The Financial Stability Board (FSB) recently published the second annual progress report on the July 2021 roadmap to address climate-related financial risks. The report outlines progress made across four building blocks of the roadmap, which are consistency and comparability of firm-level disclosures, availability of quality data for risk monitoring, analyses of vulnerabilities and systemic impact, and development of effective supervisory and regulatory approaches and tools to address climate risks.
The report highlights that steady progress has been made across all four blocks of the climate risk roadmap:
- Firm-level sustainability disclosures: In 2023, FSB welcomed, while the International Organization for Securities Commission (IOSCO) endorsed, the publication of the International Sustainability Standards Board’s (ISSB) final standards IFRS S1 on general sustainability-related disclosures and IFRS S2 on climate-related disclosures. Going forward, ISSB will take over (from TCFD) the monitoring of the progress on firm-level disclosures from 2024 and will develop additional adoption guidance to support the scaling and phasing of implementation of the ISSB standards. The Basel Committee on Banking Supervision (BCBS) also plans to propose, by the fourth quarter of 2023, a Pillar 3 framework for climate risks as a common disclosure baseline across the internationally active banks. The Basel Committee disclosures framework would be interoperable with ISSB standards.
- Data availability: A key goal is to develop global repositories that provide open access to data, which includes development of forward-looking monitoring metrics. The Network for Greening the Financial System (NGFS) developed a directory of data sources for financial sector stakeholders. The work is underway on developing data hubs organizations within central banks and supervision authorities, setting up national climate data directories or catalogs, and improving emissions data. NGFS aims to publish an updated version of the NGFS Data Directory referencing data sources and metrics. At a macro level, the IMF-led G20 Data Gap Initiative (DGI) launched its workplan in 2023, with seven recommendations to address data gaps, including carbon footprint of foreign direct investment, climate finance, and forward-looking physical and transition risk indicators.
- Vulnerability analysis: Work in this area has focused on drawing financial stability insights by computing metrics using a snapshot of current exposures in the financial system to assess physical and transition risks and by using a forward-looking approach to draw qualitative insights based on outputs from scenario analysis and other forward-looking approaches. NGFS will continue to enhance its climate macro-financial scenarios, issue a conceptual note on short-term scenarios in the third quarter of 2023, and publish phase 4, long-term scenarios in the fourth quarter of 2023.
- Regulatory and supervisory practices and tools: Initiatives on embedding climate risks into risk management and prudential frameworks are ongoing among the standard-setting bodies and NGFS. Additionally, NGFS is conducting a deep dive on the supervision of climate-related litigation risks, IOSCO is working on compliance and voluntary carbon markets (final report expected in Q4 2023), and IOSCO is also developing a report on supervisory approaches for asset management and the oversight of ESG ratings and data product providers (expected in Q4 2023). Next up, FSB will prepare a report presenting a conceptual understanding on the relevance of transition planning by financial and non-financial firms while BCBS will assess the potential need for additional supervisory guidance in the areas of transition planning and use of climate scenario analyses by banks.
Visit Moody's Analytics Climate and ESG Risk Microsite to learn how to proactively incorporate climate and ESG insights into your risk assessment process.
Keywords: International, Banking, Securities, Basel, Climate Change Risk, TCFD, Reporting, ESG, Disclosures, ISSB, FSB
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