Within their mandates, central banks and supervisors have a variety of policy options at their disposal to discharge their traditional financial stability and safety and soundness mandate, anticipating the increased exposure of financial institutions to climate-related financial risks. They may even adopt a more proactive stance, directly supporting a smooth transition process on grounds that transition risks can threaten the safety and soundness of financial institutions and the financial system. Those actions require the review of the existing regulatory and prudential toolbox, which may not capture the specificities of climate-related risks and opportunities.
It is crucial that financial regulations remain adaptable and fit for purpose as financial institutions’ risk profiles evolve. As financial institutions engage more deeply in climate transition finance, their exposure to risks associated with climate change will change. Regulatory frameworks must be designed to accommodate these shifting risk profiles. This will facilitate a smooth transition that both supports financial stability and mitigates the pressing climate and environmental challenges
