FSB published a report that takes stock of financial authorities’ experience in including climate-related risks in financial stability monitoring. This report draws on information provided by FSB member national authorities, international bodies, and a workshop with the private sector. The stock-taking exercise finds that financial authorities vary in terms of whether—and to what degree—they consider climate-related risks as part of their financial stability monitoring. Nearly three-quarters of survey respondents consider, or are planning to consider, climate-related risks as part of their financial stability monitoring. Most authorities focus on the implications of changes in asset prices and credit quality while a minority of authorities consider the implications for underwriting, legal, liability, and operational risks.
In some jurisdictions, climate-related risks are being integrated into micro-prudential supervision of banks and insurance firms (including via requirements for firms’ stress testing and disclosure). However, such work is generally at an early stage. Some authorities report having set out—or being in the process of setting out—their expectations about firms’ disclosure of climate-related risks. Most jurisdictions with disclosure requirements set out the type of information that firms are expected to disclose. While the scope and extent of information disclosure varies across entities and jurisdictions, these reporting components generally include climate-related risks to which a firm is exposed as well as measures it is taking to mitigate such risks. Such disclosure standards are usually based on the recommendations of the FSB Task Force on Climate-related Financial Disclosures, but this is not always the case. Some approaches to disclosure are non-mandatory, and involve authorities supporting industry-led or non-binding disclosure guidelines. Other authorities have adopted a "comply or explain" approach under which a firm is considered non-compliant if it does not disclose climate-related risks and fails to provide an adequate explanation. Yet other authorities specify a catalog of data items that firms need to disclose. Non-binding disclosure standards can also support the standardization of firms’ disclosures.
The stock-take also finds that the consideration of climate-related credit and market risks faced by banks and insurers appears more advanced than that of other risks, or of risks faced by other types of financial institutions. Some financial authorities have quantified—or have work underway to quantify—climate-related risks. Such work is hindered by a lack of consistent data on financial exposures to climate risks and difficulties translating climate change outcomes into changes in those exposures. No approach to quantification provides a holistic assessment of climate-related risks to the global financial system. Some authorities have also integrated climate-related risks into their supervisory frameworks. For some authorities this has included setting expectations as to how financial institutions should monitor and manage climate-related financial risks, including how such risks should be integrated into their governance, strategy, and risk management. For example, some authorities report expecting insurers to consider climate risks, if material, in their own risk and solvency assessments (ORSA). Some insurance supervisors expect insurers in their jurisdictions to use similar scenario analysis to assess their climate-related exposures. These supervisors expressed such expectations through regulatory tools such as written guidance or supervisory statements. Among these insurers that assess climate risks using such scenario analysis, there is evidence that the majority cover only physical risks
As the next step in light of the findings of this exercise, FSB will conduct further work by October 2020 to assess the channels through which physical and transition risks could impact the financial system and how they might interact. Focus will be given to the potential amplification mechanisms and cross-border effects and to prioritizing channels that could materialize in the short-to-medium term. FSB will also consider the scope for work to assess available data through which climate-related risks can be monitored as well as any data gaps. This work will build on, and be coordinated with, that taking place in other relevant international fora.
Keywords: International, Banking, Insurance, Securities, Climate Change Risk, ESG, Disclosures, Stress Testing, ORSA, Credit Risk, Operational Risk, FSB
Previous ArticleFCA to Delay Implementation of ESEF Requirements for Reporting
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The Hong Kong Monetary Authority (HKMA) announced that the Green and Sustainable Finance (GSF) Cross-Agency Steering Group has launched the information and data repositories and outlined the progress made in advancing the development of green and sustainable finance in Hong Kong.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
The Network for Greening the Financial System (NGFS) published a report that explores the feasibility of integrating the G-Cubed general equilibrium model into the NGFS suite of models.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.