Climate change is a pervasive global challenge that is increasingly affecting economies, societies, ecosystems, and the financial sector. As commercial banks play a pivotal role in meeting financing needs, integrating climate-related considerations into their core operations can help mitigate climate impacts while strengthening financial system stability. In a recent WIREs Climate Change article, Banking for Climate Change, we investigated how central banks are adapting regulatory frameworks to improve climate-related transparency and how banks are responding to this growing agenda.
The Double-Edged Sword: Climate Risks for Banks
The banking industry, much like agriculture and manufacturing, is highly susceptible to the impacts of climate change. These risks primarily fall into two categories. Physical risks arise from climate-related events such as floods, droughts, and extreme weather that can lead to economic and financial losses, particularly when banks’ loan portfolios are exposed to vulnerable projects. Meanwhile, transition risks stem from the global shift toward a low-carbon economy, driven by new green technologies, sustainable policies, legal changes, and evolving investor and consumer behavior.
South Asia’s geographical exposure makes it highly vulnerable to extreme climatic adversities. The region faces melting glaciers, rising sea levels, and shifting weather patterns that disrupt agriculture and real estate. India alone contributed around 6% of cumulative global emissions from 1990 to 2021, despite having lower per capita emissions, underscoring the scale of climate risk. Banks funding carbon-intensive or climate-exposed projects may face mounting portfolio losses that could ultimately threaten the region’s financial stability.
For banks, climate responsibility refers to a legal obligation to mitigate climate risks linked to their investments and loans, thereby supporting sustainability and financial stability. Regulatory authorities worldwide, including central banks, are increasingly integrating climate-related considerations into their operations. Efforts by international bodies such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Basel Committee’s Task Force on Climate-related Financial Risks aim to improve climate-related financial risk management.
Central banks can support this agenda through both prudential (risk-oriented) and promotional (incentive-driven) functions. Prudential measures strengthen financial regulation by integrating climate risk mitigation into legal frameworks, mandating risk disclosures, prioritizing green financing, limiting exposure to high-carbon projects, and performing climate stress tests. Promotional strategies encourage banks to channel credit toward green initiatives through preferential refinancing, green credit quotas, or carbon-intensity limits.
Regional Initiatives in South Asia
Central banks in South Asia are increasingly demonstrating growing commitment to climate action by integrating climate-related risk considerations into their regulatory and supervisory frameworks. Bangladesh Bank pioneered the Policy Guidelines for Green Banking and introduced Guidelines on Sustainability and Climate-related Financial Disclosure. Bhutan’s Royal Monetary Authority embarked on a Green Finance Roadmap and developed a Green Taxonomy Framework. The Reserve Bank of India established a Sustainable Finance Group, developed a Green Deposit Framework, and released the draft Disclosure for Climate-related Financial Risks. Similarly, Nepal Rastra Bank and the Maldives Monetary Authority have developed green finance taxonomies and mandated environmental and social risk management guidelines. The State Bank of Pakistan issued Green Banking Guidelines, and the Central Bank of Sri Lanka introduced its Roadmap for Sustainable Finance and Green Finance Taxonomy, encouraging disclosures through international frameworks such as the TCFD.
While these initiatives show growing commitment, most South Asian countries lack mandatory policies requiring banks to integrate climate risks into credit assessments and risk management frameworks. Many initiatives remain in the early stages of voluntary adoption, constrained by limited institutional capacity and resources and insufficient data for climate modeling.
Climate Finance Initiatives: South Asia and Global Trends
The financial system plays a crucial role in climate finance. South Asian countries, heavily dependent on banks for credit, face challenges in expanding their climate finance initiatives. The combined cost of mitigation and adaptation for South Asian countries is approximately $1.76 trillion per year by 2030, while climate finance flows to South Asia were just $41 billion in 2022, far below actual needs. While globally, significant investments in green bonds were made in 2022 by the People’s Republic of China ($99.43 billion) and Germany ($83.84 billion), India ($1.24 billion) showed modest investments, and South Asia had combined totals of less than $5 billion. Data on bank loans’ carbon footprint in South Asia are limited, indicating a significant gap. In addition, Bloomberg data show low sustainability and carbon disclosure reporting by South Asian banks. Green bonds and sustainability-linked financing instruments are still emerging in the region.
The Way Forward for South Asia
To build climate-resilient banking systems in South Asia, several measures are needed. Countries should strengthen regulatory frameworks to integrate climate risks into credit, capital, and liquidity requirements. Investing in institutional capacity and equipping bank staff with technical expertise will enhance disclosure standards for reporting green asset ratios and climate data for stress testing. Additionally, promoting green finance instruments and aligning central bank actions with climate goals can drive sustainable investments. Accountability mechanisms, including penalties and incentives, can enhance compliance. A balanced approach combining regulations with financial incentives will help steer banking systems toward a low-carbon future and mitigate climate change impacts.
