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Available online at www.sciencedirect.com

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Advances in Climate Change Research xxx (xxxx) xxx
www.keaipublishing.com/en/journals/accr/

Determinants of financial-risk preparedness for climate change: Case of Fiji

Candauda Arachchige SALIYA a,*, Kandauda Arachchige Sri WICKRAMA b
a
Banking and Finance CBHTS, Nasinu Campus, Suva, 999210, Fiji
b
Department of Human Development and Family Science, The University of Georgia, Athens, 30602, USA
Received 11 April 2020; revised 25 December 2020; accepted 22 March 2021

Abstract

There is a growing concern among central bankers that climate change poses not only serious environmental problems but also a potential
economic and financial crisis. This study first confirms a hypothesized theoretical framework with different dimensions of the overall pre-
paredness for climate related financial risk in the Fijian context, and then utilizes this framework to assess the present risk preparedness in Fiji.
We tested two Confirmatory Factor Analysis (CFA) models in Structural Equation Modeling (SEM) Framework to analyse the survey data. We
evaluated these models using several fit indices. The first CFA model included four correlated latent factors defined by multiple indicators
(items) reflecting four hypothesized dimensions. The four latent factors were correlated significantly. The second CFA model included a second-
order multi-level constructs reflecting overall preparedness along with four constituent dimensions. The four dimensional factors showed sig-
nificant and substantial loadings towards overall risk preparedness suggesting that there also exists an overall higher order construct. The model
fit indices showed that this second-order CFA model has an acceptable model fit. These results confirm that the four hypothesised dimensions e
political leadership (Political ), administrative direction (Administration), international standards (Standards) and supervisory mechanisms
(Supervision) e are identifiable and distinct aspects. In addition to the four dimensions, the results suggest that overall preparedness should also
be tackled in a multi-level integrated manner. The results also reveal that political initiatives would be futile without proper administrative
direction and strong supervisory mechanisms. This theoretical framework can also be used to assess financial systems in other developing
countries with similar socioeconomic contexts.

Keywords: Climate change; Fiji; Financial regulations; Financial risk; Pacific countries; Political leadership

1. Introduction (ESDS) from the United Nations Environment Programme

(UNEP, 2011) declared that banks have a critical role in sus-
The financial systems in most developing nations have been tainable development in emerging economies.
shown to be highly vulnerable to climate change e high- Banks too, similar to any other businesses, produce
lighting the urgent need for strengthening their financial sys- greenhouse gases (GHG) directly from their normal operations
tems (Alexander, 2019; Alexander and Baden, 2013; Saliya but banks’ indirect contribution to the problem, by way of
and Pandey, 2021; Tooze, 2019). It is noticeable that finan- financing projects causing environmental pollution (Kılıç and
cial sectors have been late to respond to issues related to Kuzey, 2019), is mammoth. Banks can adjust the conditions of
environmental sustainability and climate change (CDR, 2013). loans that they provide to GHG incentive industries which can
The Environment and Sustainable Development Statement help to reduce the impact of climate change in their business
practices (Furrer et al., 2012).
The three main climate-related financial risks (CRFRs)
* Corresponding author. have been identified as physical risks, where insurers may
E-mail address: [email protected] (SALIYA C.A.). charge higher premiums and bankers have concerns of types of
Peer review under responsibility of National Climate Center (China
collateral; transition risks associated with a society's
Meteorological Administration).

https://doi.org/10.1016/j.accre.2021.03.012
1674-9278/Copyright © 2021 The Authors. Publishing services by Elsevier B.V. on behalf of KeAi Communication Co. Ltd. This is an open access article
under the CC BY license (http://creativecommons.org/licenses/by/4.0/).

Please cite this article as: SALIYA, C.A., WICKRAMA, K.A.S., Determinants of financial-risk preparedness for climate change: Case of Fiji, Advances in
Climate Change Research, https://doi.org/10.1016/j.accre.2021.03.012
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2 SALIYA C.A., WICKRAMA K.A.S. / Advances in Climate Change Research xxx (xxxx) xxx

adjustment to a low-carbon economy, where values of certain goals of the NGFS is to promote markets for green bonds. The
assets are affected, especially investment valuations; so banks, first green bonds were issued by the World Bank in 2008
investors and insurers will have to ensure that their portfolios (World Bank, 2019). By 2018, that market had expanded to an
are resilient to climate change; liability risks arise from parties annual volume of 170 billion USD (Tooze, 2019).
who have suffered loss or damage from the physical and The World Wildlife Fund (WWF, 2019a; 2019b) has
transition risk factors (Roberts, 2019; Scott et al., 2017). developed a framework called The Sustainable Banking
Campiglio (2015) argues that, as the main source of Assessment (SUSBA) to assess banks' performance on the
external finance for firms, banks are capable of performing a integration of ESG. Using this method, after a study of 35
more effective role in the process of creating and allocating of banks in the Southeast region, WWF revealed that banks are
credit considering climate-related financial risks. The possi- not adequately addressing the climate change issue. Investor
bility for banks to facilitate climate change mitigation and Responsibility Research Center (IRRC) studied 40 of the
transition to a low-carbon economy is seen through their world's largest banks introducing another framework, named
unique business practices as well as off-putting (or restraining) Climate Change Governance Index (CCGI) covering four
GHG emissions of other corporate actors (Bowman, 2010). main aspects using 14 criteria (Cogan, 2006).
Although there are various international agreements on Climate related financial risks (CRFR) have been studied in
climate change initiated by United Nations Climate Change the academic research through climate stress-testing methods
Conferences in the framework of the United Nations Frame- or macroeconomic modelling. However, the analysing meth-
work Convention on Climate Change (UNFCCC), consider- odologies are still in the developmental stage and the chal-
ation has to be given to a focus on national and regional lenges for researchers are significant due to various factors
regulations. such as the availability of, and access to, credible data, poor
The Supervisory Statement PRA SS 3/2019 of the Pru- integration between regulatory supervision, the financial sys-
dential Regulatory Authority (PRA) of the Bank of England tem, climate change and environmental policies (Campiglio
outlines the financial risks from climate change (physical and et al., 2018).
transitional) where the regulators require firms to adopt a We posit that financial risk-assessment methods should take
strategic approach to risk management on four key expecta- the country-specific socioeconomic and geographical contexts
tions (BoE, 2019): governance, risk management, scenario into account. This provides a deeper understanding about, not
analysis, and disclosure. According to Australian Accounting only the overall risk preparedness, but also different di-
Standards Board/Auditing and Assurance Standards Board mensions of risk preparedness within the country. Particularly,
(AABS, 2018), information (omitted or misstated) becomes identifying the severity of present overall financial risk pre-
material, if it could influence decisions that users make on the paredness as well as the varying severity of constituent di-
basis of financial information about a specific reporting entity. mensions of financial risk preparedness is vital to prepare for
Krasodomska (2015) highlighted the Equator Principles, Fiji's task in dealing with climate-related financial risks.
which were published in 2003, and based on World Bank and All these frameworks, methods and tools are designed to
International Finance Corporation standards as a set of general assess financial institutions in advanced economies; it appears
guidelines for financial institutions to assess the environmental that they lack appropriateness and practical applicability to
and social risk in project finance. Similarly, in 2008, the assess less developed financial systems in small emerging
Climate Principle was initiated by many financial institutions economies such as Fiji's. Discussions with the individuals
to tackle the challenges of the banking sector in response to working in financial institutions, and meetings with senior
climate change. In addition to this, numerous non-government bank executives revealed that there is no specific circulars/
organisations (NGOs) like Bank Track, Rain Forest Network, directives issued in Fuji by the regulatory authorities in rela-
among others, examined financial institutions with a view to tion to climate related financial risk management such as
ensuring that their operations would preserve the ecosystem stress-testing and scenario analysis. Thus, the primary objec-
and natural well-being of the planet (Buranatrakul and tive of the present study is to gain an insight into an appro-
Swierczek, 2017). priate financial risk management policies and programmes in
The Fiji's government has stressed that Fijians should Fujian context. We posit that there are four possible, distinct
determine “to build an inclusive, prosperous, resilient and low- aspects, which underpin the overall readiness in handling the
carbon future for ourselves, and so remain steadfast in the impact of climate change on financial stability. These discrete
battle against climate change, the single greatest threat to our dimensions are identified as: political leadership, administra-
future” (RBF, 2018). The governors of the nine central banks tive direction, compliance with international standards, and
in the Pacific region agreed to involve the Network for institutional supervision. Although these dimensions are
Greening the Financial System (NGFS) to assess the impact of generally interdependent and correlated, we consider they can
climate change on the Pacific's financial systems and foster be considered as distinct constructs which, together, constitute
investment in green technology (RBA, 2019). However, it overall risk preparedness. Therefore, we articulate our
requires a generous investment in low-carbon-intensive infra- research problems as;
structure, including go-green initiatives, energy efficiency, Are these four dimensions significant in assessing the
renewable energy, transportation etc., relevant to climate financial-risk preparedness for climate change in Fiji?
change mitigation (Sørensen and Pfeifer, 2011). One of the If so, to what extent?

Please cite this article as: SALIYA, C.A., WICKRAMA, K.A.S., Determinants of financial-risk preparedness for climate change: Case of Fiji, Advances in
Climate Change Research, https://doi.org/10.1016/j.accre.2021.03.012
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SALIYA C.A., WICKRAMA K.A.S. / Advances in Climate Change Research xxx (xxxx) xxx 3

Thus, the present study aims to identify the different di- For further analysis, based on CFA results, we computed
mensions (the factor structure) of preparedness in Fiji's battle composite measures for each factor by adding constituent
against climate-related financial risk using Confirmatory items. For example, the composite measure for Political
Factor Analysis, then to examine the differences in the levels leadership was created by adding Q1, Q2, Q3 and Q4. As
or severity of these different dimensions. Second, based on the shown in Fig. 1, this was a process combining theories, local
results, we attempt to assess the robustness of the perceived knowledge and, empirical findings (data).
preparedness of Fiji's financial system in dealing adequately There were 212 participants including 23 accountants/au-
with the potential financial risks caused by climate change. ditors, 107 related academics/students and 82 bankers/finan-
ciers/stock brokers. Six research assistants were involved in
2. Methodology collecting data, and 108 questionnaires were received via
emails and Google forms. The survey was carried out with the
We designed four dimensions based on extant literature and employees of the six commercial banks and other financial
the two frameworks; SUSBA and CCGI (Cogan, 2006; RBA, institutions. In order to confirm that respondents’ responses
2019; RBF, 2018; WWF, 2019a; 2019b). To assess the impact define the previously hypothesized factors (political, admin-
of climate change on financial stability, SUSBA proposed six istration, standards, and supervision) and whether these
pillars (purpose, policies, processes, people, products and dimensional factors would ultimately define the overall factor
portfolio) using 11 indicators, and CCGI used 14 indicators to of preparedness, we tested a) first-order Confirmatory Factor
construct five governance areas, board oversight, management Analysis and b) a second-order Confirmatory Factor Analysis
execution, public disclosure, emission accounting, and stra- (CFA) in the Structural Equation Modeling (SEM) framework
tegic planning. After reviewing all these pillars, governance (Bollen, 1989). Table A1 provides the 16 questions/indicators
areas and indicators etc., we initially formulated 30 questions with the frequency distributions of the responses; Yes, No and
and ran Principal Components Analysis (PCA) which is a Neutral which were attached weights of 100, 0 and 50
variable-reduction technique in SPSS. PCA results produced respectively for statistical analysis.
nine ‘principal components’ covering 69.4% of cumulative
variance of the variance in the original variables. Based on the 2.1. Hypothesis and the model
SUSBA and CCGI theories, knowledge on the Fiji context,
together with the level of contributions of each factor (e.g., The overall preparedness will be assessed by the four
Eigenvalues of higher than two) and correlations and previously hypothesized dimensions: political leadership,
component matrices among all items, we identified a sub- administrative directions, standards followed, and supervisory
stantively important and empirically powerful four compo- control mechanisms. We will test two Confirmatory Factor
nents/factors and constituent items which explained 50% of Analyses (CFA) in Structural Equation Modeling (SEM)
variance. As shown in Fig. 1, this was a process combining framework. First, we will test a CFA with correlated four latent
theories, local knowledge and empirical findings (data). We factors representing four dimensions. Each latent factor will be
considered questions having more than 0.45 of loadings under captured by valid items or indicators. The four dimensions will
the four most prominent components with the total Eigen- be defined by 16 items/responses, four items for each
values of higher than two. We really blended our experience dimension. Statistically, latent factors reflect the common
and background knowledge of Fijian context in this exercise. variance of indicators, and the squared loading of indicators

Fig. 1. Methodology flow-chart.

Please cite this article as: SALIYA, C.A., WICKRAMA, K.A.S., Determinants of financial-risk preparedness for climate change: Case of Fiji, Advances in
Climate Change Research, https://doi.org/10.1016/j.accre.2021.03.012
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4 SALIYA C.A., WICKRAMA K.A.S. / Advances in Climate Change Research xxx (xxxx) xxx

reflects the amounts of variance of the indicators explained by This CFA model reflected an acceptable model fit (chi-
the latent factor. We will assess the distinctiveness or square/df ¼ 2.12, CFI ¼ 0.92, RMSEA 0.07, CI: 0.052,
discriminant validity of four hypothesized factors and the 0.083). Overall, the CFA model provided evidence for a hy-
inter-factor association. Second, we will test four second-order pothesized first-order factor structure. Accordingly, political,
factor structure with second-level overall factor of prepared- administrative, standards, and supervision are four distinct
ness. The second-level latent factor of overall preparedness dimensions of risk preparedness. The highest correlation be-
will be defined by first-level four latent factors reflecting four tween administration and standard suggests a close relation-
dimensions of preparedness (Fig. 2). ship or the least distinctiveness between these two dimensions.
This analysis was performed with Mplus version 7.0 The lowest correlation between political and standard suggests
(Muthen and Muthen, 2017) with Maximum Likelihood a weak relationship or the greatest distinctiveness between the
Estimation. A range of fit indices were used to evaluate the two dimensions. However, significant correlations among four
model fit of the models including the chi-square statistic, factors suggest that there is a common variance across these
Cumulative Fit Indices (CFI), and Root Mean Square Error of factors, which may represent a higher order factor. Thus, we
Approximation (RMSEA). For the chi-square fit statistic, the will test the second CFA after incorporating the higher-order
model is thought to fit the data well when the chi-square factor of preparedness.
divided by the degrees of freedom is below 3.0 (Carmines All 16 items showed significant substantial factor loadings
and McIver, 1981). The CFI and RMSEA are used to eval- to respective dimensional factors ranging from 0.42 to 0.95
uate the models’ fit due to the fact that they are not directly ( p < 0.05) showing the reliability and validity of these items
related to the sample size. We used the chi-square statistic, the in relation to the respective factor (Bollen, 1989). There were
CFI, and the RMSEA to evaluate the model fit. Hu and Bentler no significant cross-factor loadings. Four dimensional factors
(1999) report that a CFI value greater than 0.90 ensures that showed significant and substantial loadings (0.49, 0.55, 0.51
the model is not mis-specified. MacCallum et al. (1996) re- and 0.89 to political, standard, supervision and administration,
ported that a RMSEA nearing 0.08 indicates a reasonably respectively) to the second-order overall latent factor of pre-
good model fit. paredness. Measurement errors of observed responses are
In sum, we expect to confirm the distinctiveness of the shown in Fig. 3 (significant error correlations were freed to be
identified four distinct dimensions and their contributions to correlated, not shown in the figure). This CFA model reflected
the overall preparedness based on their correlation matrix. an acceptable model fit (chi-square/df ¼ 0.91, CFI ¼ 0.91,
RMSEA ¼ 0.07). Overall, the CFA model provided evidence
3. Results for a hypothesized factor structure. Accordingly, political,
administrative, standards, and supervision are four distinct
The first-order CFA model with four latent factors repre- dimensions of risk preparedness. Also, there exists an overall
senting political, administrative, standards and supervision higher-order factor of preparedness along with four first-order
dimensions is presented in Fig. 2. The responses to Q1, Q2, Q3 factors reflecting four dimensions.
& Q4 were used as indicators of political leadership. The re- For further analysis, based on CFA results, we computed
sponses to Q5, Q6, Q7 & Q8 were used as indicators of composite measures for each factor by adding constituent
administration while the responses to Q9, Q10, Q11 & Q12, items. For example the composite measure for political lead-
and Q13, Q14, Q15 & Q16 were used as indicators of stan- ership was created by adding Q1, Q2, Q3 and Q4. These
dards and supervision dimensions respectively. The second- composite measures of four factors were used to produce
order factor structure with the overall preparedness factor is statistics in Table A2. The descriptive statistics and paired t-
presented in Fig. 3. test results for composite measures for four factors are also

Fig. 2. First-order factor structure reflecting four dimensions of preparedness (*p < 0.05; measurement error correlations are not shown).

Please cite this article as: SALIYA, C.A., WICKRAMA, K.A.S., Determinants of financial-risk preparedness for climate change: Case of Fiji, Advances in
Climate Change Research, https://doi.org/10.1016/j.accre.2021.03.012
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SALIYA C.A., WICKRAMA K.A.S. / Advances in Climate Change Research xxx (xxxx) xxx 5

Fig. 3. Latent second-order factor structure reflecting different dimensions of vigilance (*p < 0.05, **p < 0.01; measurement error correlations are not shown).

presented in Table A3. The paired t-test compared the average institutions and how far the regulators impose directives to-
levels of factor scores. wards compliance. The perceived knowledge is tested on
standards such as ‘low carbon incentives’, ‘high carbon pen-
4. Discussion alties’, utilizing of Greenbonds funds for the relevant projects,
among other things. The loading indicates 0.55 and the
The political dimension consists of the perceived impor- perceived assessment is the lowest amongst the four di-
tance and awareness of four factors; government initiative, mensions with below 14% confirmation that FRPCC is satis-
public awareness of such initiatives, mobilizing funds for the factory despite the concerns expressed by CSR Asia (2011)
cause within, and internationally, and shows a loading of 0.49 that high rates of failure of many banks are due to ignorant
towards financial-risk preparedness to climate change financing practices endangering sustainable development in
(FRPCC). Encouragingly, more than 75% of the respondents South East Asian Nations.
acknowledged that the government is actively engaged in its The supervision dimension shows a loading of 0.51 and
battle against climate change, and contributing towards consists of factors such as internal and external audit, disclo-
FRPCC is commendable. However, a majority of respondents sure requirements and adherence. The perceived knowledge on
(> 60%) were not satisfied with the efforts and results of these issues is very poor with less than 10% of the respondents
mobilizing funds for the cause. Generous investment relevant believing that the contribution from this dimension towards
to climate change mitigation is required (Sørensen and Pfeifer, FRPCC is not satisfactory. This dimension needs more atten-
2011), and this market has expanded to an annual volume of tion because regulators and associations will issue sustainable
170 billion USD (Tooze, 2019). banking regulations or guidelines (SBRG) by 2020 (WWF,
The administrative dimension consists of the perceived 2019a; 2019b).
awareness of the respondents on the part played by regulators, According to this framework, the administrative direction
financial institutions (including the members of the manage- plays the most important role by formulating strategies and
ment team), and their clients (borrowers). The administrative policies and communicating them effectively to the respective
dimension carries the highest loading of 0.89 and the factors parties for implementation. Then, in implementation of those
underpinning this dimension show that the efforts towards the policies, the administrative direction prompts these parties to
FRPCC are poor e many regulators are in agreement that comply with international standards, as appropriate. This
financial sectors have been late to respond to environmental framework attaches more importance to the supervision
sustainability and climate change (CDR, 2013). The re- dimension than to the political dimension, and suggests strict
spondents perceived that government agents such as the control measures to make ensure compliance with the set
Reserve Bank of Fiji and responsible ministries are not benchmarks and standards. Finally, it suggests that political
developing adequate policy procedures to transform the po- patronage is also a critical factor, in particular, in financing
litical initiatives into action. On the other hand, they perceived this battle against climate change.
that there is no system to motivate responsible employees both Practically, the research participants' results suggest that
at the regulatory bodies and financial institutions towards administrations should set the rules and goals in line with
FRPCC. In this study, it is also widely perceived that dealing appropriate standards and advise the regulators to develop
with non-compliance and disclosure in the same way is not guidelines and directives for financial institutions to follow.
satisfactory with less than 30% of the respondents saying The study also revealed that the control mechanism has to be
‘Yes’. equipped with modern technical skills such as how to carry out
The standards dimension concerns the perceived awareness scenario analysis and stress-testing in relation to CRFR. The
of following the international standards by the financial regulatory returns (the forms to be filed with the authorities by

Please cite this article as: SALIYA, C.A., WICKRAMA, K.A.S., Determinants of financial-risk preparedness for climate change: Case of Fiji, Advances in
Climate Change Research, https://doi.org/10.1016/j.accre.2021.03.012
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6 SALIYA C.A., WICKRAMA K.A.S. / Advances in Climate Change Research xxx (xxxx) xxx

the financial institutions) have to be updated by incorporating The present study has several limitations. First, the sample
appropriate benchmarks, which are suitable for underdevel- size is relatively small; it would need to be larger to yield more
oped systems in emerging economies such as Fiji's. statistical power. Second, respondents with more diverse
backgrounds and from diverse geographical areas would have
5. Conclusions increased the generalisability of the study findings. Third,
greater numbers of questionnaire items would have produced
In general, the results of the study supported the hypothe- higher reliability of factors reflecting different dimensions.
sized framework for financial system risk preparedness for Future studies should test this theoretical framework with a
climate change in this context. Overall, the study provided larger and more diverse sample, and with a more compre-
useful findings about the varied severity of different di- hensive instrument.
mensions, which may constitute important input for financial Despite these limitations, the current study enhanced our
policy and programme planners. knowledge about the assessment of financial system pre-
This study revealed that four observed factors (political paredness for climate change in Fijian context as well as its
leadership, administrative direction, international standards, and application for strengthening of the current financial system.
supervisory mechanisms) as distinct dimensions of risk pre-
paredness. In addition, there exists a higher-level risk pre- Declaration of competing interest
paredness factor. These findings inform financial planners and
policymakers and aid preparing for the financial risk caused by The authors declare no conflict of interest.
climate change. These four dimensions of risk preparedness and
the overall risk preparedness can be tackled independently and Acknowledgment
also in an integrated manner in a multi-pronged integrated
manner. We believe that this theoretical framework can also be We sincerely thank the editors and two anonymous re-
used to assess financial systems in other developing countries viewers for their careful reading of the manuscript and
with similar socioeconomic contexts. insightful comments and suggestions. We also thank the sur-
The administrative direction and supervision mechanism vey respondents for their valuable time.
play critical roles in designing, implementing and monitoring
effective systems to ensure compliance with the standards. The
regulatory returns have to be updated by incorporating Appendix A. Supplementary data
appropriate benchmarks, which are suitable for underdevel-
oped systems in emerging economies such as Fiji's. The results Supplementary data to this article can be found online at
also reveal that political initiatives would be futile without https://doi.org/10.1016/j.accre.2021.03.012.
proper administrative direction and strong supervisory
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Please cite this article as: SALIYA, C.A., WICKRAMA, K.A.S., Determinants of financial-risk preparedness for climate change: Case of Fiji, Advances in
Climate Change Research, https://doi.org/10.1016/j.accre.2021.03.012
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SALIYA C.A., WICKRAMA K.A.S. / Advances in Climate Change Research xxx (xxxx) xxx 7

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Please cite this article as: SALIYA, C.A., WICKRAMA, K.A.S., Determinants of financial-risk preparedness for climate change: Case of Fiji, Advances in
Climate Change Research, https://doi.org/10.1016/j.accre.2021.03.012