FSI Occasional Paper No 23
The intersection of climate change and environmental degradation underscores the urgent need for economies and businesses to adopt sustainable practices. Achieving this transition requires significant climate finance, with the private sector—particularly banks, asset managers, and investors—expected to play a pivotal role. However, their participation hinges on financial soundness, resource availability, and incentives, which are shaped by policy frameworks.
Policymakers and regulators face the challenge of creating frameworks that encourage financial institutions to invest in climate finance while managing associated risks to their stability. Central banks and supervisors have various tools to ensure financial stability and address the unique risks of climate-related finance. These tools may require updating to account for the evolving risk profiles of institutions as they engage in climate finance.
To support a smooth transition and maintain financial stability, regulatory frameworks must remain flexible and purpose-built, accommodating the changing exposure of financial institutions to climate-related risks. This adaptability is essential to mitigate climate and environmental challenges while safeguarding the financial system.
