CLIMATE-RELATED RISKS: IMPACT AND CHALLENGES FOR FINANCIAL INSTITUTIONS

Climate change awareness and the necessity of taking steps to lessen its long-term implications on the economy, regions, cities, and population have gained importance in recent years. The transition to a low-carbon economy presents various challenges for governments, organizations, authorities, businesses, and the public. In this context, financial institutions, as key participants in the economic landscape, can and should play a significant role in translating environmental strategies into the real economy. The purpose of the study is to identify and examine how banks are affected by climate change risks and determine the primary mitigation strategies that banks must use to guarantee a sufficient risk management system, control the impact on financial results and maintain the financial stability at country level, while continuing to be a main player in stimulating the global economy in implementing sustainable practices and reducing climate impact. Materials and methods used were driven by collecting statistical data provided by banks and and non-banking financial institutions (IFN) which were analysed in order to come to conclusions as regards changes needed on bank’s risk policies, quantification systems and methods (including stress-test. The study main results underline that banks need to continue and intensify incorporating climate risks in the internal risk management policies and risk assessment models (including stress testing) which will support anticipating and managing the impact of future extreme events, potential disruptions in clients’ supply chains, interdependencies, and cascading impact potential. Moreover, through financing green investments, banks can contribute to achieving sustainable economic growth and reducing carbon emissions and the impact of climate change.