Western Balkan countries are highly vulnerable to costly natural disasters such as floods, wildfires, earthquakes and droughts, and climate change will only exacerbate the frequency and intensity of weather-related risks. meteorological. Tackling climate change also brings its own significant challenges, as the transition to less carbon-intensive economic activities may lead to a transformation in certain economic sectors that may require new investments.
The region must remain vigilant about the impact of climate change on its financial sectors. Physical and transition risks related to climate change may result in lost revenue, increased credit risks and reduced sources of financing for customers in affected sectors such as mining, energy or agriculture. At the same time, economic shocks such as the COVID-19 pandemic and the aftermath of Russia’s invasion of Ukraine have reduced fiscal space in the Western Balkans. With limited public resources for investing in climate change adaptation and mitigation and shallow capital markets, domestic banking sectors are seen as key players in mobilizing private funds for green investments.
The Western Balkans still have a way to go on green finance
Green finance – whereby loans and investments from financial institutions contribute to climate change mitigation, adaptation and resilience to climate change and the mitigation of environmental risks – is essential, but progress remains at an initial stage. initial stages in the Western Balkans. Despite significant physical and transition risks as well as their proximity and economic ties to the European market, governments in the region lack comprehensive strategies and roadmaps to address climate and environmental risks. Green taxonomies, a key factor for creating a green loan and bond market, have yet to be developed, while disclosure requirements for large companies and other economic agents have not been introduced. And banking supervisors are only beginning to take a closer look at financial institutions’ exposure to climate risks.
A first step would be to address the imbalance in fiscal, economic and environmental policies. For example, public subsidies are still offered to economic activities with a high carbon footprint, and effective carbon taxation is largely lacking. Uncertainty over long-term government policies can also hinder the development of sustainable economic projects, while a lack of data can limit the ability of financial institutions to identify and create green assets and manage climate risks. Furthermore, as noted in a recent World Bank Toolkit, high initial financing costs, transaction costs, lack of experience with new technologies and long payback periods of some green projects could increase the real and perceived risk of green projects overall. These factors may indirectly influence investor appetite, which will negatively impact investment and lending decisions.
Ways forward for green finance in the Western Balkans
To green the region’s financial sector, Western Balkan governments must consider:
Prioritize sustainability strategies and green taxonomies
Central banks and banking supervisors in the region are taking their first steps towards preparing and approving sustainable development strategies and roadmaps. These strategies are developed by the central banks of Albania, Kosovo, Montenegro and North Macedonia, as well as the banking branches of Bosnia and Herzegovina.
At the same time, finance ministries should take the lead in developing green taxonomies, essential for defining green investments and finance, which will enable banks, insurers and capital market institutions to develop new instruments , and for central banks and supervisors to rely on standardized and comparable data. , and companies to provide the appropriate information.
Promote prudential management of climate and environmental risks
To support the prudential management of climate and environmental risks, financial authorities must develop an approach to assessing climate and environmental risks. Regulators must have a comprehensive understanding of the climate and environmental risk situation of the banking sector. Albania, Bosnia and Herzegovina, Kosovo and North Macedonia are in the early stages of publishing environmental risk surveys of commercial banks, while Bosnia and Herzegovina and North Macedonia have started to develop a strategy for green finance.
Develop green finance instruments
Western Balkan governments could explore possibilities of issuing green and blue sovereign bonds; Serbia issued sovereign green bonds in 2021. To help mobilize private capital for climate mitigation and adaptation, financial authorities could cooperate with businesses and financial market participants to develop lines green finance guidelines for issuance as well as to establish minimum entry requirements for independent evaluators, ratings or green bonds. verification services to ensure the quality of external reviews and improve comparability. As the corporate bond market is nascent in the Western Balkans financial sector, governments could consider introducing incentive mechanisms to reduce transaction costs, such as external reviews of green bonds. Additionally, working with institutional investors to integrate sustainability considerations into the investment decision-making process could promote demand for green assets.
Finance ministries can also explore the possibility of introducing risk pooling mechanisms at the sectoral level for insurance against natural disasters, such as agricultural insurance. Existing national development banks and credit guarantee schemes could also play a leading role in greening the financial sector.
Finally, for the purposes of capacity building and knowledge exchange, Western Balkan governments could also consider joining international platforms such as Coalition of Finance Ministers for Climate Action.
