
‘green’ growth. into green low carbon infrastructure,
support a disclosure system for the
Nonetheless, it is worth reviewing implementation of companies’ green
some of the green finance initiatives management standards, and establish a
by different financial governmental carbon trading market.
agencies in Korea. A report by the
Global Green Growth Institute,79 lists The promotion of green bonds has
green commercial and policy loans been the second green finance area
(mentioned in the previous section), where there has been some policy
green policy guarantees, green policy activity. The public Export-Import
funds, and green policy insurance as Bank of Korea is the first financial
the four policy instruments through institution in Asia to issue green bonds.
which the government is seeking It did so in 2013, issuing bonds worth
to support green business activities. U$D500 million.58 Today, the state-
Against the background of the owned KDB has taken a leading role
low-carbon green-growth strategy in the promotion of green bonds; it
40
issued green bonds in June 2017 that commitment to a Green Bond market
raised U$D300 million.83 The KDB as evidenced by the drawing up of
has announced that the proceeds green bond guidelines by the Ministry
of the green bonds will be used to of Finance and the first issuances of
finance or refinance investments green bonds by government-owned
in renewable energy projects, low policy banks in Korea.
carbon emission technology and green
transportation. It also announced Implementation and impact
that the review and project evaluation The implementation of green financial
process starts with the assessment policy as part of Korea’s overall green
of E&S risk and that it will publish growth strategy appears to be modest.
an annual investors newsletter with The first policy documents on green
information on the amount that has growth did not address the issue
been allocated to green projects, the of green finance directly and most
details of the projects itself as well as government initiatives fell short of
the environmental impact and the mentioning the Bank of Korea and
reduction of CO2 emissions of the giving it a dedicated role. A search
financed projects84,85. of the Bank of Korea’s homepage
reveals not a single English document
Furthermore, the KDB has developed mentioning the term ‘green’. The
an E&S risk assessment framework that non-engagement of the Bank of Korea
it applies to its own project financing with green finance in the broadest
operations with the aim of avoiding sense is also reflected in its annual
a negative impact of its investments reports, which in recent years have
on the environment or society and to not mentioned any green activities by
ensure that stakeholders take E&S the bank.81 The UNEP Inquiry76 comes
risk into account.85 The KDB has also to the conclusion that no explicit
played a central role in enhancing provisions for the financial sector
green finance in South Korea by, on were made under the Green Growth
an operational level, setting up a green Strategy, yet the report is expected to
finance programme to provide funds have far-reaching consequences for
to green industries and low-carbon financial industries based on the Green
projects and by participating in the Growth Strategy.
national emissions trading markets.
Because the financial sectors’
In summary, although the Korean involvement in green finance activities
central bank has not played a role is rather restrained, except for the
in green finance, a range of other KDB, available data for the flow of
initiatives have been implemented. green funds is scarce and focuses
UNEP Inquiry’s Green Finance Progress mainly on the real economy. With
Report 6 groups these initiatives into regard to the early initiatives, following
three categories. First, the government the government’s Green Growth
is providing a strategic policy Strategy in 2008, early reports on the
framework that helps reduce policy implementation were very positive
uncertainties. Second, the FSC has and predicted a substantial impact.86
made efforts to develop a ‘stewardship In 2009, the government allocated 80%,
code’ as an important step towards the totalling U$D38.1 billion, of its post-
promotion of voluntary green finance crisis stimulus package at green growth
principles that rely on the market’s related projects.75 In 2011 South Korea
own initiative to promote green spent 3% or about U$D33 billion of its
finance under the absence of binding GDP on investments in green growth.76
regulatory measures. And third, the
41
In general, green growth has been

financed through companies and
the government’s own funds and
not through the help of the banking
sector, which remains conservative in
its lending strategy.76 In assessing the
overall impact of Korea’s green growth,
several reports have a positive outlook
of the future.75,76,86 However, Kim and
Thurbon75 also mention that despite
the substantial investments, energy
intensity increased between 2009 and
2012.
Conclusion
In summary, although the issuance
of the Green Growth Strategy by
the government was followed by
substantial investment into energy
conserving projects, financial regulation
and the greening of the financial
system are currently not at the centre of
the strategy. The lack of green financial
policy is also reflected in the reserved
participation of the financial regulatory
agencies in South Korea with the Bank
of Korea seemingly not being involved
at all. Whether the government chose
not to engage with the Bank of Korea
or the Bank of Korea did not wish to
be involved in the strategy is unclear,
but the outcome has been that other
public institutions, not least the Korean
Development Bank and government
itself have done the heavy lifting in
providing green investment. Korea’s
relatively healthy fiscal position (with
a debt-to-GDP ratio under 40%) and
concentration of public debt in long-
term domestic investors place in a good
position to continue to use fiscal policy
and development bank funding to
support a green transition.
42
4. CONCLUSIONS At one end of the spectrum,

in countries such as India and
Bangladesh, central banks are
This review has made implementing mandatory credit quotas
clear the key role that to require banks to finance renewable
central banks and related energy, green transportation, and
overall sustainable development.
financial regulators’
in EMDCs can play At the other end, regulatory financial
institutions are abstaining from direct
in promoting green intervention into financial markets and
finance and growth to instead offering voluntary guidelines on
green banking or bond issuance with
protect the environment, the aim of establishing the institutional
mitigate climate-change, framework within which financial
and safeguard financial institutions move on their own towards
greener lending operations. The latter
stability. Our survey approach is clearly more aligned with
of six major EMDCs current policy in advanced economies.
also shows that are a In the middle of this policy spectrum
variety of approaches to would be a third approach that focuses
greening the financial on setting incentives to make green
lending and investment operations
system involving different more profitable for financial institutions
policies and different through binding regulatory guidelines
and standards on topics including E&S
forms of cooperation
risk management, green bonds, and the
between governments, loan origination process.
central banks, and
Many of the central banks in EMDCs
commercial banks. have an explicit mandate to support
sustainable development or at least the
government’s economic policy agenda,
thereby giving the central bank the
legal grounds to engage more actively
in green financial policy. In countries
where central banks have a strong
focus on the singular objective of price
stability and its act stresses its policy
independence, the central bank tends
to be less involved in developmental
and green financial or allocative policy:
Korea and Indonesia would fall into
this category.
The second issue of interest in the case

studies has been the identification
of other relevant financial regulatory
institutions and the degree to
which there has been inter-agency
cooperation on a national and
43
international level on green policy development banks have played a more

initiatives. One conclusion from the important role in supporting credit to
case studies is that governments that green sectors with the central bank
give a higher priority to greening playing more of a role in suppressing
finance and growth tend to engage credit to ‘brown’ sectors. Regarding
all relevant governmental actors by implementation and impact, results
instructing them to issue guidelines have been mixed and further research
or regulation in their own field of is needed to ascertain how successful
expertise and jurisdiction and by credit guidance policies have been but
setting up inter-agency coordination to there is certainly much to build on.
secure the far-reaching implementation
of policy initiatives. China would be the A closer look at other green central
prime candidate here although there banking polices revealed a wide range
was also evidence of sophisticated of different policy initiatives in which
coordination in Brazil and India. The not only the central bank, but also
countries where one agency alone has other financial regulatory institutions
the responsibility for green financial play a central role. In general, the more
policy tend to have a weaker record of successful green finance initiatives
implementation. tend to address several aspects of the
financial system, including E&S risk
Green macroprudential policy and management, green bond markets,
the engagement with environmental retail banking as well as insurance.
and social risk on a systemic level are
issues that seem fairly new to most Assessing the implementation and
central banks in our case studies. While impact of green financial policy in
some have discussed or acknowledged the countries of interest has been
that there are systemic implications challenging. In some countries,
of increasing environmental risk governmental institutions have
against the background of climate- issued comprehensive regulation,
change, only a few – Brazil being the guidelines, or policy roadmaps, but
outstanding example – have translated have failed to present evidence on the
this insight into policy measures. implementation and impact of their
However, quite a few central banks green initiatives. With regard to the
with the responsibility for financial general implementation and impact
stability have not yet engaged with of green finance initiatives, the UNEP
E&S risk at all and seem to be some Inquiry Green Finance Progress Report6
way off addressing environmental also comes to the conclusion that the
systemic risk. measurement of green governance
activities and their impact has been
Regarding green growth and credit limited so far. The report argues that,
allocation, our case studies show while the overall understanding of
how existing traditions of financial the macroeconomic impact of green
intervention shape the country’s finance is still insufficient, recent green
approach. Central banks that have in initiatives have been mostly market-
the past been engaged in centralised led and not policy-guided, with rather
credit allocation policies – India and disappointing results as private markets
Bangladesh most obviously – have have remained risk averse in the face
added categories to their existing of policy uncertainty (the renewable
priority loan programmes for green energy sector may be an exception here
projects and, most often, renewable however).
energy. In other countries, such as
Korea, Brazil, and China, national
44
In other cases, however, central banks Having said this, it is also increasingly
have acted to improve things. For recognised that private markets in
example, the RBI was criticised for its both advanced and EMDC economies
definition of renewable energy projects are not investing sufficient financing
and the CBRC was also criticised for in green infrastructure and green
short comings in its definition of green innovation to meet the challenge of
credit. In both instances, the central keeping global temperatures from
banks responded and implemented increasing above 2°C.13 Given this,
new measures as a result. This there may be valuable lessons for
illustrates that green finance is likely advanced economies to learn from
to be an exploratory policy-making the early experiments in green central
process, where policies platforms can banking reviewed in our case studies.
be gradually built upon over-time.
Only 10 years ago, the idea of directing
In general, central banks and other credit in to or away from certain sectors
regulatory institutions in our case of mature capitalist economies might
studies are seriously engaged in green have been dismissed as a reversion to
finance issues to a greater extent than defunct socialist planning. Following
central banks in advanced economies. the financial crisis, however, and the
One possible explanation for this is increasing use of macroprudential
the broad acknowledgement that policy in advanced economies, the
the poorest economies will be the pendulum appears to be shifting. We
ones first hit by the consequences hope therefore, that this report aids
of climate change, global warming, knowledge transfer and engagement
and more frequent, severe weather not only between EMDCs but also
events. Central banks in developing between them and advanced economy
and emerging economies therefore monetary policymakers and financial
seem to be more committed to regulators.
engaging with the topic of greening
the financial system, specifically
regarding incorporating E&S risk into
loan origination, due diligence, and
prudential policy.
A second possible explanation for why

central banks in emerging economies
are playing a leading role when it
comes to greening economic growth,
especially regarding credit guidance
policies, is that in the absence of
deep financial markets, central banks
have traditionally engaged in more
direct credit allocation policies, also
in the conduct of routine liquidity
management.
45
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49
NEW ECONOMICS FOUNDATION TITLE
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WWW.NEWECONOMICS.ORG WRITTEN BY:
info@neweconomics.org Simon Dikau (SOAS University
+44 (0)20 7820 6300 @NEF of London) and Josh Ryan-Collins
Registered charity number 1055254
WITH THANKS TO:
Frank van Lerven, Ulrich Volz,
Nick Robins, and participants at the
‘Central banks, climate change and
green finance’ roundtable held on
4 July 2017 at the School of Oriental
and African Studies, University of
London.

Green-Central-Banking in Emerging Markets and Developing Country Economies

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GREEN CENTRAL BANKING

2. GREEN CENTRAL BANKING POLICY: A TAXONOMY 13

3. GREEN CENTRAL BANKING IN PRACTICE: COUNTRY CASE STUDIES 18

EXECUTIVE SUMMARY In emerging and developing countries

over the last decade. EMDCs are more exposed to the

• Green credit allocation instruments

• Green regulatory (prudential and

• Other green central banking including E&S risk management, green

In general, central banks and other be valuable lessons for advanced

TABLE 1. SUMMARY OF CASE STUDY FINDINGS

Green credit allocation Green prudential and Other green financial

Green credit allocation Green prudential and Other green financial

• PBC is also working on

India • Loans to renewable • RBI is considering • Industry-led voluntary • Lending to renewable

Green credit allocation Green prudential and Other green financial

Indonesia • ‘Roadmap for • OJK is considering • Voluntary green lending • No evaluation of

1. INTRODUCTION There is a variety of explanations as

financial markets – via But it has become increasingly clear

Nevertheless, most national and

TABLE 1. SUMMARY OF CASE STUDY FINDINGS

Green credit allocation Green prudential and Other green financial

Green credit allocation Green prudential and Other green financial

China • Preferential interest • PBC has collaborated • Evidence also says

• PBC is also working on

India • Loans to renewable • RBI is considering • Industry-led voluntary • Lending to renewable

in the conclusion, we reflect on the of other state agencies, including

Green credit allocation Green prudential and Other green financial

Indonesia • ‘Roadmap for • OJK is considering • Voluntary green lending • No evaluation of

2. GREEN CENTRAL In developing our taxonomy of green

Central banks in • Green credit allocation instruments

Targeted refinancing lines

with underdeveloped secondary determining minimum credit quotas

risk weights according to the carbon Identification of systemically

standards for disclosure. Policy-directed

Research on green growth and finance

Offering capacity building

Participation in the International

3. GREEN CENTRAL For each case study, the mandate

change. The case studies Mandate and objectives

Green credit allocation policies The most recent sustainable finance

Additional support is offered by the 2010 stood at BDT5 million (US$62

FIGURE 1. TAKE-UP OF BANGLADESH BANK'S GREEN REFINANCING LINES

had introduced a Green Office Guide. On Conclusion

3.2 BANCO CENTRAL DO BRASIL system and shares responsibility with

Green credit allocation policies This publication establishes detailed

Implementation and impact disclosure levels in regard to PRSA of

3.3 PEOPLE’S BANK OF CHINA Inter-agency cooperation and shared

Responsibility for financial regulation Green credit allocation policies

has been the Green Credit Policy, These voluntary recommendations

The International Institute for On a more general note, it would

Another open question is whether the Inter-agency cooperation and shared

and by setting sector-specific interest For individual household borrowers,

banking operations are conducted, Furthermore, the Small Industries

success of the various green lending 3.5 BANK INDONESIA

supervising financial services, thereby level. Yet, since initiatives on E&S

The OJK, however, has started to addresses E&S risk management,

Environment, USAID, and the GIZ in In regard to flows of green finance,

3.6 BANK OF KOREA Historical context

Inter-agency cooperation and shared Green credit allocation policies

The FSC’s Financial Policy Roadmap announced in 2008, it is targeting

In general, green growth has been

4. CONCLUSIONS At one end of the spectrum,

The second issue of interest in the case