The Bank of England strengthens its climate expectations, as the global south prepares for the European carbon border adjustment mechanism, Hong Kong explores nature-related criteria for its green taxonomy, and the Bank for International Settlements warns that central banks should monitor water scarcity.
BoE strengthens climate risk expectations for financial firms
The Prudential Regulation Authority has significantly tightened climate risk management rules for UK banks and insurers, requiring them to embed climate considerations into core risk frameworks and board-level decision making. The supervisory statement, published in December, replaces earlier 2019 guidance with its latest expectations on governance, scenario analysis and risk appetite.
The regulator said the six-month review period ending in June 2026 is not an implementation period. Firms must complete an internal assessment, identify gaps, and agree a “credible and ambitious” action plan by that date.
“This is a step change, not a refinement. Firms need to mobilise quickly if they’re going to deliver the level of integration the PRA now expects”, said David Croker, partner at PwC UK. According to PwC analysis, industry insiders “broadly welcomed the PRA’s direction and viewed the proposed rules as a pragmatic step toward maturing climate risk supervision”.
EU competition chief defends green regulation against ‘race to the bottom’
To remain globally competitive the EU must defend its regulatory regime, the bloc’s competition chief Teresa Riberain said in recent comments to the Financial Times. Ribera cautioned that amid global regulatory rollbacks, the bloc is “destined to lose” a race to the bottom.
“It’s not by chance that it’s the green and digital agenda that are under threat. They are the main drivers of competitiveness”, Ribera said. She argued the EU should listen to its allies, but should not concede to Washington’s increasing pressure to scrap laws on sustainable supply chains and deforestation.
“If we lose our identity, our values, the confidence of our people, we will not be in a position to negotiate anything,” she added.
These comments come as the EU’s sustainability omnibus package cleared its final political hurdle after a year of debate, with the final rule drastically reducing the scope of companies subject to climate reporting rules by 90%. This despite several supervisors pointing out that the revised rules could cause a lack of data.
Warnings that water scarcity poses macroeconomic risks
Water scarcity poses “macroeconomically relevant” risks to growth, inflation and investment, according to separate research from the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), all released late last year.
BIS analysis of 169 countries between 1990 and 2020 found that increased water scarcity reduces GDP and fixed investment growth, while increasing consumer price inflation. “Water availability and use could thus become an area for economists and central banks to monitor in the context of climate change, economic forecasting and monetary policy”, the paper concluded.
The OECD’s framework on embedding water-related risks in financial stability warns that systemic risks may accumulate due to interconnections, common exposures and feedback loops between institutions and sectors. Water-related economic risks are estimated to be 7-9% of global GDP, the highest amongst all ecosystem services.
The IMF study highlighted that water scarcity affects macro-fiscal and balance of payments positions through multiple channels, emphasising the need for forward-looking scenario analysis.
EU’s CBAM launch poses monetary policy risks for global south
Europe’s long-awaited carbon border adjustment mechanism came into force on 1 January, despite “fierce opposition from trading partners and warnings from European industry about increased costs and red tape”, the Financial Times reports.
The levy covers six sectors including steel, electricity and fertilisers. EU companies are subject to a regional emissions trading scheme, and CBAM aims to prevent them from being undercut by cheaper, more heavily polluting competition abroad.
Yet the levy poses significant challenges for global south exporters. South African Reserve Bank research from 2022 warns that high-carbon net exporters with low domestic carbon pricing may face serious monetary policy consequences, with risks spanning value chains, stranded assets and price shocks.
Egypt launched a green finance platform to help factories adapt exports to CBAM requirements last year. However, Menafem and Greenpeace research cautioned that investing exclusively in export-focused green development risks worsening economic dependence whilst neglecting domestic energy insecurity.
Hong Kong explores role for biodiversity in its green taxonomy
Hong Kong is reportedly considering expanding its sustainable finance taxonomy to cover biodiversity and nature related objectives.
The Hong Kong Environment and Ecology Board recently updated its biodiversity plan, to include a commitment to “explore expanding the Hong Kong Taxonomy for Sustainable Finance to cover additional environmental objectives beyond climate change”.
The board also announced plans to fund a pilot scheme to build capacity within Hong Kong’s financial sector on green and sustainable finance. The board stated it will prioritise “strategic investment [that] moves beyond project-based funding to systematically embed biodiversity into Hong Kong’s financial architecture, ensuring the long-term, large-scale investment required to meet conservation and sustainable development goals”.
While details of the taxonomy scoping exercise remain unclear for now, the Hong Kong Monetary Authority’s communications around the second phase of taxonomy development stated that it “will consider expanding the scope to other climate risk areas based on experience, and evolving climate risks and market needs” through a “step-by-step approach” that will “help the market build experience and capacity in this emerging field over time”.
Research highlights
Mapping the scale and scope of just transition finance in private credit and equity funds
Grantham Research Institute
Analysis of 23 specialist private equity and credit funds reveals regulatory frameworks play a key role in determining baseline just transition engagement in energy infrastructure investments. The report presents a risk-management related investment case for just transition investments and recommends regulators establish minimum acceptable thresholds via strengthened requirements for impact assessments and benefit-sharing mechanisms.
Climate change and financial risk: Is there a role for central banks?
Energy Economics
Cross-country analysis of 115 nations demonstrates extreme weather events – particularly wildfires and floods – significantly heighten financial risk, with impacts persisting for approximately two years. Central bank green policies moderate these effects through regulatory requirements and green finance programmes, though high-credit countries face amplified vulnerabilities requiring prioritised mitigation.
Call for comments
- Banco Central do Brasil is consulting on new requirements for mandatory sustainability disclosures under its Pillar 3 framework. The proposed rules add quantitative requirements for environmental, social and climate risks to the previously required qualitative disclosures, applicable from 2028. The public consultation document and proposed disclosure tables are available in Portuguese.
- Hong Kong’s Accounting and Financial Reporting Council launched a consultation on a proposed framework for regulating independent assurance of sustainability reporting. The deadline is 30 March.
This page was last updated January 8, 2026
Written by
Ingrid Walker, a Green Central Banking contributor since 2023, has a decade's experience in research writing. An Utrecht-based scholar, Ingrid specialises in transformative justice, green finance, law and systems change. They are an Utrecht University's Bright Minds scholar and previously worked for Cambridge University and various justice-based NGOs.
