THE TREATMENT OF PHYSICAL CLIMATE RISKS BY CENTRAL BANKS

The report examines how central banks in various jurisdictions integrate physical climate risks into banking supervision, highlighting a common shift toward enhancing regulated entities' capabilities rather than immediately adjusting capital requirements. Through case studies of six central banks, it identifies systemic challenges in data availability and technical capacity, advocating for a phased approach to policy implementation. It concludes with a stylised roadmap for the Reserve Bank of India to move from awareness-raising to mainstreaming climate risk assessment in supervisory processes.

• Central banks generally prioritize enhancing the capabilities of regulated entities (REs) to understand and manage physical climate risks over modifying regulatory capital requirements, due to significant gaps in data and technical skills.
• A phased approach to implementing physical climate risk policies is recommended to allow for awareness-raising, scoping of technical capacities, and the establishment of realistic roadmaps before mandatory requirements are introduced.
• The Reserve Bank of India (RBI) has completed initial phases of climate risk integration, including communications on financial stability and stocktaking of RE technical capacities, and is now moving toward issuing regulatory guidelines on disclosure and stress testing.
• Common challenges across jurisdictions include a lack of granular counterparty exposure data, the sensitivity of financial modelling assumptions, and a heavy reliance by banks on third-party data providers, which may lead to 'group think'.
• The principle of proportionality is frequently applied to ensure that regulatory requirements are commensurate with the size and systemic importance of the financial institution, sometimes allowing smaller banks to submit transition plans instead of immediate compliance.
• Case studies reveal diverse assessment approaches: the Banco Central do Brasil and Bank of England have used top-down stress tests, while the Hong Kong Monetary Authority and South African Reserve Bank have employed bottom-up approaches to build industry capability.
• The Bank of England's Climate Biennial Exploratory Scenarios (CBES) pushed firms to extend their risk modelling time horizons from five years to 30 years for long-term strategy and lending decisions.

APA

Raga, S., Vaze, P., Tan, E., & Gilmour, A. (2024). THE TREATMENT OF PHYSICAL CLIMATE RISKS BY CENTRAL BANKS. Climate Bonds Initiative. https://www.climatebonds.net/files/documents/publications/The-Treatment-of-Physical-Climate-Risks-by-Central-Banks-Insights-for-the-Reserve-Bank-of-India.pdf

Chicago

Raga, Sherillyn, Prashant Vaze, Elizabeth Tan, and Archie Gilmour. THE TREATMENT OF PHYSICAL CLIMATE RISKS BY CENTRAL BANKS. Climate Bonds Initiative, 2024. https://www.climatebonds.net/files/documents/publications/The-Treatment-of-Physical-Climate-Risks-by-Central-Banks-Insights-for-the-Reserve-Bank-of-India.pdf.

Wikipedia

{{cite report |last1=Raga |first1=Sherillyn |last2=Vaze |first2=Prashant |last3=Tan |first3=Elizabeth |last4=Gilmour |first4=Archie |title=THE TREATMENT OF PHYSICAL CLIMATE RISKS BY CENTRAL BANKS |publisher=Climate Bonds Initiative |date=September 2024 |url=https://www.climatebonds.net/files/documents/publications/The-Treatment-of-Physical-Climate-Risks-by-Central-Banks-Insights-for-the-Reserve-Bank-of-India.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{raga2024treatment, author = {Raga, Sherillyn and Vaze, Prashant and Tan, Elizabeth and Gilmour, Archie}, title = {{THE TREATMENT OF PHYSICAL CLIMATE RISKS BY CENTRAL BANKS}}, institution = {Climate Bonds Initiative}, year = {2024}, month = sep, url = {https://www.climatebonds.net/files/documents/publications/The-Treatment-of-Physical-Climate-Risks-by-Central-Banks-Insights-for-the-Reserve-Bank-of-India.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }