06 October 2022

FSB's Knott: Navigating climate-related financial risks

First, what data and tools do financial institutions, including asset managers, need to properly manage financial risks from climate change? Second, what needs to be done to ensure the stability of the financial system as a whole amidst climate change?

...An existential threat for humanity at large, and so, also for finance, is the threat of climate change. A threat that moves ever closer. A threat that is global and pervasive.

Physical risks may affect the value of a broad range of financial assets in ways that are hard to predict. And the transition to net zero, though it offers a wealth of opportunities – also comes with its own risks. Current discussions of energy policies in the face of rising fuel prices have demonstrated the difficulties in identifying and pursuing a sustainable course forward.

So, what is needed to give the private sector the means to navigate the challenges of climate change? I will try to provide an answer by discussing three specific questions. First, what data and tools do financial institutions, including asset managers, need to properly manage financial risks from climate change? Second, what needs to be done to ensure the stability of the financial system as a whole amidst climate change? And third, against this background, what does effective cooperation on financial risks from climate change look like, not least between the private and the public sectors?

I will discuss these issues, using the Financial Stability Board’s (FSB) work in this area as a reference point. Concretely, I will refer to the FSB’s Roadmap to address financial risks from climate change. This roadmap, which G20 Leaders endorsed in October 2021, has the ultimate goal that climate risk is adequately reflected in all financial decisions – precisely what is needed to successfully navigate the financial aspects of climate change.

Managing financial risks from climate change at financial institutions

Let me start with the firm-level – or micro – perspective. The basis for good risk management is good data. Climate risk is no different. Recognising this, the FSB has long championed the need for investors, lenders, insurers and others to have access to the information they need to understand and manage climate risks, but equally, to seize opportunities stemming from climate change.

The FSB’s Task Force on Climate-related Financial Disclosures (TCFD) was established in 2015. It has led the charge in developing effective climate-related disclosures that promote better informed credit, investment and insurance underwriting decisions. The TCFD’s work has gained enormous traction over the years. More than 3,000 companies from 92 countries are TCFD supporters, representing a combined market capitalisation of US$ 27 trillion. And most FSB jurisdictions either require or encourage disclosures that use the TCFD Recommendations as a basis.2

But now we are moving to the next level - a global baseline standard that can build on the TCFD framework with more granularity and standardisation. This is where the International Sustainability Standards Board (ISSB) comes in. Establishing a global baseline standard for sustainability reporting – starting with climate – is important for promoting convergence of approaches, as well as consistency and comparability of firms’ disclosures across the globe....

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