FSB Consults on Supervisory and Regulatory Approaches to Climate Risk

The report focuses on cross-sectoral and system-wide aspects of climate-related financial risks and complements the standard-setting bodies’ ongoing work on approaches to address these risks. The report puts forward an early view on the need for tools and policies to sufficiently address systemic risks arising from climate change. The report examines the extent to which the existing policies and tools address all or parts of climate-related risks and contains an Annex that briefly explains approaches of selected authorities for gathering information from financial institutions on climate-related risks. FSB is inviting comments on the recommendations set out in the following three focus areas and includes a set of questions for this purpose:

• Reporting and data collection. Keeping in mind the challenges related to the lack of sufficiently consistent, comparable, granular, and reliable climate data reporting by financial institutions, the recommendations address identification of information needs of authorities, strengthening of the reliability of data by supervisory oversight on governance, processes, and controls of financial institutions, use of common definitions across jurisdictions and sectors, and global coordination toward common regulatory reporting frameworks.
• System-wide supervisory and regulatory approaches. Supervisory and regulatory risk assessments and policies need to better incorporate understanding of the channels for how climate risks to financial institutions may be transferred across sectors or borders. A system-wide approach  would draw on the elements of existing prudential frameworks, including supervisory review and evaluation processes; use of risk analytical tools such as scenario analysis and stress testing exercises; supervisory actions to address deficiencies in management of climate risks; and macro-prudential tools and policies to address systemic risks. The report includes recommendations on the way the authorities should account for the potential widespread impact of climate risks across the financial system, including expanding the use of climate scenario analysis and stress testing exercises. One of the recommendations is that future exercises should consider the range of financial risks beyond credit and market risks, to the extent they pose material risks, such as liquidity and insurance (underwriting) risks, which could be important to assessing the resilience of sectors across the financial system and address their interconnectedness. 
• Macro-prudential policies and tools. The report presents the early thinking from standard-setting bodies and authorities on macro-prudential policies and tools that could complement micro-prudential measures and trade-off considerations. The report recommends authorities and standard-setting bodies to undertake research and analysis in the near to medium term on appropriate enhancements to their regulatory and supervisory frameworks.

These three areas taken together inform how the use of climate scenario analysis and stress tests can be expanded to incorporate systemic risks that arise from climate change and to better inform a macroprudential perspective of risks across financial sectors and jurisdictions. The  report has been developed as part of the FSB Roadmap for Addressing Climate-related Financial Risks (published in 2021). FSB plans to incorporate feedback from this consultation and then publish the final recommendations in the fourth quarter of 2022.

Related Links

• Press Release
• Report (PDF)

Keywords: International, Banking, Insurance, Securities, Basel, ESG, Climate Change Risk, Disclosures, Reporting, Systemic Risk, Prudential Framework, Scenario Analysis, Stress Testing, Macro-Prudential Policy, FSB