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(CNS): Climate change is expected to increase risks within the financial system in many ways, the Cayman Islands Monetary Authority said in a report assessing the stability of the local economy and salient trends. Local institutions face acute and chronic climate-related risks potentially causing “dire economic consequences”, CIMA warned, as the regulator seeks ways to regulate how institutions manage that risk.
In the first edition of the Cayman Islands Financial Stability Report, CIMA sought to shed light on the performance of the major sectors across the Cayman economy and examine future threats to the financial industry.
Included in the report is an assessment of the potential impact of climate change and how institutions and the regulator could tackle a warming planet and the economic consequences. All financial institutions, including banks, are exposed to climate-related risks that could affect their safety and soundness as well as have broader financial stability implications for the economy.
“Although climate-related financial risk is a complex and developing subject, there is a growing need for regulated entities to integrate climate-related risks into their business strategies and processes,” CIMA said in the new report.
While the fastest growing investment strategy within the financial services sector is based on environmental, social and governance (ESG) considerations, or sustainable investing, expectations and practices around climate risk are still evolving. CIMA said it is now shaping a suitable regulatory and supervisory approach for climate and ESG-related investing with the development of detailed climate-related scenarios and templates as well as more guidance to the industry on the related threats.
The regulator pointed out that the financial ecosystem plays an important role in two ways when dealing with climate-related economics: institutions are exposed to risk in their role of providing financing and insurance services to those directly impacted by climate change, and financial services are directly involved in the transition to investing sustainably in a low-carbon world.
“CIMA has created an internal working group to examine the regulatory work to be developed within this area,” the regulator said in the report.
As the world grapples with climate change issues, capital markets are becoming an important funding source for green or sustainability-linked bonds and loans for investments towards ‘greening’. CIMA said that climate-related risk is not a future phenomenon but is already impacting the world economy and the financial system.
“For a financial regulator, it is imperative to understand that climate change risks can affect supervised financial institutions directly and indirectly,” the report stated, pointing out the potential financial losses due to physical risk from increasing severity and frequency of extreme climate change-related weather events.
There are also financial costs associated with the adjustment to a lower-carbon and less polluted world, as some sectors of the economy will face big swings in asset values or be faced with higher costs of doing business.
CIMA warned that here in the Cayman, the effect on shoreline assets, especially financially critical resources such as the Seven Mile Beach, could be a cause for concern. “Due to the propensity of recent developments and the improper placement of structures such as dikes, pools and possibly active beach zone buildings, the beach has a limited distance to which it naturally recedes or bends, thus causing problems and erosion,” the regulator said.
In February last year, CIMA became a member of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) to keep updated on the development happening around climate-related risks. The NGFS has over 100 member countries and has published recommendations for members to adopt in the implementation of climate-related measures.
See the report in the CNS Library.
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