The BCBS Task Force on Climate-related Financial Risks (TFCR), which was established in February 2020, held a virtual workshop in October 2020. The TFCR is undertaking analytical work related to the transmission channels of climate-related financial risks to the banking sector and the measurement methodologies of such risks. The information gathered during the workshop will contribute to the development of the analytical reports of the taskforce. Overall, there was broad agreement on the value of strengthening cooperation and knowledge-sharing among banks, supervisors, and policy makers, to address climate-related financial risks in a more harmonized and efficient manner.
The taskforce met with senior representatives from internationally active banks and associated industry associations to discuss how banks assess and address climate-related financial risks in practice. At the workshop, panelists from internationally active banks shared their views regarding transmission channels of climate-related risks to the banking sector and individual banks. They also discussed methodologies used or being considered to measure climate-related financial risks and the use of the methodologies in risk management procedures of banks. Banks reported progress and future work in incorporating climate-related financial risks into existing risk management frameworks and governance structures, which requires making adjustments and enhancements to reflect the unique and complex nature of climate-related risks. Panelists highlighted the benefits of international coordination in developing regulatory requirements, reporting standards and disclosure expectations. Several panelists identified the potential benefits of principles-based guidance from international standard-setting bodies to align the development and phasing-in of climate risk requirements.
With respect to climate risk stress testing, panelists described the role of scenario analysis and models in quantifying transition and physical risks, noting the considerable uncertainty surrounding the scale and speed at which climate change will occur, which makes assumptions difficult to narrow down. Moreover, the longer-term time horizon over which the most severe scenarios may materialize is beyond the existing risk measurement or planning horizon of banks. Panelists discussed limitations with respect to data availability and quality as well as challenges in translating climate scenarios into financial risks parameters. Banks noted they are considering how to best translate the results of climate scenario analysis into financial planning and use the results to drive internal decision making to address these risks. Panelists described efforts to enhance scenario analysis and narrow the gaps on assumptions on climate scenarios. The NGFS Climate Scenarios were identified as being helpful in providing a common starting point for analyzing climate risks.
Related Link: Workshop Update
Keywords: International, Banking, TFCR, Scenario Analysis, NGFS, Climate Change Risk, Disclosures, ESG, BCBS
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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