FI published a report that outlines the sustainability issues are related to the financial sector and lists examples of what FI is working on in this area. The report covers work of FI with future EU regulations, work in the area of a global standard for sustainability reporting, and assessing sustainability risks in the credit portfolio of banks. Another report from FI discusses internal carbon pricing as way to help to manage transition risk and to encourage reduced carbon emissions by firms.
The FI report on sustainability issues notes that, during 2020, FI investigated the extent to which the financial firms are measuring and reporting climate-related risks and climate effects. The Swedish regulator also assessed how assets in insurance undertakings align to the climate goals in the Paris Agreement, as part of which countries worldwide agreed to keep global warming well below 2 degrees. During 2021, FI will include a sustainability perspective when reviewing business models and credit risks of banks. It will review the extent to which banks consider sustainability risks when assessing the profitability of their business plans and in their risk management. FI will also analyze sustainability risks in the credit portfolios of banks.
Additionally, new EU regulations entering into force this year will have a major impact on the role of financial market in the area of sustainability. The new EU regulation introduces requirements on enhanced transparency for investment activities of financial firms. Similar requirements are expected for the lending activities of banks and FI is encouraging banks to pre-empt the coming regulations. It is important that banks start to report more on their exposure to climate risks. This requires that banks use tools for analysis, for example Paris Agreement Capital Transition Assessment or PACTA, to gain a better overview of climate risks and how well their credit portfolios align with climate goals. Furthermore, to reduce emissions, the price on emitting carbon needs to increase in many parts of the world. To better understand and manage the transition risk associated with future price increases, FI advocates that firms use internal carbon pricing and disclose information on this.
As a supervisory authority, one of the most important focus areas for FI is related to sustainability reporting by firms. Stricter reporting requirements for firms in general are a condition for financial firms as intermediaries to be able to live up to the high demands on transparency of financial exposures. It needs to be easier for investors and other stakeholders to understand and compare information about a firm’s climate exposures and work to transition. FI has, therefore, taken an active role in an ongoing international cooperation to develop a global standard based on the TCFD recommendations. FI is also pushing for more firms to start reporting in accordance with these recommendations.
Keywords: Europe, EU, Sweden, Banking, Reporting, ESG, Credit Risk, TCFD, PACTA, Climate Change Risk, Transition Risk, Carbon Pricing, FI
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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