Pacific Money | Economy

Asia’s Central Banks Must Take Climate Change Seriously

Asian central banks must take climate risks seriously.

By Ishka Yadav for
Asia’s Central Banks Must Take Climate Change Seriously
Credit: CC0 image via Pixabay

The United Nations Framework Convention on Climate Change (UNFCCC) identified that Asia’s booming population and the rapidity of intensified natural disasters confirms climate change will have a catastrophic impact on the continent. The long-term, irreparable vanishing of the glaciers could change the flow of core rivers in Asia, including the Brahmaputra, the Mekong, and the Yangtze. The World Bank has predicted that a majority of South Asia will witness a fall in living conditions due to increasing temperatures, affecting agricultural yield and triggering mass displacement. So far the reality of climate change has not modified the habits of energy consumption across the Asian region, however.

The energy market in the Southeast Asian region has developed rapidly. Regional demand increased by 80 percent since 2000, with millions of new consumers gaining electricity. This demand has doubled the use of fossil fuel and several power systems in the Southeast Asian region are confronting critical financial stress. Pushed by growing incomes and urbanization, oil dominates the automobile sector regardless of the increasing demand for bio-fuel. Southeast Asia has among been the few regions where the distribution of coal in the energy mix rose in 2018 and, established on current policy parameters, the demand for coal is expected to increase to fuel new coal-fired power plants. Nonetheless, the hurdles for these projects have been increasing, including complications to safeguard competitiveness in financing new coal plants. Still, there has been a confirmed expansion of coal and oil in China, India, Japan, South Korea, Indonesia, and Australia. This manner of energy consumption is not aligned with carbon risk.

Asian economies are vulnerable to extreme weather conditions. Questions about low-carbon financing and climate risks have gained importance within central banks in the Asian region, where various countries are facing tough consequences. In 2019, the South East Asian Central Banks (SEACEN) surveyed its members to analyze their perceptions and problems on low-carbon transition. With 18 respondents from Asian central banks, the survey revealed that 94 percent of the respondents think that their institution should be encouraging green enterprises and low-carbon financing. Whereas only 22 percent of the respondents had investment approaches to boost private capital in low-carbon businesses, 72 percent were conscious about national commitments to carry out green financing. Only 29 percent issued regulatory policies for low-carbon investments and 39 percent trained their financial personnel on risks related to climate change.

To accomplish the 2030 Agenda for Sustainable Development and net-zero carbon emissions by 2050, more funds will have to be directed toward sustainable investment. The accountability for macroeconomic and financial security specifically lies with the central bank, which consequently must tackle climate change risks using a systematic standard. A plan for integrating environmental risk and climate change mitigation into the scheme of monetary regulation is a core responsibility of the central banks and can be outlined as the passive feature of green central banking. The policies need to be structured in a way that would encourage private sectors to alter their investments in order to fulfill the demands of a low-carbon economy. The main goal for low-carbon investments has been carbon pricing, which is usually perceived as negatively affecting customers and business, hence making it a politically objectionable choice.

Decision-makers and stockholders in Asia face complications in assuring a constructive transition to a low-carbon economy. There are multiple methods by which central banks can commit themselves to low-carbon transition and climate risks. First, they can evaluate climate risks, for single organizations at a systematic level. This technique had been currently executed by some central banks in developed countries. Second, they can apply the policy tools to minimize climate risks and promote the advancement of low-carbon efforts. Central bankers in rising Asia should accept that climate change is a business problem.

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Addressing climate change as a regular risk would help Asian central banks to implement climate stress tests and norms to their own debt security, as is being applied progressively in Europe. The European Central Bank’s programs related to corporate bond purchase have determined to refrain from all climate unfriendly capital. This will result in an investment shift from fossil fuels to renewable energy. Other central banks have shown interest in evaluating the danger of their national financial system to climate risks; the Bank of England examined the risks of the U.K. insurance industry to climate financial risks in 2015 and is implementing an identical test of the banking sector. Asian central banks have taken a range of actions to lessen climate risks. Bangladesh Bank was the very first central bank to address climate change. In 2011, the bank released an environmental risk management directive that ordered banks to integrate corporate risk management policies into their debt risk management. The People’s Bank of China has fixed mandatory declarations for banks to classify what is ‘green’, ‘brown’, and ‘neutral’ money lending in their portfolios. Despite such actions, a more proactive measure is required. In December 2017 at “One Planet Summit” in Paris, eight central banks founded a Network of Central Banks and Supervisors for Greening the Financial System (NGFS). To mitigate climate-related risks more effectively, Asian central banks should be a part of the NGFS.

While climate stress tests are a complicated area, obligatory testing will need banks and financial establishments to address climate change risks. It would result in greater proficiency and the progress of more vigorous modeling methods, as well as pressing banks’ lending policies toward more low-carbon enterprises. The task is how such approaches should be launched within each central bank, and this must be the focus of SEACEN in applying green banking. A new effective framework along with economic policy is necessary in a way that fuses with climate risks in all areas of finance. Putting a price on carbon and eliminating fossil fuel grants should carried out immediately.

Ishka Yadav is a research associate at the Central for Air Power Studies in New Delhi, India, working on nontraditional security threats.