An African central bank sought to better understand how climate-related risks could affect the national financial sector and through it the economy at large. The country faces a combination of physical climate hazards and transition-related risks, with potentially significant implications for economic resilience, financial stability, and supervisory priorities.
RiskSphere was engaged to lead a climate vulnerability assessment of the financial sector, combining climate risk expertise with deep knowledge of financial systems, pathways to the real economy, and practical experience in developing methodologies for central banks and financial supervisors.
Climate vulnerability analysis requires a system-wide perspective. Unlike a stress test focused on a single institution, portfolio, or risk type, a national-level assessment must connect climate hazards, economic structures, sectoral exposures, and the characteristics of the financial system.
For the client, this meant assessing both physical and transition risks. Physical risks were significant due to the country's exposure to climate hazards affecting agriculture, water resources, infrastructure, coastal areas, and livelihoods. Transition risks were at least equally important, as the economy is highly dependent upon carbon-intensive sectors and – through this – the broader dynamics of the global energy transition.
The challenge was to develop an analytical approach that would help the central bank identify key risk transmission channels, priority sectors, and supervisory implications, while accounting for data limitations and the evolving nature of climate risk supervision.
Key questions included:
Which climate hazards are most relevant for the national economy and financial sector?
Which sectors and regions may be most exposed to physical climate risks?
How could transition risks affect the macro-financial environment?
Through which channels might climate vulnerabilities translate into credit, market, liquidity or operational risks?
What type of information would the central bank need to deepen future supervisory analysis?
RiskSphere developed a structured climate vulnerability assessment linking the country's climate and economic context to financial sector risk channels. The analysis combined desk research and interviews and workshops in the country itself, using supervisory insight, financial sector expertise, and established climate risk methodologies.
The analysis considered exposure to major physical risk drivers, including drought, flooding, coastal vulnerability, water stress, and impacts on agriculture, fisheries, and infrastructure. It also considered transition-related vulnerabilities associated with the global shift toward lower-carbon energy systems and the implications this may have for sectors, public finances and the broader economy.
The approach focused on translating climate risk into supervisory perspectives. Rather than treating climate vulnerability as an environmental issue in isolation, the analysis linked climate drivers to financial risk transmission channels, including borrower repayment capacity, collateral values, sector concentration, sovereign–bank linkages, operational disruption, and broader macroeconomic resilience.
RiskSphere also assessed the maturity of available data and identified practical steps for progressing from a qualitative vulnerability assessment to more quantitative supervisory tools over time. As a result, the analysis distinguished between immediate supervisory insights, medium-term data priorities, and longer-term modelling opportunities.
The climate vulnerability assessment provided the client with a structured understanding of how climate-related risks could affect the financial sector. It identified key risk drivers, vulnerable sectors, potential financial transmission channels, and priority areas for further data development and supervisory capacity building.
The project delivered:
A climate vulnerability framework tailored to the national economic and financial sector context;
A structured overview of key physical and transition risk drivers;
Identification of relevant sectors, regions and exposure channels;
Translation of climate vulnerabilities into financial risk categories;
A basis for future supervisory dialogue with financial institutions;
Recommendations for strengthening data, monitoring, and future analytical capabilities.
The result was a practical foundation for integrating climate risk into financial sector supervision from a policy standpoint. By connecting climate science, economic vulnerability, and financial risk management, the analysis enabled the central bank to take a structured first step toward more climate-informed supervision and financial stability monitoring.