KARACHI: The State Bank of Pakistan (SBP) has introduced a set of shocks covering climate-related risk measures to protect the financial institutions as the threat has been increasing with climate change.
“In pursuance of its goal to further strengthen the risk management capacity of regulated financial institutions (banks, DFIs and MFBs), it has decided to introduce an additional set of shocks covering climate-related risks,” said a circular of the State Bank.
Consequently, Guidelines on Climate Stress Testing are being rolled out. Climate change has emerged as a significant challenge for the domestic economy and the financial system, said the SBP.
Another related circular issued by the SBP said Pakistan is among the most climate-vulnerable countries. “Consequently, its financial sector faces increasing exposure to physical and transition risks,” said the circular.
New guidelines aim to strengthen risk management as climate threats intensify
According to the SBP circular, the guidelines provide scenarios for climate-related single-factor shocks across physical and transition risks for SBP-regulated financial institutions (FIs). “The sample Domestic Systemically Important Banks (D-SIBs), as identified under D-SIBs Framework 2018, are now required to incorporate climate-related risks into their annual scenario analysis i.e., Macro Stress Testing (MST) exercise,” said the SBP.
The guidance will enable FIs to gauge the impact of climate-related risks on their lending portfolios and financial positions.
The circular said that the regulated FIs will conduct climate stress tests in addition to the exercises being carried out under FSD Circular No. 01 dated Sept 1, 2020.
The regulated FIs will conduct climate stress testing (single-factor) based on end-of-December data by the second quarter of the following year. However, the first iteration may be conducted by end of Q3CY26, based on end-December 2025 data.
The sample D-SIBs will conduct an annual MST exercise based on data as of December 31 (audited annual financials) and will also incorporate climate-related risks in the scenarios. The results will be included in the relevant section and submitted to SBP by June 30 of the following year.
The SBP, as part of its supervisory process, will regularly conduct its own in-house climate stress testing exercises and, if required, may engage with the regulated FIs for any risk mitigation measures/contingency plans based on the outcome of these exercises.
The SBP supervisory teams may also review the climate stress testing framework and processes of the regulated FIs.
