How Southeast Asia’s central banks can meet the climate challenge
Last Updated on August 4, 2026 7:06 pm
As the urgency to respond to climate change intensifies across Southeast Asia, central banks could make a vital difference. Their traditional mandates to maintain price and financial stability are increasingly having to reckon with climate-induced macroeconomic shocks. Under their core mandates, regional central banks are already monitoring the price and financial risks of climate scenarios, an important reactive function.
But as extreme weather events become more frequent, systematically causing price hikes by disrupting supply chains and production processes, eroding the value of loan collateral and increasing default risks, central banks should more proactively set monetary policy. During a single week in 2025, three typhoons tore across the region, killing more than 1300 people and displacing 1.2 million, while a one per cent rise in temperature could hike regional food production costs by 0.5–0.8 per cent, stressing the price stability mandates of central banks.
The rationale for an anticipatory policy role is further buttressed by the sheer scope of the market failure associated with climate change, especially given the region is a leading carbon emitter. Fossil fuels make up four-fifths of ASEAN’s energy and their use is still growing on the back of the region’s projected economic growth and energy demand — among the highest in the world — with emissions projected to rise 35 per cent by 2050.
In this situation, central banks are uniquely positioned to influence policy. Their monetary decisions and bank oversight affect capital allocation across the economy and the conditions under which banks lend — helping increase capital for renewable energy while restricting the development of new fossil fuel facilities, accelerating decarbonisation.
This is particularly pressing given most Southeast Asian economies have committed to net zero carbon emissions by mid-century but are not on track to meet them. Mitigation and adaptation remain seriously underfunded, despite being highly cost-efficient compared to the steep costs of climate failure. Central banks must use their means to direct funding towards critical mitigation and adaptation against climate dangers, such as renewable energy, forest protection and green cities.
The Joint Statement of the 13th ASEAN Finance Ministers and Central Bank Governors Meeting in April 2026 rightly stressed the importance of mobilising private finance for clean energy and climate resilience. But its effectiveness will ultimately require central bank financial supervisory tools and liquidity management instruments as well — something authorities have shown their willingness to do.
In Malaysia and Singapore, central banks have mandated disclosure frameworks for financial entities to enhance transparency around these risks, and they, as well as Indonesia, the Philippines and Thailand are working out climate risk assessments and stress tests. Incorporating climate risks in bank capital requirements to reflect extreme weather events — as flagged by the OECD — is a further pivotal measure.
Central banks also ought to go further in aligning liquidity facilities to catalyse capital towards the energy transition. Financing for fossil fuels should be restricted — especially coal development — while funding for affordable, secure and clean energy should be supported, deploying measures such as relaxing reserve requirements and improving the preferential terms on which central banks lend to banks. Central banks also need to account for climate risks in the assets they accept as collateral, something none of the regional central banks have done thus far.
Concern exists that this new role could stretch the mandate of regional central banks, dragging an unelected institution into industrial policy and eroding their independence. But climate risk is a financial fact — one which actively affects their price and financial stability mandates — not a political preference. The willingness and capacity to implement a proactive approach, however, need work.
If a proactive climate action is a rightful agenda for price and financial stability, it can, and should be, dealt with while safeguarding central bank independence — financing decisions based solely on how risks affect price and financial stability are an example of this approach. Given the market failure in carbon emissions, market neutrality would not be genuinely neutral in the presence of active market distortions. The real challenge is whether the same forces that cause the neglect of this externality hamper the central bank’s role in correcting it.
Southeast Asian economies have set ambitious goals for transitioning to the high-income bracket by 2050. The transition will depend on not just the pace of growth but also its environmental and social sustainability, requiring these economies to reduce dependence on fossil fuels and to adapt to climate risks. A reactive central bank role in monitoring climate risk is helpful, but a proactive role in monetary policy and financial supervision to build resilience to this risk is also required.
Under the Philippines’ 2026 ASEAN chairmanship, the region’s finance ministers and central bank governors placed sustainable finance and climate-related risk on the agenda. Now, this shared ambition needs to be translated into action.