Greening the Financial Sector: The Central Bank of Jordan’s Green Finance Strategy
Financial Services Focus
Dana AbduljaleelPartner,Banking & Finance
Celine KishekTrainee Lawyer,Banking & Finance
On 13 November 2023, the Central Bank of Jordan (the “CBJ”) launched the Green Finance Strategy 2023-2028 (the “Strategy”), the first of its kind in the MENA region. The Strategy applies to all banks, insurance companies, and micro-finance institutions licensed in Jordan. Its aim is to combat climate change by shifting towards more environment-friendly investments and projects. This involves two main pillars: managing climate-related financial risks and mobilising green finance.
According to the World Bank Group Country Climate and Development Report of 2022, Jordan’s annual maximum and minimum temperatures have risen, and annual precipitation has decreased, exacerbating water scarcity. Adverse climate changes directly expose Jordan to financial risks. This is expected to have a direct correlation on investment financing and opportunities in Jordan, particularly taking into account the pivotal role of FDAs in financing major projects in Jordan in their advocacy of ESG policies. Climate change can also directly harm borrowers that are vulnerable to water stress and rely on energy as their main source of input from a credit point of view.
As a response, the CBJ carried out a survey with banks in 2021. The responses highlighted that most banks do not have sufficient tools and capabilities to alleviate climate change risks on the financial sector. This provides the backdrop for launching the Strategy.
The CBJ has specified the following objectives for the Strategy:
To strengthen capacity and governance, operationalise systems, and implement policies for green financing and climate-risk management.
To enhance resilience of financial institutions to climate-related and environmental risks.
To increase mobilisation of green finance.
The CBJ seeks to achieve the objectives by developing a holistic capacity-building program to mobilise green finance and manage environment-related financial risks, centred on three levels as follows:
Institutional level, focusing on training CBJ staff on green finance and climate risk management.
Sectoral level, focusing on raising awareness within the financial sector and organising joint capacity building events with financial institutions.
International level, focusing on participation in the international community.
Significantly, the CBJ will also establish the Climate Change Risk and Green Finance Division (the “CCRGFD”) as an extension of the Financial Stability Department. The CCRGFD will be authorised to implement the Strategy in collaboration with the CBJ by structuring capacity building needs and measures within the CBJ and developing a capacity building action plan.
The CBJ will integrate climate change considerations into its financial stability framework (a framework in place to identify and mitigate systemic issues). This entails the identification of climate risks material to Jordan’s financial stability and promptly taking steps, including following best international practices, developing a tool kit, and issuing guidance to mitigate such risks.
On a smaller scale, the CBJ will also integrate climate considerations into its micro-prudential framework. As part of this process, financial institutions licensed in Jordan will be obliged to integrate climate risks into their frameworks. This may require financial institutions to adjust their strategies and policies, risk management, and internal control system to mitigate climate risks likely to impact the financial sector. In this regard, the CBJ will issue regulations that impose an obligation on financial institutions to report on climate-related financial risks and appoint and train designated staff for such purposes.
As Jordan is a Muslim country, implementing a sustainable financial strategy aligned with Sharia can incentivise individuals seeking Sharia-compliant investment opportunities and strengthen Islamic banks and financial institutions’ response to climate risks affecting the financial sector. In consideration of this, the Strategy sets out a framework for Sharia compliant sustainable finance. The framework will include, among other things, guidance on Islamic sustainable finance development and fatwas relating to sustainable structures and products. The CBJ will further design a framework specifically for Islamic financial institutions to ensure that their businesses are aligned with Sharia-compliant green financing.
The Strategy sets out the following five steps that the CBJ will take in order to boost green finance in Jordan:
Addressing informational gaps
A potential shortcoming of introducing green finance to the Jordanian financial sector is that obtaining information about the greenness of a financial service can be costly for both the borrower and the financial institution. In consideration of this, the Strategy introduces the idea of a national green taxonomy. This presents a systematic mechanism which seeks to classify green financing, thereby reducing information costs for individual borrowers and financial institutions.
Levelling the playing field for green finance products
The CBJ aims to design a green loan framework, providing a mechanism by which borrowers can take a loan from a financial institution on the basis that it will use such funds to contribute to the environment. The CBJ will further issue guidelines to stimulate the use of green finance products and services. Examples of such products and services include green mortgages, green credit card services, and sustainable trade finance.
Partnerships to facilitate the green finance market
The Strategy emphasises the need for policy de-risking (i.e., achieving an environment that is suitable for private sector investments) and financial de-risking (i.e., mitigating financial risks relating to green investment). The CBJ plans to undergo the process of de-risking by developing a green credit guarantee program in collaboration with the Jordan Loan Guarantee Corporation and by utilising green blended financing structures. The latter involves using public funds to reduce risks of investing in the private sector, incentivising private investors and lenders to undertake investments that they otherwise would not undertake due to the associated financial risks.
Undertaking CBJ’s other climate-responsive activities
The CBJ will integrate environmental considerations into its wider policies, such its reserve management policies and the monetary policy framework.
Monetizing emission reductions from carbon finance or results-based climate finance
Finally, the Strategy moves to discuss low-carbon investments and projects. In this respect, the CBJ aims to mobilise results-based climate finance (“RBCF”). RBCF is a process by which rewards are given for emission reductions generated while undergoing low-carbon project or policy. To mobilise RBCF, the CBJ will take steps including issuing guidelines to explain RBCF, collaborating with authorities such as the Ministry of Finance and Ministry of Environment, and developing policies to present its utilisation of RBCG. An example of how RBCF can be mobilised is for RBCF payments to be made to commercial banks if they increase their share of loans for green projects in their lending portfolio. Alternatively, penalties can be imposed on commercial banks if they fail to meet a specific standard for green lending.
Climate change has rendered essential sector-wide changes. The Strategy presents a comprehensive framework for developing a sustainable financial system in Jordan. As Jordan’s financial sector represents more than 180% of Jordan’s GDP, developing the financial sector through an environmental-friendly finance mechanism can directly promote economic growth. More widely, the Strategy as the first of its kind in the region can provide a model for other countries and sets the ground for Jordan’s leadership position in green finance.
For further information,please contact Dana Abduljaleel and Celine Kishek.
Published in February 2024
