Climate Risks Are Becoming a Financial Threat

It is being suggested that the central banks in the region of Southeast Asia must take an active role in mitigating the impact of the effect of climate change since extreme weather constitutes a rising risk to economic and financial stability, according to the opinion article written by Muhammad Qaisar and Vinod Thomas and featured in Green Central Banking on August 13, 2026.

It has always been the duty of the central banks to focus on the maintenance of price and financial stability. Most of the central banks have been focusing on the different scenarios and impact of climate change on the economy and financial institutions. However, the authors argue that mere monitoring of the risk factors will no longer suffice.

The floods, storms, heat waves and other such climatic events will disrupt the process of production, cause prices to rise, reduce the value of the asset collaterals used in loans and increase the probability of defaulting on those loans. There were three typhoons in the region in a week in 2025 causing 1,300 fatalities and displacing 1.2 million people. An increase in temperature of just 1% can add a 0.5% to 0.8% production cost for food in the region.

Southeast Asia Faces a Growing Emissions Challenge

The urgency of taking action is particularly important since fossil fuel consumption represents four out of five units of energy consumed in ASEAN. Energy demand will remain high in the region because of economic development in the coming years, as well as increased greenhouse gas emissions up to 35% by 2050.

Despite most Southeastern economies setting net-zero goals for mid-century, most countries are falling behind in achieving their stated climate goals now. At the same time, financing of both mitigation and adaptation of climate change falls short of needs.

The authors state that central banks are unique in their ability to direct financial flows through their monetary policies and banking supervision.

Central Banks Could Direct More Finance Toward Clean Energy

Central banks might promote increased investments in renewable energy, forests, and climate change resilient cities and make financing for fossil fuel investments, especially coal investments, harder to obtain.

The joint statement of the 13th ASEAN Finance Ministers and Central Bank Governors Meeting held in April 2026 mentioned the need to mobilise private finances for clean energy and climate change resilience. The authors state that the task would be facilitated by more effective financial supervision and management of liquidity on the part of central banks.

A mandatory climate disclosure framework has already been introduced in Malaysia and Singapore. Malaysia, Singapore, Indonesia, Philippines, and Thailand are preparing climate risk assessments and stress tests.

Another possible option would be the inclusion of climate risk in capital requirements for banks, particularly concerning the financial effect of extreme weather.

Liquidity and Collateral Rules Could Support the Energy Transition

Critics might claim that engaging more in climate policies could lead to the central banks becoming involved in industrial policy and lose their independence as a result of such engagement. Authors believe that climate change affects price and financial stability, so it falls within the remit of central banks.

The authors claim that taking decisions on the basis of the financial and economic risks of climate change allows for actions to be taken without undermining the independence of the central banks. They believe that the pursuit of neutrality can lead to distortions in markets failing to incorporate the cost of carbon emissions.

Climate Action Can Remain Within Central Bank Mandates

Critics might claim that engaging more in climate policies could lead to the central banks becoming involved in industrial policy and lose their independence as a result of such engagement. Authors believe that climate change affects price and financial stability, so it falls within the remit of central banks.

The authors claim that taking decisions on the basis of the financial and economic risks of climate change allows for actions to be taken without undermining the independence of the central banks. They believe that the pursuit of neutrality can lead to distortions in markets failing to incorporate the cost of carbon emissions.

ASEAN's Climate Ambition Must Lead to Action

Southeast Asian economies aspire to reach high-income economy status by 2050. However, this will entail pursuing growth that is environmentally and socially sustainable in order to reach this aspiration.

In the context of the Philippine chairmanship of ASEAN 2026, the finance ministers and central bank governors have included sustainable finance and climate-related risks in the regional agenda. The authors contend that this joint initiative now requires action beyond the discourse.

The piece first appeared in East Asia Forum. Muhammad Qaisar is a Fellow at the Council on Economic Policies where he focuses on the issue of finance and energy transition in Asia. Vinod Thomas is a Visiting Senior Fellow at the ISEAS-Yusof Ishak Institute and works on issues of risk, resilience, climate change and sustainable development.