Why sustainable finance is a priority for developing countries and the Western Balkans Region?
WB6 is not an island. It is a vibrant group of countries, whose current and future development is closely linked to emerging trends, policy and financing decisions taken elsewhere and, particularly within the European Union (EU).
Green transition is not just a business opportunity. It is smart economics and a development imperative, which will shape the countries’ future. Thinking about transition, new business and economic development opportunities may sound ethereal in the current juncture, when some firms may be still grappling with the consequences of the pandemic. But, it is what lies ahead of us and, willingly or unwillingly, market dynamics, policy and regulatory incentives will eventually drive the change.
You are all familiar about the European Green Deal (EGD) launched in December 2019, so I won’t elaborate on its objectives. What is important, however, is to highlight that its objective of promoting a concerted strategy for a climate-neutral, resource-efficient and competitive economy for Europe is closely linked and, to a certain extent, dependent on the development of green finance, including investment taxonomies, disclosure of climate related risks and new instruments such as green bonds.
Several WB countries are candidates for EU membership and have anchored key economic reforms in EU regulatory and policy frameworks. However, even without the prospect of imminent membership, the WB6 countries would benefit from adjusting and preparing their economies to the EGD to continue deriving long-term benefits from trade, investment and financial linkages with the EU.
While the Green Deal requires the transformation of both the public and private sectors, the private sector should be at the forefront of the new growth model. About half of total GHG emissions and more than 90 percent of biodiversity loss and water stress come from resource extraction and the industrial processing of materials, fuels, and food. The private sector would have a critical role to play for industrial transformation.
The European Commission’s New Circular Economy Action Plan and New Industry Strategy lay out the vision, the guiding principles and the roadmap for industry’s transformation toward a clean and circular model.
- At the heart of the Circular Economy Action Plan and the New Industrial Strategy lies making products fit for a climate-neutral, resource-efficient and circular model of production, reducing waste and ensuring that the sustainability performance of the front-runners becomes the norm for industrial companies. To achieve this goal would require designing sustainable products, increasing circularity in production processes and empowering customers and public buyers to make informed decisions, but also redesigning standards and promoting the transition towards different production models.
- To maintain their competitiveness, companies will need to invest in new technologies, and internalize innovation and digitalization, which will require not only transforming their manufacturing processes, but also their key business functions, including corporate governance, financial management, accounting, and human resources. Finally, achieving this transformation and bridging firms’ investment gap will require unlocking private capital and greening the financial sector.
The implementation of the green financial sector, currently underdeveloped, would support the stability and development of the financial sector in Kosovo, while also accelerating convergence with the EU financial system. At present, the financial sector has much lower depth and is far less diversified than the EU one.
The depth of the financial sector measured by private sector credit to GDP stands at an average of 48 percent – significantly lower than the ECA average of 87 percent. Financial sector continues to face several challenges to its development and stability in both the short and medium term, including the impact of the COVID-19 crisis. Reforms to implement sustainable and green finance which include strengthening of the risk management, governance, reporting and disclosure standards and development of new and long-term instruments would significantly contribute to the development of the financial sectors in Kosovo.
Greening the financial sector starts upstream, with regulators driving the change with regulators playing a big role to create the enabling conditions for financial institutions to accompany firms along the green transition.
Noting that the financial sector holds enormous power in funding and bringing awareness to issues of sustainability and to enable sustainable finance, from informing decisions, to exerting pressure on companies to innovate, governments, regulators, and standard setting bodies have been working for decades at strengthening the regulation, supervision, and capacity of the financial sector to implement sustainability principles.
Let’s think at the coordination at the international level within the Network for Greening the Financial System, or at the work done by the Bank for International Settlements (BIS), Basel Committee on Banking Supervision (BCBS), Financial Stability Board (FSB), to cite some, to incorporate environmental, social, and governance (ESG) principles into business decisions, economic development, and investment strategies.
Mindful of the physical and transition risks associated to climate change, and in line with the guidance provided by standard setter bodies, countries have been reforming their financial sectors to promote sustainable and green finance, focusing on risk management capacity, development of new financial products, increased transparency and reporting on climate related risks, development of new taxonomies to incentivize green investments and development of standard and reliable data.
Developing sustainable and green finance is a priority for developing countries and countries in the Western Balkans region including Kosovo. In the case of Kosovo, this is even more important, not only because of the incipient level of development of the country’s financial system, but also because of:
- Higher vulnerability: Emerging markets tend to be particularly vulnerable to natural disasters and the impacts of climate change. Many developing countries have higher than average exposures to natural disasters, climate change, and other environmental risks (including land, water and air pollution). At the same time, they have limited capacity and resources to deal with these impacts, let alone steer for more sustainable economic development. Latest example of this was Covid crisis which deeply impacted economies in Western Balkans region.
- Investment gap: Reducing emissions and becoming more resilient are possible, but require major social, economic and technological changes which are only possible with new investment. With limits in public spending, there is a significant opportunity for the financial sector to contribute to green growth in Western Balkans and in Kosovo, but the capacity of the financial sector to mobilize green finance must be developed.
How can World Bank support green and sustainable finance agenda in Kosovo?
The World Bank Group can support the private sector to build capacities to identify and leverage opportunities arising from the necessary transition to greener economy.
At the same time, the WBG can support financial sectors across emerging markets through its work with central banks, and private sector financial institutions through targeted advisory engagements. These are opportunities to equip governments with the necessary frameworks to create enabling environments and risk mitigation practices to embrace climate action, while also enabling innovative and scalable funding mechanisms in support of sustainable investments. More specifically World Bank can support Kosovo in:
- Conducting green and sustainable finance diagnostics build on well-established methodologies that the World Bank has applied in Financial Sector Assessment Programs (FSAPs) through the Climate Change and Environmental Risks and Opportunities (CERO) Assessments.
- Developing green finance roadmaps informed by the Green Finance Diagnostics, which will outline the long-term strategic direction to green the overall financial system and developments needed to advance the countries’ green and sustainable finance agenda.
- Providing targeted implementation support for green finance reforms (i.e. risk management, taxonomies, disclosure).
- Supporting development of new and innovative financial products to scale up green finance (i.e. green bonds, green infrastructure finance, green mortgages).
Providing financing for sustainable and green investments.
In sum, if it is true that green is the new black, then when money talks, it talks green and only those economic actors who will be able to adjust to the new normal will be able to thrive in the new green world.