Singapore’s central bank conducts first scenario analysis on physical climate risks

Assessing the Financial Impact of Climate Change

Singapore's central bank is expanding its climate risk assessment efforts to better understand the financial implications of physical climate hazards, including floods, extreme heat and other weather-related events.

The analysis, conducted with technical assistance from the International Monetary Fund (IMF), aims to assess how climate-related physical risks could affect financial institutions and the broader financial system.

Physical climate risks are becoming an increasingly important consideration for financial regulators as climate change raises concerns about potential damage to assets, business disruptions and financial losses.

Building on Earlier Climate Risk Assessments

The new analysis builds on MAS' previous work examining climate-related transition risks.

An earlier MAS study in 2023 found that a delayed and disorderly transition to a low-carbon economy could result in costs for banks and insurers that are approximately 50% higher than those associated with an earlier, more orderly transition.

While transition risks arise from changes in policies, technologies and market conditions during the shift towards a low-carbon economy, physical risks relate to the direct impacts of climate change.

Assessing both types of risks provides financial institutions and regulators with a more comprehensive understanding of potential climate-related financial vulnerabilities.

Strengthening Climate Risk Management in Singapore

MAS has also been advancing its regulatory approach to climate risk management.

Its transition planning guidelines for banks, insurers and asset managers are expected to take effect in 2027, reinforcing the importance of incorporating climate-related considerations into financial institutions' risk management processes.

The latest physical climate scenario analysis marks another step in Singapore's efforts to understand the potential financial consequences of climate change and strengthen the resilience of its financial system.

As climate risks evolve, scenario analysis is becoming an increasingly important tool for regulators and financial institutions to assess vulnerabilities and prepare for potential future disruptions.

++++

Read the full article here.

‍