Climate change poses challenges for financial stability: CBO report

‘The impacts of climate change, such as weather events, can have profound implications for individual financial institutions (micro-prudential risk) as well as the stability of the entire financial system (macroprudential risk),’ CBO said in its Financial Stability Report 2023.

These risks, as per the central bank, include physical risks (direct impacts from climate-related events), transition risks (risks associated with the transition to a low-carbon or green economy), and liability risks (legal or financial consequences arising from climate-related damages).

Moreover, financial institutions, especially in hydrocarbon-dependent countries like Oman, face an additional challenge in addressing the implications of transitioning to a greener and low-carbon economy, it said.

‘The shift towards reducing carbon footprints requires significant changes in the structure of the economy, which can have profound implications for the operations, investments and overall business strategies of these institutions.’ This transition, CBO said, ‘may involve a fundamental restructuring of industries, diversification of revenues for the government and businesses, and adoption of sustainable practices’.

The central bank added that financial institutions need to actively assess and manage the risks and opportunities associated with this transition to ensure long-term viability and resilience in a changing economic landscape. ‘It is crucial for financial regulators, policymakers and institutions to proactively consider, manage and mitigate these risks to safeguard the stability and resilience of the financial system in the face of ongoing climate change.’

It has advised banks and financial leasing companies to enhance their risk management policies and practices in accordance with the international best practices on climate-related financial risks.