Sustainable finance and growth Dejan Vasiljev CFA Banks

Sustainable finance and growth Dejan Vasiljev, CFA Banks for Sustainable Development– Tirana, May 2019

1. Macroeconomic developments in the EBRD region 2. Sustainable finance 26/09/2020 ‒ EU legislative agenda ‒ Network for Greening the Financial System ‒ EBRD and green finance 2

Growth momentum weakening in line with global trends Growth in the EBRD regions is projected to decline to 2. 3% in 2019 from 3. 8% in 2017 and 3. 4% in 2018, before picking up to 2. 6% in 2020 • The deceleration is to a large extent explained by the slowdown in Turkey • Weaker external demand – from advanced Europe and China – weighed on exports and growth • In about 70% of countries growth slowed in the second half of 2018, in line with weaker global outlook Financing conditions tightened in 2018, but episode ended in January 2019 • Interest rates remain low in historical perspective • Markets expect monetary easing in US going forward • Some strengthening in exchange rates and improvement in stock market valuations in 2019 • Supported also by oil prices rising again in 2019 and recovering remittances Stronger macro frameworks have facilitated policy response to changing external conditions • Increased reliance on flexible exchange rates, inflation targeting, counter-cyclical fiscal policies • Volatility of capital flows has been coming down, as investors perceive risks to be lower • ‘High-risk’ countries benefited most from lower differentiation in spreads Shocks to external conditions and high uncertainty present risks to outlook • Regions deeply integrated in value chains • Escalating trade wars could, in an extreme scenario, lead to unwinding of global value chains with profound impacts on the region 3

Average growth in the EBRD regions has slowed, reflecting weaker global growth Average growth rates, % Source: IMF WEO, EBRD forecasts and authors’ calculations. 4

And a marked slowdown in Turkey Growth picked up in 2018 in central and eastern Europe, Russia and the southern and eastern Mediterranean, but the large drop in Turkey weighs on average growth in the EBRD regions Average growth rates, % Source: IMF WEO population growth, EBRD and authors’ calculations. 5

If trade wars escalate globally, risks are high but largely mitigated for EBRD economies trading mostly within the EU customs union Emerging Europe has higher exports of intermediate goods (as % of GDP) than most other emerging markets – reflecting strong integration into “factory Europe” Mitigating factor: Many EBRD economies trade intermediate goods mostly within the EU customs union Economies in Emerging Europe tend to be very strongly integrated into global value chains Source: WITS, World Bank and author’s calculations. 6

NPLs have significantly fallen over the past several years NPL ratios across CESEE Sources: IMF Financial Soundness Indicators database, central banks directly for Montenegro and Serbia, EBRD staff calculations 26/09/2020 8

The regulatory environment improved and the NPL deal volume saw strong pick up. 9

Concluding remarks: More challenging outlook amidst slowing global growth I. Growth in the EBRD regions peaked at 4. 1 per cent in mid-2018 and has been weakening in recent quarters, in line with slowing global growth II. Growth expected to bottom out in mid-2019, partially recovering afterwards III. Episode of tightening of financing conditions for emerging markets ended in Jan’ 19 (5 th highest), conditions remain neutral-to-favourable in historical perspective IV. EBRD regions depend on global environment more strongly than before V. But also have stronger macroeconomic frameworks to respond to external shocks – through exchange rate adjustments, inflation targeting, counter-cyclical fiscal policy VI. Most economies have some fiscal space and adequate international reserve coverage of external financing needs 10

1. Macroeconomic developments in the EBRD region 2. Sustainable finance 26/09/2020 ‒ EU legislative agenda ‒ Network for Greening the Financial System ‒ EBRD and green finance 11

EU legislative activity on sustainable finance • Financial sector can act as a powerful amplifier and support the transition to a sustainable economy • To achieve the 2030 energy and climate objectives, Europe will need additional investments of EUR 180 billion per year, majority from private sources • In March 2018, EC adopted Action plan on sustainable finance, which aims to: o Reorient capital flows towards a more sustainable economy o Mainstream sustainability into risk management o Foster transparency and long-termism • Based on Action plan, EC formulated three legislative proposals: o On taxonomy: a unified EU classification system for sustainable activities o On disclosures on sustainable investments and sustainability risks o On low carbon benchmarks 26/09/2020 12

EU legislative activity: two done, one (but important!) to go • Political agreement reached on the proposals for o Benchmarks on 25 February 2019 o Disclosures on 6 March 2019 • On taxonomy: o European parliament voted today on 28 March o Council expected to reach general agreement by 2019 Q 2 o Trilogues expected to begin in autumn • Taxonomy will lays out conditions to consider an activity sustainable • TEG will draft EU green bond standards • So far, China is the only country that defined green loans (2007) 26/09/2020 13

Network for Greening the Financial System (NGFS) • Set up by eights central banks (including German, Dutch, UK, and Chinese) in December 2017. Membership has since grown to 40 institutions • Two main objectives: o Contribute to analysis and management of climate risks in the financial sector o Mainstream finance to support transition towards a sustainable global economy “Climate-related risks are a source of financial risk and it therefore falls squarely within the mandates of central banks and supervisors to ensure the financial system is resilient to these risks. ” • A major milestone with significant consequences, given that NGFS members: o Supervise 2/3 of GSIBs and GSIIs o Cover 31% of global population; 44% of GDP and 45% of greenhouse emissions 26/09/2020 14

NGFS: recommendations • First report published at the conference in Paris on March 17 • 6 key recommendations: 1. Integrate climate-related risks into micro-supervision and financial stability monitoring 2. Integrate sustainability factors into own portfolio management 3. Bridge data gaps 4. Build awareness and in-house intellectual capacity and encourage technical assistance and knowledge sharing 5. Achieve robust and internationally consistent climate and environmental related disclosure 6. Support the development of taxonomy of economic activities 26/09/2020 15

NGFS: next steps • A lot of analytical work needed to equip central banks/supervisors with tools to identify, quantify and manage climate risks in the financial system • Engage with central banks to better assess and mitigate climate related risks. • Concrete deliverables: • o A handbook on climate and environmental risk for supervisors and financial institutions o Voluntary guidelines on scenario-based risk analysis o Best practices for incorporating sustainability criteria into own portfolio management Engage with stakeholders: o With non-NGFS central banks and supervisors, regional and international supervisory authorities, standard setting bodies, governments and policy makers o Academia o Financial industry and NGOs 26/09/2020 16

EBRD and green finance International context COP 21 Paris: universal and ambitious agreement to limit the increase in global average temperatures to +2℃; The Sustainable Development Goals, adopted in 2015, provided increased focus on environmental sustainability The IPCC 5 th Assessment Report estimated US$ 6. 4 trillion are needed in 2010 -2029 for energy efficiency investments to limit to + 2℃ increase. Global initiatives such as TCFD have significant impact on 26/09/2020 already transparency EU Sustainable Finance Infrastructure • • Unified taxonomy will accelerate the low carbon transition and increase transparency Increasing focus on climate risks and their recognition by rating agencies • Potential introduction of green supporting factor • Accelerated introduction of the relevant regulation and legislation will ultimately increase the benefit for early movers into the green markets, but will increase Role of EBRD Critical role for redirecting capital flows towards sustainable and green investments Demonstrate commitment, ambition and transparency in line with public mandate Crowding in private sector by acting as an aggregator of projects, allowing to bridge the global funding gap Using toolbox of investments, policy dialogue and technical cooperation to support green economy transition in countries 17 of operation

EBRD green finance by business area Target of 40 per cent ‘green’ business volume by 2020 Financial Institutions EBRD extends credit lines to financial institutions for on-lending to businesses and homeowners so that they can invest in higher performance, green technologies. Overall more than EUR 30 bn in green financing signed across since 2006 Our GEFFs operate in 25 countries with EUR 557 million provided to FIs in Green Financing in 2017 1600+ Projects 18

EBRD’s Green Economy Transition Impact of EBRD’s Green Financing 19

EBRD role in the Green Bond Market Key activities The EBRD has established a dedicated technical assistance programme to accelerate green bond issuances in the EBRD region. The EBRD is participating in the Technical Expert Group on Sustainable Finance established by the European Commission. Network for Greening of Financial Systems – central banks on managing systemic risks of climate change. Issuing green bonds Technical assistance for issuers Supporting regulatory developme nts The EBRD has issued its first Green Bond in 2010 and cumulatively 80 green bonds totalling EUR 3. 7 billion equivalent to date. Investing directly and through funds The EBRD is increasingly playing a role as a Green Bond investor (direct and through fund structures), such as the USD 68. 5 m Setting best participation in the practice Green Cornerstone standards Bond Fund in early The Bank has been a member of the Executive 2018. Committee of the GBP, currently co-chairing the GBP Impact Reporting Working Group. The Bank also participates in the formulation of other relevant GB 21

EBRD as investor in largest emerging market Green Bond fund § EBRD invested in Amundi Planet – Emerging Green One alongside the IFC, EIB and commercial institutional investors in March 2018. § The Fund represents a sizeable commitment of USD 1. 4 billion pledged towards Green Bonds issued by financial institutions active in emerging markets. § Key eligibility criteria: 22