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Supervisory and Regulatory Approaches to Climate-related Risks: Financial Stability Board publishes Interim Report

16 May 2022

The Financial Stability Board (“FSB”) is inviting comments on the consultative report, Supervisory and Regulatory Approaches to Climate-related Risks to assist supervisory and regulatory authorities in developing their approaches to monitor, manage and mitigate risks arising from climate change and, in particular, to promote consistent approaches across sectors and jurisdictions.

'Climate-related risks, including physical, transition and liability risks, may be transmitted across the financial system through various transmission channels and may be amplified by the financial system, including across borders and across sectors. A more consistent global approach to addressing climate-related risks will help to better assess and mitigate financial vulnerabilities and reduce the risk of harmful market fragmentation’.

The FSB’s report highlights and focuses on three core areas:

  1. 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
  2. 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
  3. Assessing the extent to which current policies and tools address climate-related risks, and early consideration of other potential macroprudential 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.

To address the above three core elements, the FSB is seeking comment on a number of fundamental issues, including:

  • Its aim to find a consistent global approach to addressing climate-related risks
  • Supervisory and regulatory reporting and collection of climate-related data from financial institutions
  • Appropriately identifying the elements of a common high-level definition of climate-related risks
    • Physical,
    • Transition
    • Liability risks)
  • Identification of exposures and understanding of the impacts of climate-related risks of financial institutions and across financial sectors
  • Appropriate areas to increase the reliability of climate-related data reported by financial institutions
  • Whether the recommendations help accelerate the identification of authorities’ climate related information needs from financial institutions and work towards common regulatory reporting frameworks
  • Identifying relevant system-wide aspects that should be considered as part of supervisory and regulatory approaches to incorporate systemic risks arising from climate change

The FSB noted that a system-wide approach to climate-related risks would also need to draw on elements of existing prudential frameworks to incorporate appropriate stress and scenario testing through:

  1. Supervisory review and evaluation processes
  2. Use of risk analytical tools such as scenario analysis and stress testing exercises – to include:
    1. Both physical and transition risks
    2. Key financial sectors (e.g. banks, insurers, asset managers and pension funds)
    3. Interdependencies between physical and transition risks, geographical and sectoral risks, as well as improved understanding of impacts on financial risks
    4. System-wide aspects of climate-related risks such as indirect exposures, risk transfers, spillovers and feedback loops
  3. Supervisory actions to address deficiencies in the risk management of climate-related risks
  4. Macroprudential tools and policies to address systemic risks

Summary

The report sets forth detailed points on a number of considerations for the industry and supervisors, but the salient elements of the feedback sought by the FSB related to the following critical elements, which reflect this nascent but rapidly evolving area of financial services:

  • Need for agreed definition of climate-related risks
  • Need for consistent disclosure requirements to optimize comparability of data
  • Understand regulators emerging regulations related to climate-related risks
  • Reliable and accurate ESG and Climate-Related data
  • Scope to incorporate climate-risks into regulatory returns; and
  • Enhance supervisory approach and expertise of supervisors to identify, assess and opine on appropriate ESG/ Climate related systems and controls

Feedback is sought before June 30, 2022. 

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