Climate, Nature, and Central Banks
Climate change is expensive – the International Monetary Fund (IMF) estimates that damage from extreme weather events costs USD1.3 trillion annually, or 0.2% of global GDP. As guardians of financial and macroeconomic stability, central banks and supervisory authorities play an important role in greening the financial system and managing growing environmental risk (EU, UNEP FI).
Photo source : Freepik
Scenario analysis can enhance climate resilience
Delaying decarbonisation means falling short of Paris Agreement goals and taking on costly physical risks. The absence of climate mitigation policies could spell an additional 6% loss in global GDP by 2100 compared to abiding by the Agreement (IMF).
In 2020, the Monetary Authority of Singapore (MAS) issued Guidelines on Environmental Risk Management. Under the Guidelines, asset managers are to take stock of environmental risks associated with customers’ assets and put risk management frameworks into place. In addition, financial institutions are to adopt forward-looking tools such as scenario analysis to understand their resilience to financial losses under a range of plausible outcomes.
Already, central banks and supervisory authorities from Australia, England, France, Hong Kong and Singapore have taken the lead and began conducting sector-wide climate scenario analysis to assess financial systems’ exposures to climate risk. In 2022, MAS found that a severe flooding shock on ASEAN-5 countries could significantly increase property-related claims for insurers.
Stabilising the economy means safeguarding nature
As acknowledged by the Network for Greening the Financial System (NGFS) – an international group of over 100 central banks and supervisors – nature risks could also have major macroeconomic and financial implications (NGFS).
Recent developments are helping to develop science-based understanding and language around nature-related financial risks. Earlier this month, the NGFS released a conceptual framework to guide central banks and supervisors in identifying nature-related financial risks. This comes a day after the Nature Positive initiative – a 27-strong multi-stakeholder coalition which seeks to halt and reverse biodiversity loss by 2030 – was launched.
The final recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD) – released early this week after 2 years in development – are expected to facilitate comparable reporting on how nature loss impacts financial positions. The TNFD builds upon the success of the widely adopted TCFD recommendations and encourages companies to provide integrated climate-nature disclosures.
Photo Source : TNFD
Phillip Capital Management is a TNFD Forum member. Our assessments take guidance from the TNFD frameworks, above baseline industry-specific reporting standards and scientific research.
At present, TNFD disclosures are taken up on a voluntary basis. Early adopters include a listed multi-billion-dollar vaccine producer – which has committed to releasing its first TNFD disclosures from 2026, based on 2025 data.
On the international stage, momentum is also building. By December 2022, the International Sustainability Standards Board (ISSB) had already announced that it was considering the TNFD’s recommendations while developing its climate-related disclosures.
Towards a sustainable world
Financial regulators have the opportunity to take bold steps in encouraging financial flows for the benefit of People, Planet, and Prosperity (NGFS; Positive Money). Our ESG research helps us identify investments that contribute to climate, nature, and social outcomes.
In our environmental analysis under PCM ESG Research Objective 2 (Mitigating Negative Externalities), we assess ways central banks positively influence their stakeholders to adopt sustainable solutions. For example, MAS encourages the uptake of green, sustainability-linked, or transition loans by providing grants which can be used to offset external review costs.
A just transition is significant for Asia – where climate risks are a top vulnerability. In our social analysis under PCM ESG Research Objective 3 (Measuring Positive Change and Impact), we consider how issuers are contributing to UN SDG 11 (Sustainable Cities and Communities). For example, MAS announced in June that it will set supervisory expectations to guide financial institutions’ transition planning processes that support credible decarbonisation efforts by their clients.
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