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

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 preparedness 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 significant 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 – political leadership (Political), administrative direction (Administration), international standards (Standards) and supervisory mechanisms (Supervision) – 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.