Bangladesh Bank’s recent guidelines on Sustainability and Climate-Related Financial Disclosure aim to address the heightened vulnerability of the country’s financial system to climate change.
These guidelines mandate banks and non-bank financial institutions (NBFI) to evaluate and report their assets’ exposure to climate risks.
However, the degree of importance given to this issue within the financial industry remains uncertain.
Understanding Climate-Induced Risks
Climate change poses dual threats to financial institutions: physical risks and transition risks. Bangladesh, as the seventh most climate-vulnerable country, faces recurrent natural disasters, impacting assets located in vulnerable areas.
Transition risks, driven by global climate initiatives like the Paris Agreement, necessitate a shift towards green businesses, potentially affecting asset portfolios.
Challenges and Solutions
Despite an upward trend in green finance, challenges persist in identifying and disclosing climate risk-exposed assets.
Technical complexities, including assessing borrowers’ responses to climate policies and understanding location-specific vulnerability, hinder accurate risk evaluation.
Capacity building and collaboration between government and financial institutions are crucial for addressing these challenges and establishing criteria for risk assessment.
