Tropical cyclones and flooding may be costing Fiji $500m (US$250 million) a year but the country’s climate action commitments under its new Climate Change Act, 2021 will expose its financial system to “significant” shocks.
This was revealed by the Reserve Bank of Fiji in its Financial Stability Report, 2021, released in Suva early last December.
The central bank outlined two categories of risks associated with climate change – physical risks and transition risks, the latter potentially more problematic.
“With the greater adaptation of the Climate Change Act 2021 and its accompanying regulations, a potential source of shock to the financial system is transition risk, mainly around the changes that will be made to adjust towards a low carbon economy. This is expected to cut across all sectors, but would mostly impact high carbon emitting sectors such as agriculture, electricity, manufacturing and transport, all of which contribute a notable portion to Fiji’s GDP,” the RBF said.
“Collectively, these sectors represent 15.5% of commercial bank loans as at October 2021. Firms in these sectors could see their earnings decline, business disrupted and funding costs increase because of policy action, technological change, and consumer and investor demands for alignment with policies to tackle climate change. Noting the deadline for carbon neutral by 2050, the set timeline would mean the need to swiftly adopt low carbon processes for the entire economy. The level of stress that would be imposed on the economy is expected to be significant, and necessary assessment along these lines would need to be undertaken similar to other developed jurisdictions,” the RBF report said.
Already, the ongoing physical risks of climate change are costing the country dearly.
“Despite its minute carbon footprint, Fiji is particularly vulnerable to floods and tropical cyclones, which have had significant impact on the economy. Annually, the average losses owing to tropical cyclones and floods are estimated at more than $500 million, equivalent to more than 5 percent of Fiji’s GDP,” the report said.
RBF added that the Fijian financial system was familiar with the physical risks and it predicts these will worsen over time as impacts of climate change intensify.
“For insurance companies, this will mean increasing claims and large spikes in claims, with the risk of some assets becoming uninsurable over time. For commercial banks, this will mean increased risks to the property, infrastructure and land they rely on as collateral leading to greater risks in mortgage portfolios. The annual hurricane season is somewhat now part of the economic cycle that the financial system has to account for. With climate change however, the intensity of these cyclones have grown as well as their frequency, which can lead to more chronic effects. However, majority of the impact on the economy has so far been confined to the re-prioritisation of fiscal spending to cater for the rebuilding of infrastructure and livelihoods. Costs to the financial system have been mainly around the materialising of a number of risks, however the most significant has been insurance risk, though these are partly shared with the broader international reinsurance market,” RBF said.
Fiji’s commitment to climate action is outlined in its new Nationally Determined Contribution (NDC) document, which espouses its commitments to reduce emissions under the Paris Agreement.
Last September, the Fijian Parliament passed the Climate Change Act, making Fiji the seventh country in the world and first Small Island Developing State to pass climate legislation inclusive of a net-zero emissions goal.
The Act legally-binds Fiji to its commitment of net-zero carbon emissions by 2050, and also provides the legal framework for a carbon-neutral and climate-resilient Fiji by committing to the 100 percent sustainable management of Fiji’s ocean and climate mitigation and adaptation through nature-based solutions.
“Once in force, the legislation will usher in a renewed and structured effort for Fiji to reduce its greenhouse gas emissions consistently in order to achieve its long term emissions reduction target and carbon budgets. The required economic transformation would have an impact on current business practices and processes which is expected to be felt by the financial system. For now, the more carbon intensive sectors would be impacted, however its exact pathway is quite uncertain as there may also be indirect effects on other sectors. All in all, it is expected that climate change risks would amplify traditional financial risks faced by licensed financial institutions,” the RBF said.
The Fiji Climate Change Act, 2021 has yet to be gazette and no timeline has been given by the Fijian government.