Climate Risks in Albania and Their Relevance to the Central Bank

The Albanian environment is particularly vulnerable to climate-related physical shocks, such as water stress, that could exacerbate other social and economic risks. According to recent research published by SUERF, “major transformations” are needed across all sectors of the economy to mitigate the exposure of the Albanian economy and financial sector to climate-related financial risks.

In this report, transition economics experts Margaret Topalli and Pierre Monnin emphasise the need for urgent planning by the Bank of Albania (BoA) to mobilise the investments necessary for transition and mitigation infrastructure.

The report highlights the active role the BoA is already taking to address climate impact, in particular by implementing a multi-year strategy for managing climate risks, but states that more action is needed. Through financial supervision and monetary policymaking, the central bank can build the Albanian financial sector’s resilience, align the sector with the European Banking Authority’s ESG guidelines, and manage the BoA’s exposure to climate risks.

The paper sets out a roadmap to achieve these outcomes built around three stages:

• Stocktaking: firstly, the BoA must improve its understanding of the specific climate risks facing the Albanian financial system. To do so, it should analyse risk transmission channels, design scenarios for the Albanian context, engage financial institutions, map risks and opportunities, identify data gaps and reach out to policymakers.
• Preparation: secondly, the BoA should analyse policy options and develop tools for implementation. To achieve this the central bank should integrate climate risks into models, develop macroprudential and monetary policy options that address those risks, refine risk assessments, establish reliable data and disclosure standards, and explore coordinated policy options.
• Implementation: finally, the BoA can implement policies developed in the previous two stages, including seven climate-adapted workstreams dedicated to monetary policy, financial supervision, prudential regulation, stress testing, data disclosure, central bank balance sheets, and coordinated policy operations.

The authors emphasise the importance of effective communication strategies, international cooperation and knowledge sharing at each stage. The report also stresses the need to grow modelling and analytical capacity in the initial steps to strengthen implementation.

Finally, the authors recommend creating a sustainable finance working group in the BoA to smooth integration of sustainability aspects into the bank’s activities.