Central Bank of Jordan Climate Risk Management Instructions No. 2-2025

CENTRAL BANK OF JORDAN

Central Bank of Jordan

No.: 1/23
Date: 19 Sha'ban, 1446 AH
Corresponding to: 18 February, 2025 AD

Climate Risk Management Instructions
No. (2) of 2025

It is decided to issue these Instructions with the aim of setting guidelines for the effective management of climate risks in banks operating in the Kingdom. These guidelines are based on the Basel Committee principles on the effective management and supervision of climate-related risks, and these principles must form an essential part of the corporate governance, business models, and risk management strategies adopted by banks.

Climate-related financial risks can affect the banking sector. The Central Bank of Jordan conducted an assessment of banks' exposure to climate-related risks, and this assessment showed that the most impactful potential risks from climate change are chronic physical risks caused by water scarcity and rising temperatures, followed by acute physical risks caused by floods and earthquakes, and transition risks (transition to a low-carbon economy) and their impact on economic sectors with high carbon emissions.

[Signature]
Governor
Dr. Adel Al-Sharkas

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CENTRAL BANK OF JORDAN

Central Bank of Jordan

Article (1): Citation
These Instructions shall be known as the (Climate Risk Management Instructions) and are issued pursuant to the provisions of Article (65/b) of the Central Bank of Jordan Law No. (23) of 1971 and its amendments, and Article (99/b) of the Banks Law No. (28) of 2000 and its amendments, and shall be effective from the date of their issuance.

Article (2): Definitions

Climate-related financial risks	Potential financial losses arising from climate change and its associated effects, which can arise through two main channels: physical risks and transition risks.
Transition risks	Financial risks arising from the transition to a low-carbon economy and their impact on economic sectors with high carbon emissions, including changes in policies, technological progress, and market shifts.
Physical risks	Potential economic and financial losses resulting from the direct impact of climate-related events, such as unusual weather conditions and their impact on assets, operations, and supply chains.
The Board	As defined in the Corporate Governance Instructions No. (2023/2) dated 2023/2/14.
Senior Executive Management	As defined in the Corporate Governance Instructions No. (2023/2) dated 2023/2/14.

Article (3): Scope of Application
These Instructions apply to all banks operating in the Kingdom, commensurate with the size of the bank, the nature and level of complexity of its operations, and its risk structure.

Governance

Article (4): Board Oversight and Responsibilities a. The Board must have adequate knowledge of climate-related financial risks that may affect the bank and ensure that these risks are appropriately taken into account as part of the bank's business strategy and risk management strategy.

b. The Board must adopt policies and procedures within the bank's risk management strategy to identify, assess, and manage climate-related risks, and must review and update these policies and procedures annually or as needed in response to emerging climate-related financial risks and regulatory requirements.

c. The Board of Directors of a bank classified as a locally systemically important bank must ensure the establishment of a specialized unit, department, or team for managing climate risks that the bank may be exposed to within the Risk Management Department. The responsibilities of this unit, department, or team and their relationship with the bank's existing governance structures must be clearly defined. Other banks are encouraged by the Central Bank to comply with this requirement or distribute climate risk management tasks within the Risk Management Department as the bank deems appropriate.

Article (5): Senior Executive Management Responsibilities a. Implement the Board's strategies and policies related to climate risk management, including their responsibility to develop and maintain a robust framework for climate risk management.

b. Clearly and explicitly define the roles and responsibilities associated with identifying and managing climate-related financial risks within the bank's organizational structure. Senior Executive Management must ensure that relevant personnel have adequate resources and expertise to effectively carry out their climate risk management responsibilities.

Article (6): Building Climate Risk Capabilities a. The bank must build capabilities and provide appropriate training for Board members and its committees (especially the Risk Management Committee) on climate-related topics if necessary, through internal workshops or external collaboration with specialized organizations.

b. The bank must build capabilities and provide appropriate training for Senior Executive Management members to ensure they possess the appropriate skills and expertise to manage climate-related risks. Training and awareness programs for employees at all levels must also be organized periodically.

Strategies

Article (7): Business Strategy and Risk Management Strategy a. The bank must explicitly consider material climate-related financial risks in its overall business strategy and risk management strategy. This includes understanding and assessing how these risks affect the resilience of the bank's business model in the short, medium, and long term, and considering how these risks affect the bank's ability to achieve its objectives. This also includes understanding and assessing the bank's exposure to structural changes in the economy and financial system, and the competitive environment in which the bank operates due to climate-related risk factors.

b. The bank's internal strategies and its risk appetite must be consistent with any publicly announced bank strategies and commitments related to climate.

Article (8): Internal Control and Supervision Systems a. The bank must integrate climate-related financial risks into its internal control and supervision systems through the three lines of defense to ensure proper, comprehensive, and effective identification, measurement, and mitigation of material climate-related financial risks.

b. Internal control and supervision systems must include a clear definition and assignment of responsibilities related to climate risks and reporting lines across the three lines of defense, as follows:

1. In the first line of defense: Climate risk assessments must be conducted during credit application studies by requesting environmental impact studies and/or environmental approvals for projects requiring them, in the credit review process, in continuous monitoring and communication with customers, and in the approval of new products or businesses. Staff in the first line of defense must have sufficient awareness and understanding to identify potential climate-related financial risks.

2. The second line of defense (Risk Management Department) must be responsible for independently assessing and monitoring climate-related risks. This includes testing the initial assessment conducted by the first line of defense, while the compliance function must ensure adherence to applicable rules and instructions.

3. The third line of defense (Internal Audit Department) must provide independent review and objective assurance on the quality and effectiveness of the overall internal control and supervision systems, the first and second lines of defense, and the risk governance framework in light of changes in business methods and business models resulting from climate-related risks, as well as measuring the quality of relevant data.

Article (9): Risk Management Process a. The bank must identify, measure, and monitor all climate-related financial risks that may materially affect its financial position, capital level, and liquidity, guided by the Basel Committee principles on the effective management and supervision of climate-related risks and the results of stress tests prepared by the bank for this purpose in accordance with the prevailing stress test instructions and circulars issued thereunder.

b. The bank must understand the impact of climate-related risk factors on its credit, market, and liquidity risks, and ensure that the systems and processes for managing these risks take into account material climate-related financial risks.

c. The bank must understand the impact of climate-related risk factors on its operational and other risks¹ and ensure that the systems and processes for managing these risks take into account material climate-related financial risks.

d. The bank must consider the climate risks it is exposed to and the need for capital against them in the bank's Internal Capital Adequacy Assessment Process (ICAAP).

e. The bank must ensure that its risk appetite and risk management frameworks take into account all material climate-related financial risks that the bank may be exposed to.

Article (10): Internal Monitoring and Reporting a. The bank must ensure that its internal reporting systems are capable of monitoring material climate-related financial risks and providing timely information to ensure effective decision-making by the Board of Directors and Senior Executive Management of the bank.

b. The bank may consider investing in data infrastructure and developing its current systems if necessary, to make them capable of identifying, collecting, and providing the necessary data to assess climate-related financial risks, commensurate with the size of the bank, the nature and level of complexity of its operations, and its risk structure.

c. The bank should consider engaging customers effectively to collect additional data related to climate risks in order to develop a better understanding of customers' transition strategies and their climate risk structures. In the absence of reliable or comparable climate-related data, the bank may consider using reasonable assumptions and proxies in its internal reports as an interim step.

Article (11): Banks must provide the Central Bank within six months from the date of issuance of these Instructions with the following:
a. Confirmation of the establishment of a specialized unit, department, or team for managing climate risks within the Risk Management Department, along with the names and qualifications of the staff therein/thereof, for banks classified as locally systemically important banks. Other banks must provide the Central Bank with the procedures/structure they will adopt for this purpose.

b. Confirmation of the amendment of the bank's risk management strategy to integrate the management of climate-related financial risks into this strategy, and the amendments made in this regard.

¹ Such as: Strategic risks, reputational risks, and compliance risks.

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CENTRAL BANK OF JORDAN

Central Bank of Jordan

Article (12): The Central Bank of Jordan will subsequently (in 2025 or later), in light of the development of climate risk management issues at the international, regional, and local levels, consider issuing more detailed instructions in specific areas of climate risk management (such as: preparing standardized models for climate risk disclosure and reporting). The Central Bank will also, based on the experience of implementing these Instructions, consider providing additional guidance on some of the requirements specified by these Instructions, to ensure that these Instructions remain effective and relevant.