News Story
New World Bank Report Urges Collective Action to Address Financial and Climate Challenges in EMDEs
Emerging markets today stand at a critical juncture where climate change is expected to have a significant impact on economic opportunities and development outcomes. Banks, making up most of the financial sector in Emerging Market and Developing Economies (EMDEs), have the potential to play a larger role in closing the climate financing gap but are limited because of financial risks.
A new flagship Finance and Prosperity 2024 report focuses on the financial challenges and opportunities in EMDEs, especially highlighting the urgent issues around climate risks and the need for significant investments in financial sector development. It also urges for collective action to support governments in testing new approaches to support climate financing, without compromising on the important goals of financial sector stability and financial inclusion for the most vulnerable people.
Video Overview: Finance and Prosperity Report 2024
Key Findings
Financial sector risks in the majority of EMDEs are low to moderate. But among the lower income countries that face high financial risks, nearly 70% are not prepared to handle financial stress. Important weaknesses in regulatory and supervisory frameworks mean higher risk in some EMDEs facing potential financial stress domestically and globally.
The excessive holding of government debt by domestic banks is an Achilles’ heel in countries struggling with debt sustainability. Between 2012 and 2023, the exposure of banks to government debt surged by over 35%.
In almost 60% of banks in EMDEs, lending for climate-related investment accounts for less than 5% of their overall portfolios, and more than one-quarter offer no climate financing at all. This is significant because in developing economies, banks dominate the financial sector, unlike in advanced economies where the financial sector is more diversified. Climate change is expected to have a significant impact on economic opportunities and development outcomes in EMDEs, requiring far greater investment than they currently receive.
Recommendations
The report urges for collective action to support governments in testing new approaches to support climate financing, without compromising on the important goals of financial sector stability and financial inclusion for the most vulnerable people.
The report recommends countries to strengthen bank buffers well in advance, operationalize financial safety nets, conduct stress tests, and put in place a variety of essential tools. These include strong interagency crisis-management mechanisms, fully operational emergency liquidity assistance, robust bank resolution frameworks, and adequately funded deposit insurance systems to reduce the likelihood of financial stress and spillovers to the overall economy. Additionally, developing economies should consider introducing disclosure requirements for banks’ exposures to the government to encourage more prudent risk taking by banks and foster market discipline.
Tackling complex financial reforms challenges requires the concerted effort of the global community. The Finance for Development (F4D) Umbrella Program offers a platform for donor financing which can help close the gap in funding for climate action and support the governments in advancing financial stability and financial inclusion for all.
More on the Finance and Prosperity 2024 Report.
Download to discover the critical insights of the Finance and Prosperity Report 2024
Engage with the report’s compelling interactive graphs to explore the data, understand the trends, and gain valuable insights into the future of finance and prosperity.
Read the press release that captures the context of the report and its findings.