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
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.
Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.
The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.
The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.