Climate change-related risks pose “significant concerns” to the financial system in the Sultanate of Oman, the Central Bank of Oman (CBO) has warned in a new report.
The ‘Financial Stability Report 2023’, issued by the apex bank on July 26, cautions that climate change impacts, notably in the form of extreme weather events, can have major implications for individual entities (microprudential risk), while potentially also imperiling the stability of the wider financial system (macroprudential risk).
These risks, according to the CBO, broadly encompass direct physical impacts from climate related events, risks stemming from the transition to a low-carbon or green economy, and legal or financial risks resulting from damage caused by climate impacts.
“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,” the Central Bank stressed in its report.
The cautionary warning comes amid a momentous drive by the Omani government to transition away from hydrocarbons to a cleaner, sustainable green hydrogen-based economy. Oman has also pledged to decarbonise its economy by switching to low and zero-carbon fuels – a goal it is committed to achieving by 2050.
For hydrocarbon-dependent economies like the Sultanate of Oman, this far-reaching energy transition could pose challenges to financial institutions, according to the report. The transition will necessitate fundamental changes in the structure of the economy with potential ramifications for the operations, investments and business strategies of banking and financial organisations, it said.
“This transition may involve a fundamental restructuring of industries, diversification of revenues for the government and businesses, and adoption of sustainable practices. 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,” the Central Bank added.
Significantly, future assessments of Oman’s financial stability will also factor in risks stemming from climate impacts and the energy transition, the apex bank said. At the same time, it has urged banks and FLCs to update their risk management policies and practices to bring them into line with Basel guidelines on climate-related financial risks.
“Furthermore, the CBO has prepared a preliminary roadmap aimed at fostering sustainable and green financing within the Omani financial system. This roadmap will be implemented to promote environmentally friendly financial practices. Moreover, CBO, along with other government entities, is also part of G-20 initiatives on climate change,” the Central Bank added in its report.
Oman Observer is now on the WhatsApp channel. Click here
