3rd July 2023
Singapore – The ASEAN+3 Macroeconomic Research Office (AMRO) organised a seminar together with the SOAS Centre for Sustainable Finance and ClientEarth on 14 June 2023. The session was attended by AMRO staff and representatives from central banks, financial supervisors and finance ministries from the ASEAN+3.
The session, titled “Banks, climate change and legal risk: perspectives for central banks and supervisors” was part of a series of seminars and workshops on climate risk. The seminar was focused on the topic of climate-related legal risks posed to commercial banks in the ASEAN+3, drawing on international experience, and how central banks and financial supervisors might respond under their financial stability, supervisory and prudential mandates.
Our lawyers Jamie Sawyer and Alex Lombos, joined by Professor Ulrich Volz, Director of the Centre for Sustainable Finance at SOAS, spoke about three important categories of legal risk: litigation, increased engagement by bank shareholders exercising their legal rights and regulatory intervention. These risks can materialise as costs for commercial banks either directly or indirectly via their exposure to clients and counterparties.
The speakers noted that each type of legal risk is likely to become more significant as climate-related legal obligations on companies and financial institutions become more stringent over time. Such obligations include mandatory rules on climate-related disclosures, increased recognition of climate change triggering directors’ duties and enhanced financial regulation on climate risk management.
The key point made was that climate change poses material legal risks to commercial banks in the ASEAN+3 that could have significant financial and reputational implications. There are steps central banks and supervisors can take to ensure that banks start to consider, better understand and mitigate these legal risks. It was also noted that the Network for Greening the Financial System has already suggested that climate-related legal risks should be taken into account by financial supervisors.
ASEAN+3 central banks and financial supervisors could start by encouraging banks to have systems, controls and strategies for the identification, management and disclosure of climate-related legal risks.
Biodiversity-related legal risks and obligations are also becoming more significant over time. There are new frameworks for reporting nature-related risks and opportunities, new supply chain due diligence laws and regulations and an increased recognition that biodiversity loss triggers directors’ duties of itself. As with climate change, biodiversity-related legal risks may manifest for banks either directly or via their financial exposure to companies in the real economy and financial sector. Accordingly, ASEAN+3 central banks and financial supervisors might also consider how they can help commercial banks to address the biodiversity-related legal risks they face.