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    FSB Reports Address Aspects of Climate Risk Regulatory Approaches

    In context of the October 2022 meeting of the G20 Finance Ministers and Central Bank Governors (FMCBG), the Financial Stability Board (FSB) published the progress report and roadmap for enhancing cross-border payments as well as the proposals on the crypto-asset regulatory framework and cyber-incident reporting. The standard-setter FSB also published the final report on supervisory and regulatory approaches to climate-related risks, a progress report on climate-related disclosures, the 2022 status report by its industry-led Task Force on Climate-related Financial Disclosures (TCFD). The recent FSB recommendations encourage authorities to accelerate the identification of their data needs for supervisory and regulatory objectives; identify relevant types of data and metrics that they may require from financial institutions; and provide key policy considerations to assist authorities in their future work toward expanding regular standardized regulatory reporting requirements.

    The letter from the FSB Chair to the G20 welcomed the milestone achieved in March with the publication of the Exposure Drafts of the International Sustainability Standards Board, for both sustainability- and climate-related financial disclosures. The International Sustainability Standards Board (ISSB) aims to issue the final standards by early 2023. The letter calls for urgent additional progress by companies in disclosing decision-useful climate-related financial information. FSB is also expected to publish, in November 2022, a joint report with the Network for Greening the Financial System (NGFS) on lessons from use of climate scenario analyses. Below are the key highlights of the recently published reports addressing climate-related financial risks:

    • The report on supervisory and regulatory approaches to climate risks is intended to assist all authorities in assessing climate-related risk. However, the applicability of the high-level recommendations may differ depending on each authority’s mandate and the role that different tools (such as scenario analysis) may play in their different sectoral settings (for example, the different role such tools may play for banks compared with asset managers). The report focuses on supervisory and regulatory reporting and collection of climate-related data from financial institutions as foundational elements in the identification and monitoring of climate-related risks and on system-wide supervisory and regulatory approaches to assessing climate-related risks, including the use of analytical tools such as climate scenario analysis and stress testing. Additional focus is on assessing the extent to which current policies and tools address climate-related risks as well as the early consideration of other potential macro-prudential policies and tools to address systemic risks that may not be addressed fully by current measures, based on the work of standard-setting bodies and authorities. 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 macro-prudential perspective of risks across financial sectors and jurisdictions. FSB will consider in 2024 whether and when to conduct a peer review of supervisory and regulatory practices against its recommendations across jurisdictions and will consider in 2025 whether to make an update to the report’s recommendations.
    • The 2022 TCFD status report analyzes the current state of disclosure practices as well as progress in firms’ disclosures in line with the TCFD Recommendations over the past five years. The report finds that the percentage of companies disclosing TCFD-aligned information continues to grow, but more urgent progress is needed. For fiscal year 2021 reporting, 80% of companies disclosed in line with at least one of the 11 recommended disclosures; however, only 4% disclosed in line with all 11 recommended disclosures and only around 40% disclosed in line with at least five. Europe remains the leading region for disclosure at 60% on average across the 11 recommended disclosures, 24% higher than the next highest region (Asia Pacific). The average level of disclosure in North America, grew by 12 percentage points, between 2019 and 2021, to 29% for North America. Several industries, including banks, now have average levels of disclosure—across all 11 recommendations—of over 40%. Notably, the increase between 2019 and 2021 reporting for banks was 20 percentage points. The TCFD review of five years of implementation of TCFD Recommendations found strong evidence that climate-related risks are being factored into the pricing and terms of bank loans in US and EU. Out of all 11 recommended disclosures of the Task Force, governance remains the least disclosed recommendation, as the two Governance recommended disclosures were the second and third least disclosed. Overall, more than 3,800 organizations have become supporters of the TCFD Recommendations, with these supporters including over 1,500 financial institutions, responsible for assets of USD 217 trillion. 
    • The progress report on climate-related disclosures takes stock of progress made over the past year by the new global standard-setter (ISSB), by national and regional authorities, and by firms. Looking ahead to the finalization of ISSB standards, more than half of FSB jurisdictions state that they already have or are putting in place structures and processes to bring the ISSB standards into local requirements, once finalized. Authorities note a number of challenges to be addressed in the implementation of the ISSB climate standard, such as consistency and comparability of disclosures across jurisdictions and across firms, data availability, proportionality, transition arrangements, and materiality. During the period until the ISSB global baseline standard is agreed and the implementation of that standard across jurisdictions begins to be monitored, there is a continuing need to maintain momentum by monitoring and reporting on progress in firms’ climate disclosures. FSB therefore requests TCFD to prepare another progress report (to be delivered in October 2023) on firms’ disclosures in 2023, after reviewing disclosures by companies in their public reporting for 2022.

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    Keywords: International, Banking, Insurance, Securities, Climate Change Risk, ESG, Disclosures, Scenario Analysis, Stress Testing, TCFD Recommendations, Lending, Basel, Reporting, FSB

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