Climate Change and Financial Risks
Climate change and environmental disasters are largely associated with human losses, physical damage, economic and financial losses. From rising sea levels to extreme weather events, energy, food and water security issues, climate risks lead to tragic consequences. On the one hand, climate change affects nature and human living conditions, providing a basis for social and economic development. On the other hand, society's activities affect the climate by changing the amount of greenhouse gas emissions and the degree of vulnerability to climate.
Climate change has a significant impact on Armenia. Between 1935 and 2016, temperatures rose by 1.23°C [1], compared to a global average of 1°C, and this increase is projected to reach 5.6°C by 2100 in a no-emissions scenario [2]. The most common physical climate risks in Armenia, which vary by geographical location, include heat waves, droughts, extreme precipitation, floods and landslides. According to the European Commission, Armenia ranks 52nd out of 181 countries in terms of climate vulnerability as of 2022 [3]. As part of its climate risk management objective, Armenia has committed to reducing its greenhouse gas emissions by 40% below 1990 levels by 2030 through its nationally targeted actions [4].
Climate change has negative consequences for the economy, which in turn leads to risks for the financial system. Financial market participants and regulators, stability risks are refining approaches to assessing and managing climate risks, with an emphasis on climate risks. It is estimated that about 40% of the banking sector's loan portfolio in the Republic of Armenia belongs to economic sectors vulnerable to climate change (see the CB Risk Radar report). The types of climate risks, the transmission channels of the economy, and the types of financial risks are presented in the diagram below.
Figure: The transmission of climate-related risks to the economy and financial system