Indonesia: Financial Sector Assessment Program-Technical Note on Climate Risk Assessment

This Technical Note focuses on Critical Risk Assessment for the Indonesia Financial Sector Assessment Program (FSAP). The FSAP assessed both transition and acute physical risks posed by climate change. The transition risk analysis followed an integrated micro-macro approach where transition scenarios for various economic sectors are structurally linked to corporate vulnerability indicators and then translated into corporate credit risk paths and eventually banks’ credit exposures. The analysis and results should be regarded as exploratory and interpreted with caution given the uncertainty associated with the scenarios and modeling approach. The climate risk analysis highlights potential vulnerabilities from climate-related physical and transition risks. In order to better monitor these risks, the authorities should further develop internal capacity and models for climate risk analysis, improve data collection, offer more detailed methodological guidance to financial institutions, and enhance the collaboration among government agencies on climate risk analyses.