Author: Ali Ashar Jaffri.
(In the loving memory of my late father Justice (R) Syed Ali Aslam Jaffri, whose teaching and guidance made me who I am today. Even though he may no longer be among us, his prayers and best wishes will continue to shine upon me)
Climate change has become a critical global issue, with severe implications for ecosystems, economies and societies. Financial modelling has emerged as an essential tool for assessing and mitigating climate-related risks, helping institutions anticipate the economic impacts of both physical and transition risks. As extreme weather events increase, central banks and regulators worldwide are integrating climate risks into financial frameworks to ensure stability.
The Paris Agreement (2015) and TCFD (Task Force on Climate Related Financial Disclosures) emphasize transparency and risk management for financial institutions, urging them to consider both physical (e.g., floods, droughts) and transition (e.g., regulatory shifts, technological changes) risks. A study warns that without mitigation, global GDP could shrink by 18% by 2100. In Pakistan, these risks are heightened, particularly in agriculture, energy and banking sectors.
The sectors most vulnerable are a) Agriculture & Livestock b) Forestry & Fishing c) Manufacturing & Construction and d) Energy & Water Supply
Financial stress tests help gauge the resilience of sectors and institutions to these risks, while also identifying specific vulnerabilities in asset valuations and market pricing. Climate-related losses in Pakistan include USD 29 billion (1992–2021), with floods causing a USD 15.2 billion economic setback in 2022.
Pakistan’s Situation: Ranked among the top 10 most vulnerable nations, Pakistan suffers major losses due to climate impacts, with agriculture being particularly at risk (24% GDP contribution). The State Bank of Pakistan is pushing banks to integrate climate risks into lending strategies, yet challenges persist, such as data gaps and regulatory uncertainties.
The TCFD highlights that 60% of large corporations globally are adopting climate risk disclosure, but emerging economies like Pakistan still face significant data gaps.
Effective financial modelling is essential for countries like Pakistan to navigate the risks of climate change. By integrating physical and transition risks into financial models,
Pakistani banks can foster resilience, attract sustainable investments, and secure a more stable, climate-resilient future.
About the Author:
Ali Ashar Jaffri is the Group Head (IT &Administration, Engineering Projects and BCP) and look after Green Banking as well at Bank Al Habib Limited, Pakistan. He has more than 24 years of managerial experience in a number of reputed national and international organizations.
Email: ali.ashar@bankalhabib.com
LinkedIn: Ali Ashar Jaffri | LinkedIn
