SINGAPORE - To promote green finance, central banks should focus on improving the quality and availability of data on emissions, developing compatible taxonomy to determine which activities qualify as sustainable, and implementing a set of standards for disclosure.
Mr Ravi Menon, the managing director of the Monetary Authority of Singapore (MAS), said at a panel discussion hosted virtually by the International Monetary Fund on Thursday (Sept 30) that climate change poses very significant risks to the financial system, and presents significant opportunities at the same time.
"We do believe the financial sector plays a very important role, not only in financing the important but challenging transition of countries to low-carbon economies, but to also manage their physical risks of climate change and the transition risks of climate change for the financial system," he said.
However, to make green finance work, regulators, financial institutions and companies need access to trusted and granular data to monitor and manage environmental risks, and improve the quality of disclosure and financial decision-making.
He said technology can be a potential game changer in addressing some of the challenges in obtaining data.
On taxonomy, a classification system identifying activities, assets and projects that deliver on key climate, green, social or sustainable objectives, Mr Menon said there are ongoing efforts, for example, at the International Platform on Sustainable Finance, to develop a common global set of principles to promote best practices in environmentally sustainable finance.
"I don't think there will be a single global taxonomy. Each country has its own peculiarities. But we should all try to work off a common consistent global set of principles," he added.
On disclosure, however, Mr Menon believes there is a good chance that a global understanding will be achieved on a baseline sustainability reporting standard.
He said the International Financial Reporting Standards Foundation's work on sustainability-related reporting is gaining strong momentum and traction over the last year, and will be instrumental in facilitating consistent compatible disclosures of climate risks and help in channelling the investments and financing to ensure impactful outcomes.
Mr Menon also emphasised that to address climate risks, financial regulators need to continue to advance their understanding of how climate can potentially impact financial institutions and financial systems.
He said central banks need to work very closely with the financial sector to strengthen their resilience and tackle the climate risk on both micro- and macro-prudential fronts.
Micro-prudential regulation examines the responses of an individual bank to exogenous risks, while macro-prudential rules deal with the risks to an operation or structure of financial institutions or markets.
Mr Menon said that Singapore, as an international financial centre, wants to play its part in financing Asia's transition towards a sustainable future.
He added that MAS has been working closely with its counterparts in central banks and ministries of finance in Asia and beyond to create a more conducive environment for sustainable financing opportunities and also to safeguard against financial stability risks, which sometimes are not well appreciated.