The Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) published a joint report that outlines the initial findings from climate scenario analyses undertaken by financial authorities to assess climate-related financial risks. The report also identifies key data gaps and the approaches adopted for addressing data challenges.
The report provides a synthesis of the findings from climate scenario analysis exercises undertaken by financial authorities at the individual firm level, at the level of the different financial sectors, and at the overall financial system level. The report builds on the NGFS “Scenarios in Action” progress report, published in October 2021, as an attempt to evaluate the implications of climate change-related developments for the financial system as depicted in climate scenarios. The report found that NGFS scenarios played a critical role in supporting financial authorities’ climate scenario analysis exercises, as majority have either used NGFS scenarios or have taken those scenarios as a point of reference. While a majority of these exercises rely on NGFS scenarios, significant variations in scope and objectives make it difficult to allow a straightforward comparison of results. However, the exercises provide a comprehensive picture on vulnerabilities when compared together. The findings indicate that further progress is required on bridging data gaps, particularly on improving data availability and consistency/comparability at the global level. Better cross-border cooperation, especially due to the early stage of the climate scenario analysis work across jurisdictions, is also needed. The authorities addressed the data gaps mainly through use of third-party data sources, collaboration with financial institutions, in-house modeling, and expert judgment.
The report concludes that climate scenario analyses exercises are at an early stage, given the complexities of scenario analysis and modelling climate risks as well as the lack of necessary data. Despite findings of the exercises not being translated into micro- or macro-prudential policies, most respondents agree that these exercises should be continued, upgraded, and updated to track climate risks and inform policy decisions in the future. FSB and NGFS will continue their work on climate scenario analyses and will foster international collaboration to advance toward a common and comprehensive framework for scenario analyses. NGFS will continue improving its climate scenarios, in particular with more granular data at the sectoral and geographical levels as well as with more physical risk data. Regarding data gaps, NGFS is working to develop a new website and identify possible long-term solutions for regularly updating its data directory. FSB is also working to improve the availability and cross-border comparability of climate related data more broadly, in particular to further coordinate the establishment of common metrics for financial risks (for example, for financial stability analysis and supervisory reporting), including forward-looking metrics anchored in real-world climate targets. Moreover, on the analysis of vulnerabilities, the work is continuing to progress along three strands—ongoing monitoring using the currently available tools, development of conceptual frameworks, and further development of scenario analysis.
Keywords: International, Banking, Insurance, Securities, Climate Change Risk, ESG, Climate Scenarios, Scenario Analysis, Cross Border Cooperation, Physical Risk, Financial Stability, Supervisory Reporting, NGFS, FSB
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.
Previous ArticleFSB Issues Reports on NBFI and Liquidity in Government Bonds
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.