Aziz Durrani is technical assistance lead for the Asean+3 Macroeconomic Research Office. © Aziz Durrani
Asian central banks may be among the world’s most proactive when it comes to taking steps to manage climate risks, but there’s plenty more that should still be on their to do list, one of the region’s leading experts has told Green Central Banking.
Aziz Durrani has advised central banks and finance ministries across Asia in his role as technical assistance lead for the Asean+3 Macroeconomic Research Office (Amro), which groups the 10 countries of the Association of Southeast Asian Nations together with China, Japan and South Korea.
Less than a decade ago, he recalls, “there was a lot of pushback across the region that this is not something central banks and so on need to get involved in. And now it’s widely accepted that actually this is a key point for financial stability. So I think that’s a real, real positive.” Nevertheless, he added, “you can’t get complacent. There’s still more to achieve.”
Durrani, who spoke in a personal capacity, recently co-authored a policy brief assessing the state of play across the region when it comes to climate-related risks, and the steps supervisors still need to take to meet the standards set by the Basel framework.
“Many of the Asean+3 economies have already been assessing climate risk as part of their macroeconomic forecasting and have also implemented climate stress testing for the financial institutions in their countries, well before the Basel guidance was produced,” he noted. The Basel Committee on Banking Supervision (BCBS), he added, has been playing catch-up given that the overall framework “provides an implicit subsidy to high-carbon industries”.
Notably, Asean+3 members have set up initiatives to strengthen the region’s financial resilience to the kinds of natural disasters that are becoming more and more frequent in the region due to climate change. These include the Southeast Asia Disaster Risk Insurance Facility (Seadrif) – a regional insurance company – and the Asean Disaster Risk Financing and Insurance programme, which aims to boost cooperation and capacity in disaster financing and risk transfer.
“Where I think the guidance from the BCBS really is adding some further value is trying to standardise the requirements in order to bring all central banks and monetary authorities in the region onto a level playing field,” Durrani said, arguing that this is something even financial institutions (FIs) support as it brings greater clarity on what is required of them.
“In addition, it emphasises that climate risk assessments need to be incorporated into traditional risk measurement and risk-weighted asset calculations. This is still something that is a relatively new concept, not only for FIs in the Asean+3 but also globally.”
Penalties for repeat offenders
Durani’s policy brief – co-authored with Julia Bingler of the Council on Economic Policies – lists numerous recommendations for Asian supervisors in further addressing climate-related risks following this year’s revision of the BCBS’s most important document, the Core Principles.
As of April, the Core Principles include the acknowledgment that “climate change may result in physical and transition risks that could affect the safety and soundness of individual banks and have broader implications for the banking system and financial stability”.
Durrani and Bingler’s recommendations span from integrating climate risks explicitly into guidance on the calculation of risk-weighted assets, to adding expectations for net-zero transition planning, strengthening disclosure requirements, and imposing penalties and capital add-ons if FIs repeatedly fail to meet the risk management expectations.
One particularly crucial area for improvement that Durrani flags is the need to move beyond the current reliance on backward-looking data in the analysis of climate-related risks.
“We still haven’t been able to tackle this one sufficiently well, in my view – not just in the Asean+3, but globally,” he said. “I think additional investment in real-time climate risk data, and an emphasis on building or requiring climate data when making new decisions as part of the business-as-usual process by commercial financial institutions, is really key.”
Looking at wider nature risks
In the coming years, a broadening of supervisors’ focus to wider nature-related risks beyond the climate appears to be inevitable. The Network for Greening the Financial System (NGFS) introduced recommendations last year for the development of scenarios that assess wider nature-related economic and financial risks such as declining biodiversity.
With Asian countries facing rising threats to the stability of their ecosystems, Durrani said it was not surprising that several Asean+3 member states are already starting work in this area.
The Monetary Authority of Singapore’s 2020 guidelines for banks on environmental risks notably include biodiversity loss, pollution and changes in land use, while Malaysia’s central bank is preparing a similar guide for FIs and businesses in collaboration with the Taskforce on Nature-related Financial Disclosures.
“The Bangko Sentral ng Pilipinas, as a further example, in 2024 has been working to improve how it monitors and scrutinises nature-related risks in the financial system, as it encourages more funding in sustainable finance,” Durrani noted.
“There are some really good examples. But again, I would say there’s still a long way to go in order to be able to comprehensively assess and quantify nature-related risks in the financial system across the Asean+3, and then to actively take steps to mitigate and manage those risks. So that’s something I’m looking forward to: providing more technical assistance and helping that journey.”
This page was last updated January 6, 2025
Written by
Katy Lee has been a writer for Green Central Banking since early 2024, focused on our Asia coverage. A Paris-based journalist who has written for major international titles for more than a decade, she is the co-host of The Europeans, an award-winning podcast about Europe which often covers environmental issues.
