FSB Report Highlights Climate-Related Risks

A new report from the Financial Stability Board today highlighted the potential implications of climate change for financial stability. While acknowledging that “it is difficult to quantify risks to financial stability from climate change precisely,” the report noted that broadly, financial stability risks can be broadly divided into two key areas: physical risks and transition risks, which are risks that could arise as the global economy shifts toward a low-carbon future. “The magnitude of these risks and the relationship between them is likely to depend not only on the course of climate change, but also on the course of action to mitigate it,” FSB added.

Thus far, there has been an uneven response toward mitigating climate risks among jurisdictions worldwide, the FSB observed. The report suggested that banks could work to incorporate their exposure to climate risks in their investment, lending and underwriting decisions, and integrate these risks into their broader risk management processes, which “might go some way towards limiting firms’ exposures to both physical and transition risks.”

Such actions could include heightened due diligence or categorical rules regarding climate-related risk exposure; engagement with investees and clients to encourage them to reduce their emissions; using metrics that track financial firms’ exposures to climate risk; and integrating climate risk management into institution-wide governance, strategies and risk management frameworks.

The FSB said it would by 2021 “conduct further work to assess the availability of data through which climate-related risks to financial stability could be monitored.”