Climate change is no longer a distant environmental issue; it is a present and growing threat to economic and financial stability. Across Asia and the Pacific, nearly 85 per cent of people are expected to be exposed to multiple climate hazards even under the targeted 1.5°C warming scenario.

Mongolia exemplifies these regional vulnerabilities. The country ranks 19th of 171 countries in the Global Climate Risk Index over 1993–2022 and has faced multiple catastrophic events in recent years. For example, the dzud (extreme winter) of 2009–2010 covered most of the country and killed over 8.5 million livestock, roughly one-quarter of the national herd, and resulted in economic losses of over $287 million. The most recent 2023 dzud claimed approximately 8 million livestock, with over 4,800 households losing 70 per cent or more of their livestock and over 500 households losing all. Additionally, in July 2023, severe floods inundated Ulaanbaatar and surrounding areas, directly affecting over 100,000 people. The compounding nature and rising frequency of these hazards are evident.

Figure1: Frequency of key disasters in Mongolia by year (Source: ESCAP based on data from NEMA)

The recent ESCAP analysis on Climate Change Risks and Impacts on Mongolia’s Financial Sector shows that the financial system faces a dual challenge from physical climate risks and transition risks. On the physical side, the country’s continental climate makes it prone to acute hazards such as floods, droughts and dzuds, and chronic shifts in rainfall and temperature patterns. Increased precipitation and rapid snowmelt have led to more frequent, intense floods that damage infrastructure and homes. Severe droughts are threatening pastureland productivity and water supplies, undermining the country’s predominantly pastoral agriculture. 

Transition risks from the global shift towards low-carbon development are also increasing. As countries worldwide enact climate policies and clean technologies, Mongolia’s carbon-intensive sectors face tough adjustments. The agriculture sector could be affected by emissions-reduction policies (for example, curbing herd sizes to cut methane), which could significantly reduce herders’ income. The mining industry, a pillar of Mongolia’s exports and GDP, is vulnerable to declining global demand for coal and other high-carbon commodities. Meanwhile, Mongolia’s energy sector is heavily reliant on coal, so efforts to decarbonize and diversify the energy mix entail significant structural changes.

From climate shocks to financial risks

Why do these climate risks matter for banks, insurers and the broader financial system? Both physical risks and transition risks can quickly transition into systemic financial risks. When herders lose their livestock to dzud or crops fail from drought, they can default on loans. Infrastructure damage from floods can impair businesses and real estate values, undermining mortgage portfolios. These climate stressors can lead to higher loan default rates, market volatility, liquidity strains and even legal liabilities for financial institutions. In Mongolia, many banks have borrowers in climate-sensitive sectors and regions. If those borrowers’ incomes collapse due to an environmental shock, the banks face rising non-performing loans and credit losses, affecting overall financial stability (see figure). 

Figure 2: Average Annual Losses (AAL) by hazard type for Mongolia (Source: ESCAP Risk and Resilience Portal)

Notably, droughts cause the highest average annual losses, underscoring their severe impact on Mongolia’s agro-ecosystems. Overall, it is estimated that natural hazards cost Mongolia about $0.43?billion each year (over 3 per cent of GDP), indicating the significant drain on development gains. 

The report finds that Mongolian banks’ loan exposures, while diversified, do include notable concentrations in areas that could be impacted by climate change. For example, based on data from 2024, about 17 per cent of outstanding bank loans are in real estate and construction, sectors exposed to physical risks like floods, and around 5 per cent of loans are directly to agriculture and herding In aggregate, this means climate-induced losses in these sectors could cascade into the financial system, undermining growth and development goals if left unaddressed.

Figure 3: Overview of outstanding loans across different sectors in Mongolia (Source: ESCAP based on data from Bank of Mongolia)

Mapping collateral against hazard layers is essential for prudent loan-to-value ratios, pricing and insurance decisions. Additionally, mapping borrowers, grazing areas and herd composition against dzud–drought hazard indices and pasture conditions while linking them to national early-warning systems could guide risk management measures, contingency credit lines, pricing and index-based livestock insurance requirements to strengthen resilience. At the same time, even under optimistic early transition scenarios, losses are expected for banks, while in scenarios of a delayed transition or business-as-usual, losses are expected to be much higher. 

Recognizing the looming threat, the Bank of Mongolia and ESCAP joined forces to study these issues. The resulting report, Climate Change Risks and Impact on Mongolia’s Financial Sector, is a product of this collaboration, drawing on nationwide data analysis, stakeholder interviews and data from Mongolian agencies and development partners. ESCAP is helping Mongolia’s central bank build capacity to deal with climate risks, an effort aligned with global climate commitments and the SDGs.

A practical agenda for supervisors and financial institutions

The report concludes with several actionable recommendations, key highlights include:

1. Integrate climate risk into financial supervision.

Embed climate considerations in supervisory risk assessments and financial stability monitoring. This includes conducting regular climate risk analyses across banks and insurers and updating prudential rules to account for climate shock exposures. 

2. Run decision-grade stress tests.

Use NGFS-aligned scenarios to stress PD/LGD/NPLs by sector and region. Combine scenario outputs with geo-referenced collateral to estimate flood and dzud damage, collateral haircuts and provisioning needs. Pilots should focus on building capacities, increasing understanding of climate risks and highlighting gaps in data and methodologies.

3. Improve data, disclosure and peer learning.

Strengthen data systems for hazards, exposure and performance; align disclosures with the new national guideline to improve comparability; and promote peer-to-peer learning among financial institutions and supervisors. 

4. Finance adaptation where it matters.

Scale lending for herder resilience (fodder storage, shelters, water points) and expand risk transfer (e.g., index-based livestock insurance with credible triggers). In urban areas, promote flood-resilient retrofits and business continuity investments for SMEs. 

By taking these actions, Mongolia and other governments can bolster their financial systems against climate shocks and ensure that economic growth is sustainable in every sense.