The State Bank of Pakistan (SBP) has introduced a comprehensive regulatory framework aimed at strengthening the ability of banks and other financial institutions to manage climate-related financial risks, highlighting Pakistan’s growing exposure to climate change impacts. The move reflects the central bank’s increasing focus on sustainability and financial stability in the face of rising environmental challenges that pose both immediate and long-term risks to the country’s financial system.
According to the circular issued by the SBP, all banks, development finance institutions (DFIs), and microfinance banks (MFBs) operating in Pakistan will now be required to systematically incorporate climate-related risks into their governance structures, business strategies, and overall risk management frameworks. The regulator emphasized that climate change presents significant physical and transition risks, which can affect asset quality, credit portfolios, operational continuity, and long-term financial performance if left unaddressed.
The framework requires financial institutions to formally recognize climate-related risks as a core component of their enterprise risk management processes. This includes assessing the potential impact of extreme weather events, environmental degradation, and climate-related policy changes on their operations and clients. By embedding these risks into strategic planning and decision-making, the SBP aims to ensure that financial institutions remain resilient while supporting a more sustainable economic transition.
Under the new requirements, all regulated institutions must submit board-approved and time-bound implementation plans to the SBP by September 30, 2026. These plans are expected to outline clear targets and milestones for adopting the framework across different functions of the organization. Full compliance with the regulatory framework must be achieved by June 30, 2029, giving institutions a phased timeline to build internal capacity and align existing systems with the new expectations.
At a minimum, the implementation plans must cover the establishment of appropriate governance arrangements, including clear oversight responsibilities at the board and senior management levels. Financial institutions are also required to develop or update relevant internal policies and procedures to address climate-related risks in a structured and consistent manner. This includes aligning internal controls, reporting mechanisms, and accountability structures with the new regulatory requirements.
Another key component of the framework is the integration of climate-related risks into existing risk management and stress-testing frameworks. Banks and other financial institutions will need to evaluate how climate scenarios could affect their balance sheets, liquidity positions, and capital adequacy over time. This step is intended to enhance risk awareness and enable institutions to take proactive measures to mitigate potential financial shocks arising from climate-related events or regulatory transitions.
Capacity building has also been identified as a critical element of the framework. The SBP has directed financial institutions to invest in training and skill development for staff at all levels, including board members and senior management. This is aimed at improving understanding of climate-related financial risks and strengthening the ability of decision-makers to incorporate sustainability considerations into core business and risk strategies.
To facilitate effective implementation, the SBP stated that it will provide support through training programs, awareness sessions, and other facilitation measures. These initiatives are intended to help institutions interpret regulatory expectations, share best practices, and gradually build the technical expertise required to manage climate risks effectively.
The introduction of this framework marks a significant step in aligning Pakistan’s financial sector with global regulatory trends on climate risk management. By proactively addressing climate-related financial risks, the SBP aims to safeguard financial stability while encouraging a more resilient and sustainable banking sector capable of supporting Pakistan’s long-term economic development.
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