A new UNEP FI policy brief examines how jurisdictions across the Asia-Pacific (APAC) region are incorporating climate-related risks into prudential frameworks, finding trends towards integration within micro- and macroprudential regulation and climate-related disclosures.
As a region highly vulnerable to climate change impacts, with rapid economic growth and development needs, APAC has a critical role to play in ensuring a just transition to mitigate global climate change while adapting and building resilience to its impacts. Governments, central banks and supervisors throughout APAC have recognized the potential for climate-related impacts to negatively affect financial system stability, the economy and social welfare. Policymakers are actively working on solutions to align financial sector activities with climate action, as detailed in the new report.
The report, “Climate-related risks in financial regulation and supervision in APAC: A policy landscape analysis”, assesses how central banks and banking supervisors are leveraging prudential regulation—rules and requirements intended to ensure the financial sector’s stability and soundness—in relation to climate change within their respective mandates.
Central bank mandates across the region demonstrate great variety in how explicitly they enable regulators to address risks and impacts of climate change. While traditional central bank mandates focus on financial and price stability, Malaysia, the Philippines, Singapore and New Zealand have explicitly included sustainability in their central bank mandates. Other central banks, for example in mainland China, South Korea, Thailand and Indonesia, implicitly reference broader sustainability-related objectives.
Even within the bounds of traditional mandates, central banks can incorporate climate-related risks into financial regulation and oversight. For example, the Hong Kong Monetary Authority, Japan’s Financial Services Agency and Bank of Japan have conducted climate-focused macroprudential exercises, including climate stress testing and scenario analysis, to assess the potential impacts of climate change on financial institutions and financial system stability. Each of the 12 jurisdictions covered in the analysis has either conducted or is conducting these exercises.
Jurisdictions’ approaches to microprudential regulation of climate-related financial risks are broadly consistent with the Basel Committee on Banking Supervision’s three-pillar framework. Pillar 2—focused on supervisory review—has been the primary entry point for incorporating climate risks, with many authorities already integrating climate considerations into risk governance expectations, internal capital assessments and supervisory dialogue. Progress is also being made under Pillar 3, with growing emphasis on enhancing transparency through climate-related disclosures. Work under Pillar 1 is at an earlier stage, as authorities and the BCBS continue to assess how climate-related financial risks can be effectively captured within minimum capital requirements, in line with the current evidence base and evolving methodologies.
“Overall, a broader and deeper integration of climate considerations into prudential frameworks is emerging. This can support more climate-resilient financial systems and encourage capital flows towards sustainable activities to support the climate transition.” – Laura Canas da Costa, Global Policy Co-Lead, UNEP FI
The report also notes that prudential regulation does not act in isolation, citing the importance of a consistent approach that includes the broader “policy enabling environment” of sustainable finance taxonomies, corporate disclosures and corporate due diligence frameworks.
The analysis concludes that as climate-related prudential regulation continues to evolve across APAC, there is a clear trend towards stronger mandates, greater alignment with international frameworks, more refined risk assessment methodologies and broadening of central banks’ regulatory scope to include environmental risks.
Ultimately, a well-coordinated approach across regulatory bodies, financial institutions and policymakers will be important in driving an effective and efficient low-carbon transition. Strengthened regulatory foundations, informed by industry input and international best practices, will support financial stability while contributing to a broader shift towards sustainable economic growth in the region.
