Climate change poses risk to Oman’s financial system, central bank warns

August 9, 2023|Written by |Central Bank of Oman

Climate change poses a significant risk to Oman’s financial system, the Central Bank of Oman (CBO) warned in its 2023 Financial Stability Report.

The transition risk and shock of climate change, as well as the shift towards net-zero emissions, are the biggest risks facing the country, the CBO said.

“The impacts of climate change, such as weather events, can have profound implications for individual financial institutions (microprudential risk) as well as the stability of the entire financial system (macroprudential risk),” the report stated.

The risks posed by climate change include physical risks, transition risks and liability risks. The transition to a low-carbon economy presents even bigger risks to an oil-dependent economy like Oman, the central bank said.

“The shift towards reducing carbon footprints requires significant changes in the structure of the economy, which can have profound implications for the operations, investments, and overall business strategies of these institutions,” the report stated. This could mean a restructuring of industries, diversifying revenues, and adopting sustainable practices.

The central bank advised banks and financial leasing companies to enhance their risk management practices regarding climate-related risks, as well as to promote and facilitate green financing. The CBO warned that financial institutions will need to manage transition risks and opportunities during a green transition “to ensure long-term viability and resilience in a changing economic landscape”.

The CBO has also created a preliminary roadmap to foster sustainable and green financing and is working on updating its toolkit “to better measure and address climate related risks”.

However, assessing the actual climate risks is a challenge due to “the difficult-to-predict shocks and significantly long-time horizon spanning over decades for modeling and analysis of transition risks”.

The central bank has previously warned that increasingly extreme weather events and water shortages could put Oman’s financial system at risk, especially in its low-lying urban coastal areas.

This page was last updated August 8, 2023

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