BB Issues Guideline for Climate Risk Management in Financial Sector
Bangladesh Bank (BB) has issued the ‘Guideline on Climate Risk Management for Banks and Finance Companies', mandating the financial sector to address its high exposure to the impacts of global warming. To this end, the central bank today issued a circular. In the guideline, the central bank has highlighted that Bangladesh is recognized globally as one of the most climate-vulnerable countries, making its financial sector highly susceptible to both direct and indirect effects of climate change. The new regulation aims to ensure the systematic identification, assessment, management, and disclosure of climate-related risks and opportunities across banks and finance companies.
The guideline addresses two primary categories of climate threats, physical risks and transition risks. The physical risks include acute events such as floods and cyclones, as well as chronic stressors like heat waves. The transition risks stem from the changes associated with moving to a low-carbon economy, encompassing policy reforms, technological shifts, and the implementation of carbon pricing. These climate risks are serious, posing a threat to the financial stability of institutions by potentially impairing asset quality, reducing collateral values, and increasing core traditional risks, including credit, market, liquidity, and operational risks.
While the challenges are crucial, Bangladesh Bank has noted that climate change simultaneously presents substantial financing opportunities. These opportunities can be realized by strategically channeling investments toward initiatives focused on climate mitigation and adaptation, thereby reducing both physical and transition risks. This new Guideline is expected to serve as a catalyst in facilitating the smooth and effective implementation of climate-related financial disclosures across the sector. It incorporates international standards and best practices and is issued alongside the Guideline on Sustainability and Climate-related Financial Disclosure for Banks and Finance Companies, which is aligned with the globally recognized ISSB Standards.
Banks and finance companies must comply with the reporting requirements detailed in the circular. Reporting, utilizing the attached templates (which are deemed an integral part of the circular), must be submitted to the Sustainable Finance Department on a semi-annual basis. The deadline for submission is the last working day of the following month. The issuance of this Guideline is an exercise of power conferred on Bangladesh Bank under Section 45 of the Bank Companies Act, 1991 (amended up to 2023), and Section 41(2) of the Finance Company Act, 2023.
