Climate-Related Financial Risks: Key takeaways from July 2023’s FSB roadmap progress report
The Financial Stability Board (FSB) has just released its second annual progress report on the roadmap to address climate-related financial risks.
Background:
In July 2021, the Financial Stability Board published a roadmap to address Financial Risks from Climate Change, which was endorsed by G20 Leaders and Central Bank Governors with the goal of coordinating the efforts and actions around 4 key policy areas: 1) firm-level disclosures, 2) data, 3) vulnerabilities analysis, and 4) regulatory and supervisory practices and tools.
The increased frequency of adverse and extreme climate-related events has led to a growing focus on potential risks to the financial stability deriving from climate change, manifesting through physical events or through a disorderly transition to a low-carbon economy. A rise in risk premia or decrease in asset prices are just few examples of the climate-related risks for the financial system, and highlight the need to strengthen risk management practices.
July 2023 Report:
The main objectives of this year’s report are: (i) assessing the progress made since the last progress report published in July 2022, and (ii) identifying the areas requiring further attention, thus updating the roadmap with the necessary actions where needed. In addition, it aims at encouraging tighter coordination among the different international initiatives.
What is the progress made this year around the 4 key areas, and next steps?
1) Disclosures
Goal: Achieve globally consistent, comparable, and decision-useful public disclosures by firms of their climate-related financial risks
The publication on June 26th 2023 of the International Sustainability Standards Board (ISSB)’s final standards on general sustainability-related disclosures (IFRS S1) and on climate-related disclosures (IFRS S2) has been a major achievement. These final standards, building on the recommendations of the FSB’s Task Force on Climate-related Financial Disclosures (TCFD) and the work of other sustainability bodies, will serve as a global framework for sustainability disclosures and, when implemented, will enable disclosures by different companies around the world to be made on a common basis. Now that the ISSB standards have been finalised, work to promote the timely and wide use of the standards by jurisdictions is important, as well as capacity building to facilitate the implementation of the standards, and interoperability of the standards with jurisdictional frameworks in order to achieve global comparability of climate-related disclosures.
Another topic that gained much traction since the previous roadmap is the development of a global assurance framework for sustainability-related corporate reporting, to drive reliability of the disclosures.
2) Data:
Goal: Establish a basis of comprehensive, consistent, and comparable data for monitoring climate-related financial risks globally
During this past year, the improvement of the availability, quality and cross-border comparability of climate data has continued to be the focus. An important next step is to develop global repositories that provide open access to data and would facilitate the use of metrics that reflect climate-related risks consistently and reliably across sectors and jurisdictions. Several public-private sector initiatives are helping to build such climate data landscape. There is a continuing need for enhancing climate data and improving its accuracy, consistency and quality, in order to support climate risk assessment and scenario analysis exercises. In this context, it will bey key to develop metrics that measure climate-related risks in a forward-looking manner.
3) Vulnerabilities analysis:
Goal: To more systematically assess and better understand climate-related financial vulnerabilities and potential financial stability impacts
Progress is being made on development of conceptual frameworks and metrics for monitoring climate-related vulnerabilities. Climate scenarios will need to be embedded into monitoring of financial vulnerabilities and a better understanding of the cross-border / cross-sectoral transmission of climate shocks will need to be done in order to obtain financial stability insights.
4) Regulatory and supervisory practices and tools
Goal: Establish effective and, where useful and appropriate, consistent supervisory and regulatory approaches and tools to address climate-related risks, both within individual sectors and at the system-wide level.
Several initiatives on integrating climate-related risk into risk management frameworks, as well as capacity building, are ongoing and remain an important area of focus. There is a growing interest in the role of transition plans of both financial and non-financial entities, not only in enabling an orderly transition, but also as a source of information for financial authorities to assess risks. The FSB is setting up a Transition Plans Working Group that will help to understand the relevance of transition plans and planning by financial entities and corporates for financial stability. It will be important to ensure close coordination among the relevant bodies.
Through partnerships with leading climate data providers, Primera Purpose assists clients navigating and meet the increasingly demanding requirements related to climate risks disclosures and risk management.
We developed an innovative climate-risk assessment model to asses physical as well as transition risks deriving from climate change, on the basis of precise forward-looking climate data across jurisdictions and sectors.
Contact us for more information.