FSB Publishes a Report on Climate-Related Risks Relevant to Financial Regulators

On April 20, 2022, the Financial Stability Board (“FSB”) published a report intended to assist financial regulators and supervisors in establishing their monitoring, managing, and mitigating “sector and system-wide risks arising from climate change” and creating a consistent approach across sectors and jurisdictions to addressing these risks, such that “market fragmentation” is avoided.

The report provided the following recommendations on how to achieve such objectives:

• Supervisory and regulatory reporting and collection of climate-related data from financial institutions.

  • Establish “consistent and comparable firm disclosures” for reporting based on global considerations and acceptable standards, which will serve as a reference point for your organization.

  • Recommended reporting parameters:

    • “Accelerate the identification of [your financial institution’s] information needs” to ensure that it can aptly address, define, and monitor climate-related risks and collect climate-related data and metrics;

    • Supervisory parties should establish expectations that address the governance, processes, and controls on climate-related data reporting so that financial institutions may properly and effectively implement these measures;

    • Regulatory and supervisory authorities should create common definitions for:

    • acute and chronic physical risk;

    • transition risk, “including technological developments, behavior or social change, and policy changes”; and

    • liability risk, on an independent basis “or as a subset of physical and transition risk.”

• System-wide supervisory and regulatory approaches to assessing climate-related risks.

  • Establish risk assessments and response policies that are specific to the ways in which climate-related risks in the industry may be transferred across sectors and borders.

  • Recommended approach parameters:

    • Authorities must establish approaches to address the “potential widespread impact of climate-related risks across the financial system”;

    • Use climate scenario analysis and stress testing and adopt features that can “best inform a system-wide view”;

    • In considering financial risks, go “beyond credit and market risks”; and

    • Authorities should cooperate and coordinate across jurisdictions and “engage in active dialogue on home-host coordination.”

• Early consideration of other potential macroprudential policies and tools to address systemic risks. 

  • Microprudential tools are utilized by financial institution supervisors and regulators to oversee individual financial institutions, as opposed to the tools that are used to regulate the industry as a whole—macroprudential tools. The report warns that these tools alone “may not sufficiently address the cross-sectoral, global and systemic dimensions of climate-related risks.” As such, the report recommends these “standard-setting bodies” engage in research in analysis mid-year to receive information on applicable frameworks to complement these microprudential tools to provide sufficient coverage to your institution.

The FSB invites public comment on these recommendations to be sent fsb@fsb.org by June 30, 2022, and provides the following questions for the public to consider in this process:

• Supervisory and regulatory reporting and collection of climate-related data from financial institutions.

  • Does the report highlight the most important climate-related data (qualitative and quantitative) for supervisors’ and regulators’ identification of exposures and understanding of the impacts of climate-related risks of financial institutions and across financial sectors? Please provide examples of climate-related data deemed most relevant and that should be prioritized.

  • Does the report draw attention to the appropriate areas to increase the reliability of climate-related data reported by financial institutions?

  • Does the report appropriately identify the elements of a common high-level definition of climate-related risks (physical, transition and liability risks)?

  • Do the proposed recommendations help accelerate the identification of authorities’ climate-related information needs from financial institutions and work towards common regulatory reporting frameworks? Please elaborate on areas where the recommendations could be enhanced, if any.

• System-wide supervisory and regulatory approaches to assessing climate-related risks.

  • Does the report identify relevant system-wide aspects that should be considered as part of supervisory and regulatory approaches to incorporate systemic risks arising from climate change? Please elaborate on other aspects that should be considered, if any.

  • Does the report accurately reflect the extent to which current supervisory and regulatory tools and policies address climate-related risks?

  • Do the proposed recommendations on incorporating systemic risks into supervisory and regulatory approaches, including the expanded use of climate scenario analysis and stress testing for macroprudential purposes, address the appropriate areas? Please elaborate if there are any other features or tools that should be considered.

• Early consideration of other potential macroprudential policies and tools to address systemic risks.

  • Are there other areas of work, literature or research being conducted on macroprudential tools and policies on climate-related risks that should be considered in the report?

• Additional considerations.

  • Are there any other issues that should be considered in future work of the FSB on supervisory and regulatory approaches to climate-related risks?