Environmental Financial Risks: A Central Banking Perspective

This paper examines the implications of environmental physical and transition risks for central banks in Latin America and the Caribbean. It reviews the evidence showing that droughts, floods, and other weather-related shocks, as well as risks associated with the transition to a low-carbon economy, can affect inflation, borrower repayment capacity, credit supply, and financial stability. Drawing on international experience, it discusses how central banks have incorporated these risks into stress-testing frameworks, disclosure requirements, and monetary policy operations. It also presents recent research conducted by the central banks of Argentina, Colombia, and Ecuador, illustrating how environmental risks can be integrated into existing analytical tools through credit-risk analysis, exposure mapping, and inflation dynamics. The main conclusion is that central banks do not require entirely new policy frameworks to address these challenges. Instead, existing tools can be adapted to improve risk assessment and strengthen resilience while remaining aligned with traditional mandates focused on price stability and financial stability.