Deep dive: Climate risk & financial regulation — the fastest-moving subsegments to watch

Asia-Pacific central banks issued 14 new climate risk supervisory guidelines in 2025 alone, more than the rest of the world combined, making the region the fastest-moving regulatory laboratory for climate-related financial oversight. The Monetary Authority of Singapore, the Bank of Japan, and the Reserve Bank of India have each advanced mandatory climate stress testing requirements that will affect over $28 trillion in combined banking assets by 2027. For financial institutions operating across the region, the pace of regulatory change has shifted climate risk management from a compliance exercise to a strategic imperative that directly affects capital adequacy, lending portfolios, and market access.

Why It Matters

The global climate risk and financial regulation landscape has entered a phase of accelerating fragmentation and convergence simultaneously. Fragmentation because jurisdictions are implementing climate-related financial rules at different speeds, with different scopes, and under different enforcement regimes. Convergence because the underlying frameworks, particularly the International Sustainability Standards Board (ISSB) standards IFRS S1 and S2, are creating a common grammar that allows disparate regulatory approaches to interoperate. The result is a regulatory environment where compliance complexity is rising sharply, but so is the opportunity for institutions that build robust, adaptable climate risk infrastructure.

The financial stakes are substantial. The Network for Greening the Financial System (NGFS) estimated in its 2025 scenario update that climate-related credit losses in Asia-Pacific banking systems could reach $1.2 trillion under a delayed transition scenario by 2040. Physical risk losses from extreme weather events in the region exceeded $130 billion in 2024, with insured losses covering less than 35% of the total, creating enormous unpriced risk on bank balance sheets. Regulatory authorities have concluded that voluntary disclosure and risk management frameworks are insufficient to address systemic climate risk, driving the shift toward mandatory requirements.

For executives, three subsegments within climate risk and financial regulation are moving faster than others and demand immediate strategic attention: mandatory climate stress testing, transition plan requirements, and climate-related litigation risk pricing. Each represents a domain where regulatory expectations are advancing ahead of institutional capabilities, creating both compliance risks and competitive advantages for early movers.

Subsegment 1: Mandatory Climate Stress Testing

Climate stress testing has evolved from an exploratory exercise conducted by a handful of European central banks in 2021-2022 to a mandatory supervisory tool adopted or under development in 34 jurisdictions as of January 2026. The Asia-Pacific region leads this acceleration.

The Monetary Authority of Singapore (MAS) completed its Industry-Wide Stress Test (IWST) 2.0 in 2025, requiring all domestic systemically important banks to model the impact of three NGFS climate scenarios on credit, market, and operational risk across a 30-year horizon. Results revealed that Singapore-domiciled banks face potential credit losses of SGD 4.2 billion to SGD 11.8 billion under the Net Zero 2050 and Delayed Transition scenarios respectively, with concentrated exposures in commercial real estate and fossil fuel-linked shipping finance. MAS has signaled that stress test results will influence Pillar 2 capital add-ons beginning in 2027.

The Bank of Japan (BOJ) launched its first mandatory climate scenario analysis for major banks and regional financial institutions in 2025, covering 127 institutions. The exercise requires banks to assess physical risk impacts on domestic real estate portfolios using granular flood and typhoon hazard maps, and transition risk impacts on corporate lending portfolios using sector-level decarbonization pathways. The BOJ's approach is notable for integrating physical and transition risks in a single framework rather than treating them as independent exercises.

The Reserve Bank of India (RBI) issued its climate risk management framework for scheduled commercial banks in 2025, requiring climate scenario analysis for all banks with assets exceeding INR 5 trillion (approximately $60 billion). India's approach emphasizes physical risk given the country's extreme heat and flood exposures, requiring banks to map lending portfolios against district-level climate vulnerability indices developed by the Indian Institute of Tropical Meteorology.

Hong Kong Monetary Authority (HKMA) advanced to its second round of climate risk stress testing in 2025, expanding scope from authorized institutions to include the insurance sector under a coordinated exercise with the Insurance Authority. The exercise incorporated for the first time litigation risk scenarios, reflecting growing concern about climate-related legal liability affecting asset valuations.

What Makes This Subsegment Fast-Moving

Three dynamics are accelerating climate stress testing requirements across Asia-Pacific. First, the NGFS has released updated scenario data with higher-resolution regional pathways that make jurisdiction-specific stress testing technically feasible for the first time. Second, supervisory authorities are observing that voluntary stress tests produce optimistic results and are moving toward mandatory exercises with standardized assumptions that enable cross-institutional comparison. Third, the European Central Bank's 2024 decision to apply capital surcharges based on climate stress test results has created a regulatory precedent that Asia-Pacific authorities are actively studying.

Subsegment 2: Transition Plan Requirements

Mandatory transition planning has emerged as the regulatory mechanism bridging climate risk disclosure and concrete institutional action. Unlike disclosure requirements that ask institutions to report on risks, transition plan mandates require institutions to articulate credible strategies for managing climate-related risks and opportunities over defined timeframes, with measurable interim targets.

The Australian Prudential Regulation Authority (APRA) finalized its Prudential Practice Guide CPG 229 update in 2025, requiring all authorized deposit-taking institutions, general insurers, and life insurers to develop and maintain climate transition plans that include quantified emissions reduction targets for financed emissions, sector-level engagement and exit strategies, and governance structures for oversight. APRA's approach explicitly links transition planning to risk management standards, making climate transition a prudential (not just disclosure) concern.

Japan's Financial Services Agency (JFSA) published its Transition Finance Guidelines 2.0 in 2025, establishing criteria for financial institutions to classify transition-aligned lending and investment activities. The guidelines introduce a "credible transition pathway" assessment framework that evaluates borrowers' decarbonization plans against sector-specific benchmarks developed by the Asia Transition Finance Study Group. Banks that cannot demonstrate credible assessment processes face enhanced supervisory scrutiny during routine examinations.

The Bangko Sentral ng Pilipinas (BSP) became the first Southeast Asian central bank to mandate transition plans for universal and commercial banks in 2025, requiring alignment with the Philippines' Nationally Determined Contribution under the Paris Agreement. The requirement reflects the Philippines' acute physical climate vulnerability and the systemic risk posed by banking sector exposure to climate-sensitive sectors including agriculture (14% of GDP) and tourism (12% of GDP).

South Korea's Financial Services Commission introduced mandatory transition plan disclosure for financial holding companies and major banks in 2025, building on the Korea Taxonomy for Sustainable Activities. Plans must include financed emissions baselines using the Partnership for Carbon Accounting Financials (PCAF) methodology, sector-level decarbonization targets, and annual progress reporting against stated objectives.

Transition Plan Quality Indicators

Element	Leading Practice	Common Practice	Lagging Practice
Financed Emissions Baseline	PCAF-aligned, audited, Scope 1-3	Scope 1-2 estimated	No baseline established
Sector Targets	Science-aligned, 5-year interim milestones	Aggregate portfolio target only	Aspirational long-term goal
Engagement Strategy	Documented escalation framework with exit criteria	Ad hoc engagement	No systematic engagement
Governance	Board-level oversight with executive accountability	Committee-level reporting	Delegated to sustainability team
Capital Allocation	Quantified green/transition finance targets	Qualitative commitments	No integration with strategy
Scenario Analysis	Multi-scenario with portfolio-level impact	Single scenario, qualitative	No scenario analysis

Subsegment 3: Climate Litigation Risk Pricing

Climate-related litigation has become a material financial risk that regulators and financial institutions can no longer treat as a tail event. The Grantham Research Institute on Climate Change and the Environment tracked 2,666 cumulative climate litigation cases globally by the end of 2025, with 312 new cases filed during the year. Asia-Pacific cases have grown at 28% annually since 2022, faster than any other region.

The financial implications are crystallizing. Commonwealth Bank of Australia disclosed in its 2025 annual report that climate litigation contingent liabilities across its lending portfolio could range from AUD 1.2 billion to AUD 3.8 billion under adverse scenarios, driven primarily by potential liability for financed emissions in the fossil fuel sector. HSBC established a $450 million litigation reserve for climate-related claims following shareholder and NGO actions challenging the credibility of its coal phase-out commitments.

Regulators are responding by requiring institutions to incorporate litigation risk into their climate risk frameworks. The Australian Securities and Investments Commission (ASIC) issued updated guidance in 2025 requiring directors of listed companies and registered managed investment schemes to consider climate litigation exposure in their risk disclosures. The guidance specifically addresses greenwashing liability, noting that ASIC brought 49 enforcement actions related to sustainability claims between 2023 and 2025.

The Hong Kong Securities and Futures Commission (SFC) updated its fund manager code of conduct to require assessment of investee company litigation risk as part of climate-related due diligence. Fund managers with assets under management exceeding HKD 8 billion must document their process for evaluating whether portfolio companies face material climate litigation exposure, including potential liability from emissions-intensive operations, inadequate transition planning, or misleading sustainability claims.

Insurance pricing is transmitting litigation risk signals into the broader financial system. Climate litigation coverage has emerged as a distinct insurance product line, with Lloyd's of London syndicates and specialty insurers in Singapore and Australia offering directors' and officers' (D&O) policies with climate litigation extensions. Premiums for these policies increased 45 to 60% in 2024-2025, reflecting underwriters' assessment of rapidly escalating claim frequency and severity.

Litigation Risk by Sector and Jurisdiction

Sector	Highest Litigation Exposure (APAC)	Primary Legal Theories	Financial Impact Range
Oil & Gas	Australia, Philippines, South Korea	Failure to mitigate, misleading disclosure	$500M-$5B per major case
Banking/Finance	Australia, Hong Kong, Japan	Greenwashing, fiduciary duty breach	$100M-$2B cumulative
Insurance	Australia, New Zealand	Failure to price physical risk, coverage disputes	$200M-$1.5B per event
Real Estate	Japan, Singapore, Australia	Physical risk non-disclosure, stranded asset liability	$50M-$500M per portfolio
Agriculture	India, Philippines, Thailand	Water rights, deforestation liability	$20M-$300M per case

Cross-Cutting Trends

Several dynamics connect these three subsegments and amplify their collective impact.

Data infrastructure is the binding constraint. Climate stress testing, transition planning, and litigation risk assessment all require granular, forward-looking data that most financial institutions do not yet possess. The PCAF Global Carbon Accounting Standard covers financed emissions estimation methodologies for six asset classes, but data quality scores remain at 3 to 4 (on a 1 to 5 scale, with 1 being highest quality) for the majority of portfolios. Institutions that invest in data infrastructure now, including counterparty emissions data, geospatial physical risk analytics, and transition pathway modeling, will have structural advantages as regulatory requirements tighten.

Interoperability between frameworks is improving. The ISSB's decision to incorporate jurisdiction-specific requirements through its "building blocks" approach means that institutions implementing IFRS S1 and S2 can extend their reporting infrastructure to meet local requirements rather than building parallel systems. The ASEAN Taxonomy Board's updated classification system (Version 3, released 2025) aligns with both ISSB and EU Taxonomy concepts while accommodating the region's diverse economic structures.

Supervisory capacity is growing. Asia-Pacific central banks have collectively added over 400 climate risk specialists to their supervisory teams since 2023. The NGFS Asia-Pacific Climate Risk Supervision Network, established in 2024, facilitates knowledge sharing and coordinated examination approaches across 18 member institutions. This capacity building means that regulatory expectations will be enforced with increasing rigor.

Action Checklist

• Map current climate risk capabilities against mandatory stress testing requirements in each operating jurisdiction
• Establish financed emissions baselines using PCAF methodology across all material asset classes
• Develop board-approved transition plans with quantified sector-level targets and interim milestones
• Incorporate climate litigation risk assessment into credit underwriting and investment due diligence processes
• Invest in geospatial physical risk analytics for real estate and infrastructure lending portfolios
• Build scenario analysis capabilities covering NGFS Net Zero, Delayed Transition, and Current Policies pathways
• Engage with industry groups (including GFANZ working groups and regional banking associations) to influence standard development
• Allocate capital for climate risk data infrastructure, including counterparty emissions and transition pathway data

Sources

• Network for Greening the Financial System. (2025). NGFS Climate Scenarios: Technical Documentation, 2025 Update. Paris: NGFS Secretariat.
• Monetary Authority of Singapore. (2025). Industry-Wide Stress Test 2.0: Climate Risk Results Summary. Singapore: MAS.
• Bank of Japan. (2025). Climate Scenario Analysis for Financial Institutions: Framework and Guidelines. Tokyo: BOJ.
• Grantham Research Institute on Climate Change and the Environment. (2025). Global Trends in Climate Change Litigation: 2025 Snapshot. London: London School of Economics.
• Australian Prudential Regulation Authority. (2025). CPG 229: Climate Change Financial Risks, Updated Prudential Practice Guide. Sydney: APRA.
• ISSB. (2025). IFRS S1 and S2: Implementation Review and Jurisdiction Adoption Tracker. Frankfurt: IFRS Foundation.
• Partnership for Carbon Accounting Financials. (2025). Global Carbon Accounting Standard, Version 3. Amsterdam: PCAF.