Front Matter
  • 1 0000000404811396 Monetary Fund
  • | 2 0000000404811396 Monetary Fund

Title page




Preparing Financial Sectors for a Green Future

Managing Risks and Securing Sustainable Finance

Prepared by an IMF team led by Bozena Radzewicz-Bak and Jérôme Vacher and comprising Gareth Anderson, Filippo Gori, Mahmoud Harb, Yevgeniya Korniyenko, Jiayi Ma, Moheb Malak, Dorothy Nampewo, and Sahra Sakha

Copyright Page

Copyright ©2024 International Monetary Fund

Cataloging-in-Publication Data

IMF Library

Names: Radzewicz-Bak, Bozena, author. | Vacher, Jérôme, author. | Anderson, Gareth, author. | Gori, Filippo, author. | Harb, Mahmoud, author. | Korniyenko, Yevgeniya, author. | Ma, Jiayi, author. | Malak, Moheb, author. | Nampewo, Dorothy, author. | Sakha, Sahra, author. | International Monetary Fund, publisher.

Title: Preparing financial sectors for a green future : managing risks and securing sustainable finance / prepared by IMF team led by Bozena Radzewicz-Bak and Jérôme Vacher and comprising Gareth Anderson, Filippo Gori, Mahmoud Harb, Yevgeniya Korniyenko, Jiayi Ma, Moheb Malak, Dorothy Nampewo, and Sahra Sakha.

Other titles: Managing risks and securing sustainable finance. |

International Monetary Fund. Middle East and Central Asia Department (Series).

Description: Washington, DC : International Monetary Fund, 2024. | Feb. 2024. | DP/2024/002. | Includes bibliographical references.

Identifiers: ISBN:

  • 9798400255250 (paper)

  • 9798400255458 (ePub)

  • 9798400255373 (WebPDF)

Subjects: LCSH: Climatic changes—Economic aspects—Middle East. | Climatic changes—Economic aspects— Asia. | Fiscal policy—Middle East. | Fiscal policy—Asia.

Classification: LCC QC903.2.M635 R3 2024


The authors are grateful to Subir Lall for his oversight of the project. Additionally, they extend their thanks to Ali Al-Eyd, Tokhir Mirzoev, and Ran Bi for their guidance throughout the process and for their valuable and constructive suggestions. Special thanks go to Chris Geiregat, Amine Mati, and Alexander Tieman for their helpful comments. The paper also benefited from discussions with Jihad Azour, the IMF’s Middle East and Central Asia (MCD) Director, the Financial Sector Group (FSG), country teams, and participants of a Middle East and Central Asia departmental seminar, as well as with representatives of the private sector and other international financial institutions. We thank the Communications Department, the Fiscal Affairs Department, the Legal Department, the Monetary and Capital Markets Department, the Research Department, the Strategy, Policy, and Review Department, and the Statistics Department for their useful comments, and Executive Director offices for their input.

Vaishnavi Rupavatharam and Tatiana Pecherkina provided excellent research and administrative assistance throughout the project. The authors would also like to also thank Lorraine Cofey for leading the editorial and production process.

The Departmental Paper Series presents research by IMF staff on issues of broad regional or crosscountry interest. The views expressed in this paper are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Publication orders may be placed online or through the mail:

International Monetary Fund, Publication Services

P.O. Box 92780, Washington, DC 20090, U.S.A.

T. +(1) 202.623.7430


  • Executive Summary

  • Acronyms and Abbreviations

  • Glossary

  • 1. Introduction

  • 2. Facing the Challenges: Climate Change Risks in the Financial Sector

    • A. Climate Change Risks and Bank Stability Nexus in the ME&CA Region

    • B. Impact from Physical Risks on Banks in the ME&CA Region

    • C. Impact from Transition Risks on Banks in the ME&CA Region

    • D. Climate Risks and the ME&CA Insurance Sector

  • 3. Green Transition: A Look at the Investment Needs in the ME&CA Region

  • 4. Opportunities in the Domestic Financial Sec tor s in the Transition to a Green Economy

    • A. Evolution of Climate Finance in the ME&CA Region

    • B. Scaling Up Opportunities for Financing the Green Economy and the Role of the Domestic Financial Sectors

  • 5. Policy Considerations

  • Annex 1. Data and Empirical Framework for Assessment of Impact from Acute Physical Risks

  • Annex 2. Data and Empirical Framework for Assessment of Impact from Transition Risks

  • Annex 3. The Structure of the Insurance and Reinsurance Sectors, and the Role of the Reinsurance Sector in Mitigating Climate Risks in the ME&CA Region

  • Annex 4. Investing for a Greener Economy: The Special Role of SWFs in Scaling Up Green Finance in the ME&CA Region

  • Annex 5. Potential Role of Central Banks in Supporting the Development of Climate Finance and Markets

  • References


  • Box 1. Climate Risk Analysis in ME&CA Financial Stability Reports

  • Box 2. Bank Stock Returns around Climate Disasters

  • Box 3. Public Green Financing Inflows to ME&CA (including Multilateral Development Banks)

  • Box 4. Islamic Financial Instruments and Green Financing in the Middle East and Central Asia

  • Box 5. The Development of Carbon Pricing Mechanisms and Carbon Markets in the Middle East and Central Asia


  • Figure 1. Orderly and Disorderly Scenarios for Unfolding Physical and Transition Risks and Their Interaction

  • Figure 2. Climate Risks and Transmission Channels to the Banking Sector Risks in the ME&CA Region

  • Figure 3. Physical Risks in the ME&CA Region

  • Figure 4. Projected Median Increase in the Larges t Five-Day Cumulative Precipitation

  • Figure 5. On Average, ME&CA Banks Appear to Be Able to Withstand a Single Climate-Related Disaster

  • Figure 6. Future Physical Risks for the ME&CA Banks

  • Figure 7. ME&CA Emissions per GDP, 2019

  • Figure 8. ME&CA Sectoral Emission Intensity, 2019

  • Figure 9. ME&CA Firm-level Stress Test

  • Figure 10. ME&CA Banking Sector Stress Test

  • Figure 11. Share of Loans at Risk

  • Figure 12. Stranded Assets by Type of Fossil Fuel

  • Figure 13. Stranded Assets by Sector

  • Figure 14. Stranded Assets by Type of Ownership

  • Figure 15. Cumulative Losses Mediated through the Financial Sector

  • Figure 16. Climate Risks and Transmission Channels to the Insurance Sector in the ME&CA Region

  • Figure 17. Insurance Resilience Index against Natural Catastrophes

  • Figure 18. Economic Losses and Insured Losses due to Natural Catastrophes in ME&CA

  • Figure 19. ME&CA Financing Needs, Upper Range

  • Figure 20. Expressed Financing Needs, by Region

  • Figure 21. Countr y Classifcation Based on Resource Endowment and Financial Development

  • Figure 22. ME&CA Financing Needs and Government Debt

  • Figure 23. Adaptation Costs to Selected Climate Risks

  • Figure 24. Climate Finance Flows

  • Figure 25. Climate Finance Composition, 2019/20

  • Figure 26. Private Climate Finance Composition, 2019/20

  • Figure 27. Green Financing by Instruments and Industry, 2003–22

  • Figure 28. Total Deposit Grow th in Commercial Banks of Oil Exporters

  • Figure 29. Financial Development Indices, 2021


  • Table 1. Policies to Strengthen the Bank Resilience to Climate Events

  • Table 2. Potential New Macroprudential Tools and Measures

  • Table 3. Financial Sec tor Actions to Facilitate Private Green Financing

  • Table 4. Enabling Environment for Private Green Finance

Executive Summary

The financial sectors in Middle East and Central Asia (ME&CA) countries should play an important role in supporting climate related policies for the region. The sectors are vulnerable to downside risks from climate-related shocks and at the same time offer potential to help fll the financing gap for needed adaptation and mitigation strategies. Successful approaches to climate change in the region therefore require coherent integration of financial sector strategies within the overall policy framework to meet climate challenges.

To this end, policymakers must ensure that financial sectors are prepared for a green future. Given the significant disparity in savings among countries in the ME&CA region, this calls for a tailored approach. Specifically, in countries with less developed private finance, bolstering financial readiness is crucial. Oil-exporting countries can channel their substantial oil revenues and public savings into climate investment initiatives, while continuing to foster the growth of private green finance. Oil-importing countries should prioritize the development of their capital markets to enhance investment capabilities. Meanwhile, low-income countries and fragile states face a distinct challenge due to their limited financing, while any additional debt issuance might lead to the crowding out of private investment. Nevertheless, they can still focus on mitigating risks within their financial sectors, thereby creating a more conducive environment for future green investments. Each of these strategies is vital in addressing the unique financial landscapes across the ME&CA region.

Specifically, in the near term, policymakers should prioritize a better understanding and measuring of climate-related risks. This includes implementing methodologies for quantifying and reporting such risks, promoting their transparent disclosure by financial institutions, and strengthening frameworks for their forecasting and analyzing. Policymakers should also ensure the adoption of robust climate risk management practices within financial institutions and take steps to develop insurance sectors and leverage reinsurance markets. At the same time, efforts are needed to create a more conducive ecosystem for green finance. Governments should finalize climate strategies, support sustainable finance frameworks, and develop standardized sustainable finance taxonomies.

Over the medium term, governments can support green finance through incentives and market mechanisms, phasing out energy subsidies, and introducing new tools and markets (such as carbon pricing frameworks), which can stimulate demand for investment in green technologies. Similarly, central banks and regulators can provide guidance on integrating green finance into investment decisions and enforcing green investment disclosure standards. They can work toward promoting the deepening of domestic capital markets and identifying and addressing barriers to accelerating green finance. Finally, substantial scope exists for collaboration between public and private sectors within and across regions, including through regional and international initiatives, involving international financial institutions and multilateral development banks, sovereign wealth funds, and state-owned entities to bridge the financing gap for climate investment needs.

The paper offers a unique regional perspective on climate risks in ME&CA’s financial sectors and outlines the road ahead in transitioning to a green future. It is the first to evaluate the impact of climate change on banking institutions in the region and assess the capacity of insurance in mitigating climate-related damages and losses. It contributes to the existing literature by synthesizing the size and nature of regional financing needs for adaptation and mitigation and discussing both opportunities and challenges for the development of green finance. The paper’s policy recommendations provide guidance to policymakers on how to enhance financial sustainability amid climate change risks.

Key Findings

On risks to financial sector stability in the ME&CA region:

  • ▪ ME&CA financial sectors are exposed to physical risks from climate change. Although past climate disasters in the region have had only moderate impact on banks’ performance, limited buffers to deal with climate change shocks (as evidenced by substantial gaps in protection and insurance coverage in the region) could result in large uninsured losses, thus weighing heavily on the economy. With the projected intensifcation and frequency of climate-related hazards, potential loan losses from physical risks are expected to increase. Our analysis indicates the combined cumulative loan losses of banking sectors of 30 ME&CA countries could reach $11 billion by 2030 and approximately $50 billion by 2050 (in 2021 prices), or around 1 to 1.5 percent of the region’s total bank assets in 2021.

  • ▪ The materialization of transition risks in the region could have adverse systemic implications. The ME&CA region’s economic sectors exhibit higher emissions intensity compared to the median for emerging market countries. Banks with larger credit exposures to high emission sectors (for example, utilities, transportation, manufacturing, and agriculture) are more vulnerable to decarbonization efforts, with oil-exporting countries and the Caucasus and Central Asia region facing heightened vulnerability to these risks. Stress tests at the firm level indicate that substantive mitigation measures (proxied by a one-time increase in the carbon price) could result in bank capital losses ranging from $70 billion (2.5 percent of GDP) to $140 billion (5.0 percent of GDP).

  • ▪ Insufficient insurance capacity in the ME&CA region results in public sectors and other entities bearing uninsured damages and losses from climate-related shocks. The region’s dependency on the reinsurance market is growing and has become more competitive. This presents an opportunity for the primary insurance market to diversify its insurance portfolio, potentially acting as a catalyst for increasing primary insurance coverage for climate-related disasters.

On the ME&CA region’s investment needs for climate change mitigation and adaptation and private and green climate finance development:

  • ▪ The supply of green finance in ME&CA countries is gradually increasing, yet it remains small when compared to the region’s significant financing needs for climate mitigation and adaptation investment. In particular, private climate finance in the ME&CA region is limited compared to other regions, with only around 0.2 percent of GDP originating from domestic financial institutions and markets. Green finance is at an early stage of development and is highly concentrated in just a few countries in the region, primarily within the Gulf Cooperation Council. By comparison, the expressed official multiyear financing needs total at least $1 trillion dollars by 2030, and according to some estimates, these financing needs may even surpass $2.6 to $3.1 trillion by 2030. Low-income and fragile states, as well as countries with underdeveloped financial sectors, report higher investment needs relative to their GDP.

On the financial sector’s role in financing green transition and attracting more private climate investment in the region:

  • ▪ There are significant opportunities for ME&CA domestic financial sectors to develop their role in climate finance. Recent financial innovations in the region, a surge in green bond issuance, and a prominent role played by sovereign wealth funds in oil-exporting countries offer encouraging signs that some large mitigation projects can be financed solely with nonpublic capital or through public-private partnerships. Domestic banking sectors have a comparative advantage in further channeling savings and providing finance for green investments in some specific segments (for example, small and medium-sized enterprises and households) and areas (for example, energy efficiency) given their knowledge of local borrowers. In oil-exporting countries, developing climate finance early on is one of the avenues to help sever the strong link between bank funding and hydrocarbon prices. It will also help in reducing challenges to financing climate initiatives over the medium term and in lowering exposure to transition risks.

Acronyms and Abbreviations


Caucasus and Central Asia


environmental, social, and governance


Financial Stability Report


Gulf Cooperation Council


greenhouse gases


interest coverage ratio


international financial institution


Middle East and Central Asia


Middle East and North Africa


Middle East, North Africa, Afghanistan, and Pakistan


nationally determined contribution


public-private partnership


state-owned enterprise


sovereign wealth fund


Adaptation Actions that reduce the negative impact of actual or expected harmful climatic events on the environment, economy, and social fabric, or making the most of any potential beneficial opportunities for human and society.

Climate bonds A subset of green bonds (see “green bonds”) that specifically focus on projects that address climate change mitigation and adaptation.

Climate change Long-term shifts in temperatures and weather patterns, attributed directly or indirectly to human activity that alter the composition of the global atmosphere, in addition to natural climate variability in the solar cycle.

Climate finance Refers to local, national, or international financing from public and private sources to support mitigation and adaptation actions that will combat climate change, including efforts to reduce carbon emissions, support vulnerable communities affected by climate change, climate-related research, as well as climate disaster preparedness, among others.

Climate investment The allocation of financial resources toward projects, activities, and initiatives that contribute to tackling climate change and its impacts. They include investment in renewable energy, energy efficiency, sustainable transportation, clean technologies, and climate sustainable infrastructure that helps communities adapt to climate change.

Climate scenario A plausible representation of how the future can develop based on a coherent and internally consistent set of assumptions about the key drivers of climate change based on, for example, the rate of technological change, prices, and regulatory frameworks.

Disaster Severe alterations in the normal functioning of a community or a society due to hazardous physical events interacting with vulnerable social conditions, leading to widespread adverse human, material, economic, or environmental effects that require immediate emergency response.

Environmental, social, and governance Framework that incorporates environmental, social, and governance factors into investment decision making. It recognizes that climate finance should not only consider financial returns, but also the environmental impacts, and takes the following into account: greenhouse gas emissions, resource usage, and climate change mitigation and adaptation efforts.

Green bonds Green bonds are debt securities issued by governments, municipalities, corporations, or other organizations to finance projects that have positive environmental impacts.

Green finance It entails the incorporation of environmental factors and sustainability principles into financial services, products, and decisions. This encompasses both (1) directing resources toward ecologically beneficial projects and (2) incorporating environmental risk assessment into financial decision-making processes.

Greenhouse gases Gases in the Earth’s atmosphere that absorb infrared radiation of certain wavelengths from the Sun and release it. The more of these gases exist, the more heat cannot escape into space, and consequently, the more the earth heats up.

Green investment Refers to the allocation of financial resources to projects, businesses, and initiatives that have positive environmental impacts. These investments are made with the intention of promoting sustainability, reducing carbon emissions, conserving resources, and addressing environmental challenges.

Greenwashing Misleading practices to create a false impression of environmental responsibility or commitment to climate-friendly initiatives, often to attract investments or improve public perception. They include exaggerating the environmental benefits of financial products or underreporting the climate impact of investments.

Liability risk The risk that arises from potential future compensation claims that insurers and reinsurers face against policyholders failing to manage climate-related risks.

Mitigation Actions that reduce the flow of heat trapping greenhouse gases into the atmosphere by reducing the sources of these gases (for example, burning fossil fuels) or by increasing the places to “store” them and thus allowing for their greater accumulation.

Patient capital Refers to long-term capital, where investors are willing to forgo immediate profits in anticipation of greater returns in the future. Rather than seeking quick gains, patient capital emphasizes the importance of sustainable and enduring outcomes.

Physical risk The risk that results from the economic costs of climate-related events. It is typically grouped into two categories: acute and chronic. Acute physical risk results from extreme weather events and natural disasters such as floods, wildfires, hurricanes, heavy precipitation and storms, and heatwaves, while chronic physical risk arises from longer-term changes in climate patterns, such as rising average temperatures, sea level rise, desertification, and ocean acidification.

Stranded assets Physical assets that are economically unviable to exploit and must be written off. This is particularly pertinent to fossil fuel-based assets that may become unprofitable or obsolete as the global economy transitions towards low-carbon alternatives.

Tipping point In the case of climate change, it refers to a critical threshold when global or regional climate changes from one stable state to another stable state does not return to the initial state, even if the drivers of the change abate.

Transition risk The economic and financial impact resulting from the introduction of climate policies to reduce carbon dioxide emissions, technological advances, and changes in consumer sentiment on high-emitting firms, sectors, and economies.

Preparing Financial Sectors for a Green Future: Managing Risks and Securing Sustainable Finance
Author: Bozena Radzewicz-Bak, Jérôme Vacher, Gareth Anderson, Filippo Gori, Mahmoud Harb, Yevgeniya Korniyenko, Jiayi Ma, Moheb T Malak, Dorothy Nampewo, and Sahra Sakha