The Role of Banking and Insurance in Addressing Climate Change and Sustainable Growth in SAARC Nations: Challenges and Opportunities

Journal of Research and Development Peer Reviewed International, Open Access Journal. ISSN : 2230-9578 | Website: https://jrdrvb.org Volume-17, Issue-9(II) | September - 2025 52 The Role of Banking and Insurance in Addressing Climate Change and Sustainable Growth in SAARC Nations: Challenges and Opportunities Dr. Kamala Kanta Dawo Assistant Professor Department of Commerce Purbanchal College, Silapathar Manuscript ID: JRD -2025(I)-170909 ISSN: 2230-9578 Volume 17 Issue 9(II)| Pp. 52-57 Sept. 2025 Submitted: 10 Aug. 2025 Revised: 22 Aug. 2025 Accepted: 20 Sept. 2025 Published: 30 Sept. 2025 Abstract South Asia is among the most climate-vulnerable regions in the world and faces urgent needs for both mitigation and adaptation finance. Banks and insurance companies—through lending, risk transfer, investment, and advisory services—play a central role in mobilizing capital, allocating risk, and shaping incentives that determine whether the region’s transition is sustainable and equitable. This paper examines the evolving role of banking and insurance in the eight SAARC nations (Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka). It synthesizes regulatory developments (green finance taxonomies, central bank guidelines), private-sector initiatives, and international finance flows; analyzes barriers (institutional, market, data and capacity constraints, exposure to transition and physical risks); and identifies policy and industry interventions to maximize positive outcomes. Using a mixed qualitative methodology—policy/document analysis, synthesis of recent reports, and comparative assessment—the study argues that while progress (green banking guidelines, taxonomies, climate disclosure initiatives) is accelerating, systemic reforms—better risk pricing, scalable insurance solutions, integrated regulatory frameworks, and targeted blended finance—are essential to channel sufficient resources to both adaptation and low-carbon development. Keywords: climate finance, green banking, insurance, SAARC, sustainable growth, green taxonomy, adaptation finance. Introduction South Asia is highly exposed to climate hazards: extreme heat, monsoon variability, glacial melt, sea-level rise and coastal inundation, and intensifying cyclones and floods. These phenomena threaten livelihoods, infrastructure, public finances, and financial sector stability. With constrained fiscal space in many SAARC countries and high development needs, privatesector finance—especially from banks and the insurance industry—must contribute materially to climate mitigation and adaptation. Financial institutions can reallocate capital toward lowcarbon investments, underwrite climate risks, offer inclusive risk-transfer products, incentivize green behaviour through pricing and covenants, and support resilient infrastructure and smallholder adaptation. Recent years have seen notable policy and regulatory movement—green banking guidelines, central bank sustainable finance policies, and national taxonomies—across several SAARC jurisdictions, but significant gaps remain in mobilizing sufficient volumes and aligning incentives across public and private stakeholders. This paper examines how banking and insurance are acting—and should act—to address climate change while fostering sustainable growth in SAARC nations. Objectives  To map the current landscape of regulatory and industry responses among SAARC nations regarding green finance, climate risk disclosure, and insurance solutions.  To analyze how banks and insurers can mobilize capital for mitigation and adaptation, including instruments, mechanisms, and institutional arrangements. Quick Response Code: Website: https://jrdrvb.org/ DOI: Creative Commons (CC BY-NC-SA 4.0) This is an open access journal, and articles are distributed under the terms of the Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International Public License, which allows others to remix, tweak, and build upon the work noncommercially, as long as appropriate credit is given and the new creations ae licensed under the idential terms. Address for correspondence: Dr. Kamala Kanta Dawo, Assistant Professor Department of Commerce Purbanchal College, Silapathar How to cite this article: Kamala Kanta Dawo, (2025). The Role of Banking and Insurance in Addressing Climate Change and Sustainable Growth in SAARC Nations: Challenges and Opportunities Journal of Research & Development, 17(9(II)), 52-57. Original Article Journal of Research and Development Peer Reviewed International, Open Access Journal. ISSN : 2230-9578 | Website: https://jrdrvb.org Volume-17, Issue-9(II) | September - 2025 53  To identify barriers—financial, institutional, informational, political—that limit effective private-sector climate action in SAARC countries.  To propose policy, regulatory, and market interventions to scale climate finance through banking and insurance while safeguarding financial stability and social inclusion.  To provide actionable recommendations for regulators, banks, insurers, multilateral partners, and civil society to accelerate a just transition in the region. Scope of Study This paper covers the eight SAARC member states (Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka). It focuses on the roles of commercial and development banks, non-bank financial institutions (where relevant), and the insurance sector (life and non-life). Primary emphasis is on policy/regulatory frameworks, industry initiatives, and international finance flows influencing national outcomes. The temporal scope prioritizes developments since around 2015 (Paris Agreement) with particular attention to the most recent policy developments up to mid-2025 (e.g., national taxonomies, central bank guidance, national climate finance strategies). The paper synthesizes secondary sources—central bank circulars and taxonomies, multilateral bank reports, industry analyses, and peer-reviewed and grey literature—and does not rely on primary fieldwork. Methodology The study uses a qualitative, comparative method combining: Document and policy analysis: review of central bank circulars, green finance guidelines, national climate finance strategies, and relevant policy documents from SAARC countries (e.g., Bangladesh Bank’s Sustainable Finance Policy; Nepal Rastra Bank’s Green Finance Taxonomy; Sri Lanka’s Green Finance Taxonomy). Synthesis of international reports: integration of findings from the World Bank, MDB joint climate finance reporting, UNEP FI, and other multilateral and industry analyses to gauge flows and systemic trends.Comparative assessment: cross-country comparison of regulatory instruments (mandatory vs voluntary disclosure, taxonomy adoption, green banking targets), insurance market penetration and products, and innovations in blended finance and public-private partnerships. Evidence triangulation: corroboration of policy claims with news and press releases (e.g., World Bank statements on private-sector led climate resilience in South Asia). Because the region’s policy environment is dynamic, the paper prioritizes credible institutional sources and recent (2022–2025) materials for claims about regulatory change and major finance initiatives. Context: Why Banks & Insurers Matter for SAARC Climate Outcomes Two key functions make banks and insurers central to climate action: Intermediation and capital allocation — Banks channel savings into investments. By adjusting risk assessment, collateral requirements, loan covenants, and portfolio strategies, banks can steer capital toward renewable energy, energy efficiency, resilient infrastructure, sustainable agriculture, and climate-smart SMEs. Conversely, continued financing of carbon-intensive assets locks in emissions and stranded asset risk. Recent global evidence shows major banks continue to finance fossil fuels significantly, underscoring the need for credible transition policies and sectoral targets. Risk transfer and management — Insurers enable risk pooling, pricing, and transfer. For climate adaptation— particularly for smallholders, low-income households, and MSMEs—microinsurance, parametric products, index insurance, and public-private risk pools can improve resilience. The insurance industry also influences behavior through underwriting standards and premiums that reflect climate risks, though market penetration for many SAARC countries remains low and affordability constrained. UNEP FI and other bodies highlight the need for integrated underwriting of climate risks and alignment of insurance portfolios with net-zero and resilience goals. Regulatory and Market Developments in SAARC Countries (Selected Examples) This section highlights representative regulatory developments that shape bank and insurer behaviour. Bangladesh: Bangladesh Bank has been a pioneer in South Asia on green banking; its Sustainable Finance Policy and prior Green Banking Guidelines set targets and reporting frameworks for banks and FIs, including minimum green lending targets in prior years and structured reporting. These measures increased institutional attention to environmental and social risk management. India: The Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and other regulators have increasingly moved on climate disclosure and sustainable finance. India has been developing national taxonomy and draft disclosure frameworks (e.g., RBI’s draft “Disclosure Framework on Climate-Related Financial Risks”) and broader country-level market mobilization remains strong given India’s size. Recent landscape analyses document institutional measures and gaps in scaling finance for adaptation. Journal of Research and Development Peer Reviewed International, Open Access Journal. ISSN : 2230-9578 | Website: https://jrdrvb.org Volume-17, Issue-9(II) | September - 2025 54 Nepal: Nepal Rastra Bank released a Green Finance Taxonomy (2024) to classify environmentally sustainable economic activities and to incentivize aligned financial products—an important step toward standardization and mobilizing private capital. Sri Lanka: The Central Bank of Sri Lanka introduced a Green Finance Taxonomy (2022) and related sustainable finance initiatives to support climate finance flows and guide financial sector actors. Pakistan: The State Bank of Pakistan (SBP) has emphasized financial stability risks from climate change and promoted sustainability through supervisory guidance; Pakistan launched a National Climate Finance Strategy (NCFS) as part of efforts to mobilize resources. The SBP’s Financial Stability Reports and related documents highlight the centrality of financial sector reforms for climate resilience. Multilateral signals: Multilateral development banks (MDBs) and the World Bank have increased climate finance commitments to South Asia; recent MDB joint reports and World Bank communications stress need for private sector mobilization for resilience, signaling channels for blended finance and policy reforms. These examples show regulatory momentum, but implementation, harmonization across jurisdictions, and scaling remain significant hurdles. Discussion: Key Themes and Analytical Findings 1. Mobilization of Climate Finance — What Banks Can Do Banks mobilize climate finance through multiple tools: Green lending and project finance for renewable energy, green infrastructure, and climate-smart agriculture. These can be supported by concessional co-financing, partial credit guarantees, and risk mitigation instruments provided by development partners. Sustainable bonds and loan products (green bonds, sustainability-linked loans) to attract institutional and international investors. Market growth depends on credible taxonomies and transparent use-ofproceeds reporting. Retail green finance (green mortgages, energy-efficiency loans) to drive household-level mitigation and resilience. Reorientation of credit risk models to incorporate climate physical and transition risks in credit assessment, thus reducing stranded asset exposure and preventing moral hazard. However, banks face barriers: limited project pipelines for bankable climate adaptation projects; weak collateralization in smallholder and MSME contexts; capacity gaps in climate risk assessment; and sometimes short-term profitability pressures. For mobilization to scale, blended finance and catalytic MDB instruments (credit enhancement, guarantees) remain crucial. MDB reporting indicates increased climate finance flows but highlights adaptation funding shortfalls; adaptation financing remains a smaller share of global climate finance, yet is critical for South Asia. 2. Insurance: From Underwriting to Resilience Insurance in South Asia is uneven: penetration of non-life insurance (property, crop, disaster) is low compared to more developed markets, and microinsurance remains underdeveloped. Insurance interventions that matter include: Parametric insurance and index products for agriculture and disaster—these provide faster payouts, reduce moral hazard, and are administratively simpler than indemnity insurance. Public-private risk pools and sovereign risk transfer tools (e.g., catastrophe bonds, regional risk pools) to protect public finances and maintain fiscal space after major disasters. Insurance-linked lending and project risk coverage to improve bankability of resilient infrastructure and private investment in adaptation. Insurance penetration and affordability initiatives—subsidies or targeted premium support for the poorest, and integrating insurance with digital payment systems for scale. Insurers must also adapt: integrate climate scenario analysis into underwriting, develop products for emerging risks (heat stress, supply chain disruptions), and manage their own asset portfolios in line with transition goals (avoiding heavy fossil fuel exposures). UNEP FI highlights the need for the insurance sector to integrate climate risk across underwriting, asset management, and client engagement. 3. Climate Risk and Financial Stability Climate risks translate into financial stability risks through multiple channels: physical damage to collateral and borrowers’ income, market repricing of carbon-intensive assets, and heightened sovereign risk from disaster-related fiscal shocks. Central banks are increasingly embedding climate considerations into prudential supervision, stress testing, and disclosure. The State Bank of Pakistan and other central banks have published analyses and guidance concerning climate risk to the financial system. More systematic climate stress testing—incorporating both physical and transition scenarios—is needed across SAARC to quantify exposures and inform macroprudential responses. Journal of Research and Development Peer Reviewed International, Open Access Journal. ISSN : 2230-9578 | Website: https://jrdrvb.org Volume-17, Issue-9(II) | September - 2025 55 4. Regulatory Tools and Market-Making: Taxonomies, Disclosure, and Targets National taxonomies (Nepal, Sri Lanka, and growing work in India) and central bank guidance help define eligible green activities, reduce greenwashing, and provide a common language for investors and issuers. Disclosure frameworks—aligned with TCFD/ISSB principles—enable market discipline and better pricing of climate risks. However, fragmentation across jurisdictions and voluntary compliance limits cross-border investment flows. Harmonization, regional principles, and technical assistance would help scale cross-border green finance within South Asia. 5. Inclusion and Social Equity: Ensuring a Just Transition Banking and insurance solutions must be inclusive. Smallholders, informal workers, and urban poor are most exposed but often lack access to formal finance or insurance. Solutions include tailored microfinance coupled with climate advisory services, bundled insurance (credit + index insurance), concessional finance for resilient livelihoods, and community-based risk pooling. Policies should avoid placing adaptation burdens on those least able to pay and incorporate gender and social safeguards in product design. 6. Data, Capacity, and Digital Innovation Effective climate finance requires high-quality, geo-referenced risk data and institutional capacity for climate risk analytics. Digital finance and fintech can reduce transaction costs, enable parametric triggers (using satellite, weather or meter data), and expand distribution. Yet data gaps (granular hazard exposures, loss histories) and limited in-house analytics capacity constrain product innovation. 7. Role of International and Regional Cooperation Multilateral development banks, bilateral partners, and climate funds are essential for de-risking private investment and providing adaptation concessional capital. MDB joint reporting indicates rising climate finance flows but stresses that public budgets alone cannot meet the need; private sector mobilization is a policy priority. The World Bank and MDB engagements emphasize private sector leadership combined with policy reforms to leverage greater private finance for resilience and mitigation in South Asia. Major Barriers (Synthesis) Insufficient bankable adaptation project pipelines (especially for decentralized, smallholder projects). `Weak insurance penetration and market depth, limiting private risk transfer for large vulnerable populations. Data and capacity gaps for climate risk assessment, resulting in inconsistent pricing and underestimation of exposures.Regulatory fragmentation and lack of harmonized taxonomies, which hamper cross-border capital flows and investor confidence.Fossil-fuel financing persistence among banks globally—locking in emissions pathways and exposing portfolios to transition risk. Opportunities & Policy Recommendations Below are prioritized actions to strengthen the role of banking and insurance for climate resilience and sustainable growth. A. For Regulators and Policymakers Adopt and harmonize green finance taxonomies and disclosure standards—while allowing country specificity, aim for regional comparability to attract cross-border capital. (Nepal, Sri Lanka, and steps in India provide models). Mandate climate risk disclosure phased in with capacity building—aligning with TCFD/ISSB principles to improve market discipline and enable stress testing. Enable blended finance instruments and partial credit guarantees to de-risk private investment in adaptation and resilient infrastructure, leveraging MDB capital. Promote microand parametric insurance markets via regulatory sandboxes, public premium support during early scaling, and integration with social protection systems. Mainstream climate into prudential supervision—incorporate climate scenario analysis in bank supervision, require climate risk management units, and encourage green asset ratio reporting. B. For Banks and Financial Institutions Integrate climate into credit risk frameworks—score borrowers for physical and transition exposures; price risk and use covenants to incentivize mitigation/adaptation investments. Develop retail green products and bundled finance (e.g., EE loans linked to green mortgages, agricultural loans bundled with weather index insurance). Leverage digital platforms for product distribution, monitoring, and parametric triggers—reducing costs and improving inclusion. Engage in corporate transition planning and align balance-sheet asset management with net-zero pathways to manage long-term risk. Journal of Research and Development Peer Reviewed International, Open Access Journal. ISSN : 2230-9578 | Website: https://jrdrvb.org Volume-17, Issue-9(II) | September - 2025 56 C. For Insurers Scale parametric/index insurance and microinsurance for agriculture, fisheries, and urban climate hazards; combine with climate advisories and early warning systems. Develop sovereign risk-transfer instruments and regional pools for catastrophic risks, supplementing domestic capacity. Adjust underwriting and asset management to reflect climate exposures and support client transition through risk pricing and product innovation. D. For International Partners and MDBs Provide catalytic capital and guarantees to mobilize private investment, especially for adaptation where returns are lower and risks higher. MDB joint reports and World Bank strategies emphasize the importance of private sector mobilization for resilience. Support capacity building and data infrastructures (hazard mapping, loss databases, climate scenario tools) for national regulators and financial institutions. Promote regional cooperation platforms to harmonize taxonomies, share best practices, and coordinate cross-border instruments. Case Examples (Brief) Bangladesh has long used bank regulatory incentives (green banking guidelines) and is piloting crop insurance and parametric products in some regions; the combination of policy and market instruments offers lessons for scaling inclusive insurance. Nepal & Sri Lanka: National green taxonomies (2024 & 2022 respectively) are steps toward standardizing eligible activities for green finance, enabling clearer use-of-proceeds for bonds and loans. Pakistan: The National Climate Finance Strategy (2024) and SBP emphasis on climate risks highlight ongoing institutional reform to mobilize finance and manage systemic risk. Regional MDB efforts: World Bank and MDB commitments signal potential for blended instruments to catalyze private flows for resilience across South Asia; they stress private sector-led adaptation with enabling policy reforms. Conclusion Banks and insurers have indispensable roles in supporting climate mitigation, adaptation, and inclusive sustainable growth in SAARC nations. Regulatory progress—green banking guidelines, taxonomies, and disclosure drafts—alongside MDB signals, reflect strong momentum. Yet, to close the finance gap and protect economic development, the region must scale bankable adaptation pipelines, deepen insurance markets, harmonize regulatory frameworks, build climate risk data and capacity, and design inclusive products for vulnerable populations. Findings  Regulatory progress is visible but uneven: Several SAARC countries (Bangladesh, Nepal, Sri Lanka, India) have issued green finance guidelines or taxonomies, but implementation and harmonization lag.  Adaptation finance remains underprovided: MDB reporting shows growth in climate finance but adaptation finance is still comparatively low versus mitigation, even though South Asia’s adaptation needs are acute.  Banks can mobilize capital but need pipeline & risk mitigation: Banks require bankable projects, blended finance, and risk-sharing instruments to scale adaptation and resilient infrastructure lending.  Insurance markets are weak but high-impact innovations exist: Parametric insurance and public-private risk pools provide pathways to protect vulnerable populations and sovereign finances—yet affordability and distribution remain obstacles.  Climate risk constitutes a financial stability concern: Central banks and supervisors must integrate climate into macroprudential frameworks and stress testing to preserve financial stability and ensure orderly transitions.  Private sector mobilization is essential: Recent World Bank guidance emphasizes private-sector led resilience as necessary given constrained public budgets; MDB catalytic instruments are crucial for unlocking private capital at scale. 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