KARACHI: The State Bank of Pakistan (SBP) has issued rules on climatic stress testing to enhance the risk management capabilities of regulated financial institutions, according to the central bank’s statement.
“Lately, climate change has emerged as a significant challenge for the domestic economy and the financial system,” the SBP said in the statement issued on Friday.
“Therefore, the guidelines provide scenarios on climate-related single-factor shocks for physical and transition risks for the SBP-regulated financial institutions (FIs),” it said. “Moreover, the sample domestic systemically important banks (D-SIBs), as identified under the D-SIBs Framework 2018, are now required to incorporate climate-related risks into their annual scenario analysis, ie, macro stress testing (MST) exercise.”
The SBP noted that the said guidance will enable the FIs to better gauge the impact of climate-related risks on their lending portfolio and financial position.
On the same day, the SBP released another circular stating that it has issued a new regulatory framework for effectively managing climate-related financial risks. The central bank highlighted that Pakistan is one of the countries that is most vulnerable to climate change. As a result, the financial sector is increasingly exposed to both physical and transition risks.
“Recognising the potential impact of climate change on the financial sector’s resilience and soundness, the State Bank of Pakistan (SBP) is issuing the regulatory framework for effective management of climate-related financial risks,” it said.
“The framework aims to ensure that financial institutions (FIs) effectively identify the climate risk drivers and integrate climate-related financial risk considerations into their governance, business strategy and risk management frameworks,” it added.
According to the circular, all FIs must ensure compliance with the framework by June 30, 2029. To achieve this, FIs are required to submit board-approved, time-bound implementation plans and targets to the SBP by September 30, 2026.
