THE TREATMENT OF PHYSICAL CLIMATE RISKS BY CENTRAL BANKS

This report provides a comparative analysis of how central banks manage physical climate risks, offering a phased roadmap for the Reserve Bank of India (RBI). It examines case studies from six central banks—Banco Central do Brasil, Bank of England, Bank Negara Malaysia, Bangko Sentral ng Pilipinas, Hong Kong Monetary Authority, and South African Reserve Bank—to identify common challenges in data availability, technical capacity, and modelling. The document emphasizes a 'phased approach' and the 'principle of proportionality' to help regulated entities (REs) build capabilities before implementing mandatory capital requirements or reporting standards.

• Central banks generally adopt a phased approach to implementing physical climate risk policies, which allows for awareness-raising, the setting of regulatory expectations, and the assessment of technical capacities and data availability among regulated entities (REs) before full implementation.
• A primary objective for most emerging market central banks is to improve the ability of banks to understand and manage physical climate risk exposure, rather than using these assessments to compare banks or adjust regulatory capital requirements.
• Central banks face three consistent challenges in climate risk assessment: a lack of technical skills within REs, significant gaps in granular data regarding counterparty exposure and asset location, and the high sensitivity of results to the assumptions used in financial and climate modelling.
• The 'principle of proportionality' is frequently applied to ensure that regulatory requirements are matched to the size, systemic importance, and technical capabilities of the RE, often resulting in stricter requirements for larger institutions and more flexible timelines or simplified requirements for smaller ones.
• The Reserve Bank of India (RBI) has completed the initial phase of climate risk integration, including senior-level communication, stocktaking of RE capacities, and studies on macroeconomic implications, and is now moving toward issuing regulatory guidelines on disclosure and stress testing.
• Central banks utilize two primary assessment approaches: 'top-down', where the central bank applies its own calculations to regulatory filings for consistency and comparability, and 'bottom-up', where REs perform their own assessments based on central bank parameters to leverage granular internal data.
• Case studies reveal diverse strategies for supporting REs, such as the Bank Negara Malaysia (BNM) providing a 'Data Catalogue Report' with 82 local and international data sources, and the Hong Kong Monetary Authority (HKMA) establishing working groups with leading REs to solve industry concerns.
• The Bank of England (BoE) has used Climate Biennial Exploratory Scenarios (CBES) to push REs to extend their risk horizons from five years to 30 years, though it noted a risk of 'group think' due to many REs relying on the same third-party data providers.
• The Banco Central do Brasil (BCB) conducted top-down stress tests finding that 16% of current loans are in municipalities with high or medium drought risks for water-intensive activities, a figure projected to rise to 19% by 2030 and 2050.
• The Bangko Sentral ng Pilipinas (BSP) emphasizes operational resilience and disaster recovery, requiring domestic systemically important banks (DSIBs) to have a maximum four-hour response time to resume operations after a disaster.

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} }