Navigating the complexities of climate-related financial supervision in Asia Pacific

February 29, 2024|Written by Akshat Garg, Siti Kholifatul Rizkiah and Adam Ng

Across the Asia Pacific (APAC) region, central banks and financial supervisors have begun to respond to the call on climate action, thanks to advances in areas such as  microprudential supervision. However, our new analysis of progress across the region shows that significant gaps remain across a range of measures, gaps that must be closed if APAC countries are to reduce emissions and meet international climate targets.

There is wide-ranging consensus that, to reach the goals of the Paris Agreement, efforts to reduce emissions need to be significantly accelerated. According to the latest edition of PwC’s Net Zero Economy Index, an annual global decarbonisation rate of 17.2% by 2050 is required.

Yet the report also highlights a positive trend: in 2022, carbon intensity worldwide was reduced by 20% compared to 2012. At the same time, global GDP grew by 34%, which suggests that effectively separating economic growth from carbon emissions could be possible.

By exploring data from the latest edition of WWF’s Sustainable Financial Regulations and Central Bank Activities (Susreg) tracker, we can see where significant progress has been made in APAC countries, and where there is still significant work to be done to harmonise and shape impactful policy-making.

Progress in microprudential supervision and gaps in monetary policy

In the realm of greening financial supervision and monetary policy, the Asia Pacific (APAC) region presents a fragmented landscape. The integration of climate risks into financial regulation is inconsistent with significant differences observed in methodologies and implementation. Most countries have made notable progress in the area of general disclosure (including the requirement to disclose information on sustainability in annual reporting) and microprudential supervision which includes supervisory expectations on strategy and governance, policies and process, and portfolio management.

Table showing performance of APAC countries in sustainble finance
Figure 1: performance of APAC countries against indicators from the Susreg analysis. © WWF

However, serious gaps are observed in the area of rule-based microprudential supervision which translates climate risks into capital and liquidity ratios requirements. This challenge arises, in part, due to difficulties with integrating climate risks into capital and liquidity ratios.

When it comes to macroprudential supervision, some countries like Singapore, South Korea, Hong Kong and Japan are progressing well, while others, including India and Indonesia, are falling behind. The disparity is particularly evident due to the absence of climate scenario analysis and stress testing by the financial supervisor, risk indicators to monitor the exposure of banks to climate risks, and prudential exposure limits to the most harmful sectors like coal, oil and gas.

On top of this, monetary policies from central banks in APAC have been slow to account for climate risks. While central banks may assert that their primary mandate is price stability and economic growth, dismissing climate risk in monetary policy is risky. The increasing frequency of extreme weather events has the potential to create persistent supply shocks, impacting inflation and posing risks to price stability. Re-evaluating the role of climate risk in shaping monetary policy decisions is therefore imperative.

Inadequacies in climate-related capital requirements and exposure limit

Relatively good progress has been made in setting climate targets. A number of financial supervisors in APAC, including Malaysia, Thailand and South Korea, require their financial institutions to set internal climate targets. For instance, under the Bank Negara Malaysia’s framework for climate risk management and scenario analysis, financial institutions are mandated to identify and diligently track internal climate-related targets.

Bar chart showing climate considerations in sustainable finance indicators
Figure 2: climate considerations across specific Susreg indicators. © WWF

A pivotal inadequacy lies in the absence of explicit climate-related minimum capital requirements and exposure limits within the APAC region. This shortcoming hinders the financial sector’s ability to internalise the costs associated with climate risks. In its recommendations to enhance Pillar 1, the European Banking Authority mentioned that a first option would be to use the existing general systemic risk buffer as a general tool to guard against systemic aspects of environmental risks.

On the positive side, the region’s progress with climate transition plans is gaining traction. For example, the Hong Kong Stock Exchange has proposed in a consultation paper that listed companies should disclose actions addressing climate risks, including changes in business models and climate goals with detailed emissions targets. The Monetary Authority of Singapore issued consultation on guidelines for transition planning in finance sectors, emphasising long-term, comprehensive environmental risk assessment.

Central banks in APAC are starting to integrate climate considerations into their monetary policy through their foreign exchange reserve management, with 11 out of 12 countries pursuing it. However, climate considerations in central banks’ corporate asset purchase programmes and collateral frameworks remain minimal.

The gap in climate banking supervision, despite net-zero targets

The majority of APAC countries have set ambitious net-zero targets, but this does not seem to be translated into strong climate banking supervision policies. And although most governments with 2050 net-zero targets have set intentions to engage all sectors, seven out of 10 APAC countries fail to reach even 50% of the climate criteria outlined in the Susreg tracker.

Scatter diagram showing APAC climate scores against countries’ net-zero target
Figure 3: climate scores of APAC countries compared with noet-zero targets. © WWF

The discrepancy between policy commitments and practical implementation is stark. The gap in effective climate banking oversight underscores the need for a cohesive approach to policy development and execution. There are also regional inconsistencies in the national decarbonisation targets: Thailand, Indonesia, India and China only aim for net zero (carbon neutrality in the case of China) after 2050, and the Philippines has no net zero targets at all.

The technical challenges of integrating climate risks into financial supervision are multifaceted. Financial institutions in the APAC region must develop advanced risk assessment models that can effectively quantify and incorporate climate risks into their risk management frameworks. This requires a harmonised approach among countries towards defining and measuring climate-related financial risks, including the development of standardised metrics and stress-testing protocols.

Furthermore, the development of green finance instruments, such as green bonds and sustainability-linked loans, should be accelerated to facilitate the transition to a low-carbon economy. Financial regulators need to encourage the adoption of such instruments through supportive policy measures and guidelines.

Collaboration is crucial to address the disparities in climate finance supervision across APAC. Shared platforms for knowledge exchange, best practices and capacity-building initiatives can help elevate the overall standard of climate finance in the region.

Examples include WWF’s recent capacity building workshops on climate and nature finance for Bank Indonesia, Otoritas Jasa Keuangan and the Indonesian Ministry of Finance, introducing tools like the Biodiversity Risk Filter, Paris Agreement Capital Transition Assessment and climate stress tests to gain a practical understanding of how climate change and biodiversity loss affect the financial system.

Opportunities for harmonised and effective policy-making are there but they require a blend of technical rigour, innovative financial instruments, regional collaboration and an unwavering commitment to the principle of sustainable finance.

This page was last updated February 29, 2024

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