Second, economic transformation in response to climate change, as a result of an adaptation and mitigation process, will also require the financial sector to adapt, by managing risk and by exploring opportunities for business. Third, being a prominent sector in the economy, the financial system can also be an agent of change, supporting the adaptation and mitigation process, through its influence on financial resource allocation, through developing supportive financial services, markets, and products, as well as engaging climate change in its own business agenda. Let me elaborate in more details on each of these points, starting with the macro impact and implications for the financial system. Conventional wisdom at this time is that the macroeconomic impact from climate change can be large, but uncertain. For example, estimates from three benchmark studies, as cited by the IMF, point to a mean GDP loss of about 0-3 percent of global GDP for a 3oC warming. In Asia, South and Southeast Asia are to be amongst the regions most likely to experience the most negative effects. Such macro-impact is tantamount to a supply shock on the country’s long-term productive capacity i.e. capital stock and technology, leading to a decline in long-term output growth, higher production cost and inflation, shift in relative price away from carbon-based energy, and a decline in productivity. Some countries may suffer balance of payments problems if they are financially unable to cope with the impact.
Increasingly, we are seeing pressure from stakeholders, pushing banks to become more engaged with the issue. And financial institutions have responded by paying more attention to their own exposure to climate risk, developing communication and business strategy that incorporates climate change, and engaging bank management and employees on the issue as part of the corporate social responsibility. Up to now, globally, evidence of the financial system’s response to climate change is positive, but still very much in an early stage. On lending, for example, fifty-four internationally-based banks have signed the Equator Principles which integrates environmental considerations into project finance. Banks like Citi, Merrill Lynch, Credit Agricole and HSBC have developed specific climate considerations on lending. But for developing and emerging market economies, evidence on environmental lending by domestic banks and by micro-finance institutions is more limited compared to international development banks and subsidiaries of international banks. 2  BIS Review 97/2008  On market development, Clean Development Mechanism (CDM) market growth is impressive and this has been the key driver of growth in primary and secondary trading in carbon market. On the issue of CSR, banks have done relatively less to elevate climate change as a governance priority. For example, only twelve out of forty of the world largest banks have board-level involvement in climate change initiatives. But in terms of banking operation, a growing number of banks are calculating carbon risk in their loan portfolios, with twenty-four banks having set greenhouse gas reduction targets for their internal operations.