This is because any uncertainty about the global rule will only discourage future efforts and derail the momentum of the current efforts. Second, policy at the country level should focus on providing market infrastructure that assists adaptation and mitigation i.e. legal, tax, regulatory framework, accounting, and information. But more importantly, correct incentive structure has to be put in place to internalize benefits from clean technology. Third, under the incentive structure provided, given many uncertainties surrounding climate change, it is important that the strategy to promote increased engagement relies on market mechanism to build growth and innovation. This is because the market would be in a better position to assess and price risk-return tradeoffs more efficiently. And fourth, financial regulation should be neutral on the issue, focusing instead on risk management capability of financial institutions, especially the ability to handle new risk and new innovation, with a view of maintaining soundness and stability of the overall financial system. Under these key principles, the actual design of incentive for specific economy would vary, taking account of country’s specific circumstances such as the state of economic development, the level of financial deepening, and the strength of its policy institution. Turning now to the development of tools for internalizing climate change in emerging markets. At this time, the main tools for internalizing climate change are provided in the global financial market, but access of emerging markets to this market are limited by its own capacity, as well as by the market nascent development.

On top of this, there is also uncertainty whether a larger impact could materialize because of the potential for catastrophic damages. Given the performance of the financial sector is closely related to the macroeconomy, implications for the financial system could be significant through increased exposure of the financial system to risk, both its own and through its clients, as well as possible damages to its assets. The key risk-driver includes market risk linked to large economic disasters, and operational, reputational, political, legal and counterparty risk relating to defaults after a disaster. In  BIS Review 97/2008  1  addition, there is also a business risk if it fails to properly incorporate climate change into its portfolio risk management. As for threat to financial stability, this would depend on whether the impact is slow-moving, which can be offset by risk-management, adaptation, and financial response. Alternatively, the impact could take the form of a series of catastrophic events that impair the operative capacity of financial institutions. Second, being a global problem, the collective response to climate change can set off an economic transformation, in terms of the changing patterns of demand and production, toward a low carbon economy that will require the financial system to adapt by managing risk and exploring related business opportunities. Three triggers will be key in driving this transformation: namely, regulations set by the government, response by the private sector through adaptation and mitigation, and increased public awareness of the issue.