ASEAN Central Banks Endorse Collective Approach to Climate Risk

A new report offers a set of non-binding recommendations to promote a unified ASEAN approach towards managing climate and environment-related risks.

ASEAN central banks have increasingly started to factor in climate change with a focus on safeguarding financial stability, but they are still in early stages, a new report has said.

The ‘Report on the Roles of ASEAN Central Banks in Managing Climate and Environment-related Risks’ is a collaborative effort among nine ASEAN central banks and monetary authorities, and aims to develop better understanding of climate and environment-related risks among the central banks.

The main approaches taken by ASEAN central banks so far to manage climate risks have been to incorporate such risks into their core policy frameworks, and to mainstream green finance, be it for risk management purposes or to achieve longer term goals such as economic development, growth and greening.

A number of ASEAN central banks have stepped up on climate issues, issuing directives to financial institutions to incorporate ESG risks into their risk management practices and lending activities, the report says.

It highlights the role and importance of central banks in ensuring financial stability, but noted that ASEAN central banks need to better understand the monetary policy implications of climate and environment-related risks.

A greater understanding of how these risks will affect key variables in the monetary policy decisions can help avoid “policy missteps”, the report says, suggesting that climate objectives be incorporated in central bank policy instruments, as some central banks are already doing.

The report outlined that while ASEAN central banks are focusing on climate change, they are still in early stages of efforts to fully understand climate risks.

They will need to implement a number of good practices, including to align practices with national policies and issue regulatory measures and guidelines to set expectations in areas such as disclosure, risk assessment, data collection and taxonomy.

Transition challenges

According to the report, ASEAN central banks face a number of challenges, including a lack of information to accurately guide the incorporation of climate and environmental considerations into policies.

In addition, most ASEAN countries are emerging economies, heavily reliant on fossil fuels to meet energy and developmental needs. A transition to low-carbon could “possibly damage” near-term growth prospects, the report says.

Low awareness about climate action, and lesser involvement of ASEAN member states in development of sustainable strategies, further limits progress.

The report calls for individual as well as collective actions to successfully manage climate and environment-related risks, with a set of non-binding recommendations split into seven themes:

  • Capacity building and awareness through partnerships with other banks and international coalitions, and by developing a network of ASEAN supervisors
  • Demonstrating leadership from central banks by embedding sustainability principles in operations and strategies, and providing incentives for financial institutions
  • Integrating climate and environment-related risks in regulatory and supervisory frameworks, including through ASEAN specific green lending guidance and a taxonomy for green and transitional activities
  • Developing an ‘ASEAN Green Map’, a roadmap, to ensure comprehensive development and unify regional efforts across financial services
  • Communicating the ‘ASEAN Voice’ at international platforms
  • Developing a surveillance and assessment framework, including a common data collection framework
  • Developing a clear communication strategy to guide the financial industry and signal commitment to greening the financial system

A copy of the report can be found here.

The report was released on Tuesday (17 November) by BNM (Bank Negara Malaysia), which currently leads the Task Force on the Roles of ASEAN Central Banks in Managing Climate and Environment-related Risks. The report was endorsed by ASEAN Central Bank Governors on 2 October 2020.

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