Pakistan is one of the countries in the world most vulnerable to climate change and its extreme weather conditions pose a risk to financial stability [1], [2]. Pakistan’s high vulnerability to climate change has been evidenced by the 2022 floods [3], with loss in gross domestic product (GDP) as a direct impact of the floods projected to be around 2.2% of FY22 GDP. The agriculture sector is projected to contract the most, at 0.9% of GDP. However, damage and losses in agriculture will have spill-over effects on the industry, external trade, and services sectors [4].

The impacts of the 2022 floods on the financial sector has been assessed primarily through damage to the physical infrastructure and projected loan losses of the banking and microfinance sectors (which includes microfinance banks [MFBs] and microfinance institutions [MFIs]). An estimated 268 branches and 35 ATMs operated by commercial banks were damaged, in addition to 81 microfinance branches and 2 ATMs. The physical infrastructure damages are estimated to be PKR 600 million (US$2.8 million), of which PKR 510 million (US$2.4 million) is in the commercial banking sector and PKR 90 million (US$0.4 million) in the microfinance sector. The flood-induced incremental nonperforming loans of the banking and microfinance sector are estimated at PKR 84.2 billion (US$392.0 million), based on data provided by the sector regulators. Of these, the commercial bank losses are estimated at PKR 26 billion (US$121 million), MFB losses at PKR 33.9 billion (US$157.8 million), and MFI losses at PKR 24.3 billion (US$113.1 million). A further PKR 5.44 billion (US$25.3 million) is estimated as additional insurance sector claims that are not re-insured abroad, and PKR 190 million (US$0.9 million) as insurance infrastructure losses [3].

The immense magnitude of estimated losses due to climate change risks will likely have a severe impact on Pakistan’s financial institutions and markets. On the other side of the coin, financial institutions can also exacerbate those risks by continuing to provide substantial financing to carbon-intensive activities [5], [6]. It is, therefore, a critical time for Pakistan’s financial sector to become sensitive to the financial consequences arising from environmental & social risks [1].

Sustainable finance will be crucial in order to reduce the vulnerability of Pakistan’s financial sector to environmental risks [7]. It also presents a real opportunity to accelerate the country’s financial flows towards Pakistan’s green, inclusive and resilient transition, e.g., through green bonds and other relevant sustainable finance instruments [8].


Key policies and governance approach

The State Bank of Pakistan (SBP) has played a crucial role in Pakistan’s sustainable finance journey. Since 2009, SBP has introduced various conventional as well as Islamic refinance schemes, with varying scope, for financing projects that use renewable energy. The schemes aim at providing financing to address climate change and energy shortages through the promotion of renewable energy. As of Feb-22, total disbursements of PKR 79.7 billion have been made under the SBP Financing Scheme for Renewable Energy [6].

In 2015, SBP joined the Sustainable Banking and Finance Network (SBFN). Additionally, in the same year, in collaboration with the International Finance Corporation, SBP also conducted an environmental and social risk management survey for the financial sector of Pakistan and published a Green Banking Concept paper to raise awareness about green banking in the industry [6].

Following this, in 2017, SBP issued Guidelines on Green Banking, which aimed at safeguarding Pakistan’s financial institutions against environmental and climate change risks. It also aimed to facilitate the investment of financial institutions in energy-efficient projects. The Guidelines covered three main areas (i) risk management, (ii) business facilitation, and (iii) reducing the impact on the environment and society [6]. Additionally, the Government of Pakistan and UNDP published the Pakistan Climate Change Financing Framework: A Road Map to Systemically Mainstream Climate Change into Public Economic and Financial Management in 2017 [9].

In 2018, SBP issued the Guidelines on Environmental and Social Risk Management (ESRM) Policy and Procedures for Microfinance Banks (MFBs), Non-Bank Microfinance Companies and Non-Bank Finance Companies in Pakistan [9]. The main objectives of the policy for the participating financial institutions were to (a) set out applicable Environmental & Social (E&S) requirements for all business activities, (b) strengthen their Environmental and Social Management Systems (ESMS), (c) fully implement and comply with national requirements for E&S risk management, and (d) promote greater transparency and accountability on E&S issues [6].

In 2021, the Securities and Exchange Commission of Pakistan issued the Green Bonds Guidelines for the corporate sector to raise funds from the capital market to finance or refinance projects that contribute positively to the environment. Pakistan’s national framework for financing sustainability is led by SBP’s Green Banking Guidelines (2017) and the Securities and Exchange Commission of Pakistan’s Green Bond Guidelines (2021). The SBP monitors the implementation of Pakistan’s sustainable finance framework and provides regulatory guidance to enhance knowledge and capacity of financial institutions on Environmental, Social, and Governance (ESG) and climate risk management [9].

More recently, as part of SBP’s ongoing efforts to promote green banking in Pakistan, the SBP launched the Environmental and Social Risk Management (ESRM) Implementation Manual in November 2022 to support banks/Development Finance Institutions (DFIs) to establish their ESRM systems [1].


Successes and remaining challenges

SBP has been monitoring the implementation of its Green Banking Guidelines (2017) by banks and DFIs and the progress that has been made has been promising. As of November 2022, as outlined in a keynote address by Mr Jameel Ahmad, Governor of the State Bank of Pakistan: (i) all Banks and DFIs have established Green Banking Offices and nominated chief green banking managers to supervise Green Banking activities; (ii) 31 banks and DFIs (79%) have formulated Green Banking Polices that have been approved by their respective Boards. These policies include policy statements on environmental risk management, facilitation of green businesses, and reduction in their own carbon emissions; (iii) 27 banks and DFIs (69%) have integrated environmental risk assessment procedures with their credit risk assessment procedures to better evaluate and manage the impact of environmental and climate changes on their credit portfolios; (iv) 16 banks and DFIs (41%) have established strategies for facilitation of green businesses by including a policy statement for allocating funds to businesses that intend to lessen their carbon footprint; and (v) 18 banks and DFIs (46%) have established annual impact reduction targets including well-defined key performance indicators and strategic plans for achievement of these targets [10].

However, while considerable progress has been made, there is still a varying degree of implementation across the industry, as well as a lack of standardization in assessing and identifying environmental risks. To overcome these challenges, the SBP issued the Environmental and Social Risk Management (ESRM) Implementation Manual for Banks and DFIs in November 2022. Further, SBP’s next milestone will be the development of a "National Green Taxonomy" in coordination with relevant stakeholders. This will support financial institutions in identifying and financing green projects and reporting their green finance portfolios to SBP and the public. This will also lay-out the groundwork for development of the green bond and Sukuk market in Pakistan [10].


Initiatives and Development Plans

Green bonds are an increasingly important climate financing instrument worldwide but relatively new in Pakistan.  In 2021, the Water and Power Development Authority (WAPDA) launched the country's first-ever 10-year green bonds and so far, has raised US$500 million to support hydropower generation. Given the encouraging market response, WAPDA is considering launching additional green bonds. Pakistan may also launch additional bonds in other sectors [11].


[6], [8], [10], [11]

  • Develop a "National Green Taxonomy" to support financial institutions (FIs) in identifying and financing green projects and reporting their green finance portfolios to SBP and the public.
  • Develop the capacity of SBP to assess the possible impact of climate change on financial stability and the potential effect of its policies and procedures on climate change.
  • Develop long-term strategic plans to identify, assess and manage financial risks arising from climate change.
  • Issue a Green Banking Facilitation Manual to support banks in developing green products that will address climate change in Pakistan.
  • Develop policies for E&S risk management, requiring FIs to include climate risk into their disclosures and report on their carbon-intensive exposures.
  • Conduct a supervisory review of financial institutions’ policies and practices for including climate risks into their risk frameworks.
  • Assess the efficacy of measures taken and use this assessment to set measurable goals for the future and systematically monitor them.
  • Develop climate-related financial risks literacy programs to educate the government, businesses, and the public about how their policies, operations and consumption decisions affect the environment, monetary and financial stability.
  • Issue green financing targets from the SBP to FIs.
  • Introduce commercially viable incentives for green financing for FIs to build capacity, pursue green finance and lend to investments that reduce GHG emissions.
  • Support the development of innovative financial instruments including green bonds and provide appropriate risk-sharing mechanisms to mobilise private investors towards sustainable investments.

[1] External Relations Department, State Bank of Pakistan (2022). Governor SBP launches Environmental & Social Risk Management (ESRM) manual in high-level sustainable banking conference.

[2] State Bank of Pakistan (2021). Financial Stability Review – 2021. Chapter 4: Resilience of the Banking Sector under Adverse Conditions.

[3] The Government of Pakistan, Asian Development Bank, European Union, United Nations Development Programme, World Bank (2022). PAKISTAN FLOODS 2022 Post-Disaster Needs Assessment.

[4] The World Bank Group (2022). Pakistan: Flood Damages and Economic Losses Over USD 30 billion and Reconstruction Needs Over USD 16 billion - New Assessment. [Online]. Available:

[5] Financial Stability Board (2020). The Implications of Climate Change for Financial Stability.

[6] State Bank of Pakistan (2021). Financial Stability Review – 2021. Box 4.1: Climate Change and Financial Stability.

[7] IFC, World Bank Group (2018). IFC and State Bank of Pakistan Join Forces to Boost Green Banking in Pakistan. [Online]. Available:

[8] European Commission (2021). ISLAMIC REPUBLIC OF PAKISTAN: Multi-annual Indicative Programme 2021-2027.

[9] Sustainable Banking and Finance Network (SBFN), International Finance Corporation (2022). Pakistan Country Progress Report April 2022.

[10] BIS (2022). Jameel Ahmad: Launch of Environmental and Social Risk Management Manual.

[11] World Bank Group. 2022. Pakistan Country Climate and Development Report. CCDR Series;. World Bank, Washington, DC. © World Bank Group. License: CC BY-NC-ND.