The FSB is coordinating internationally the work to address climate-related financial risks. These risks are global in nature, and will have effects across all entities, sectors and economies.
The occurrence of extreme climate events, as well as a disorderly transition to a low-carbon economy, could have destabilising effects on the financial system, including through a rise in risk premia and falling asset prices in the relatively short term. Climate-related risks may also be amplified by the financial system, across borders and across sectors.
Climate-related risks are far-reaching and differ from other risks to financial stability. Climate-related risks may be , and their effects on the financial system subject to substantial uncertainty and tail-risk. The effects are spread over long time horizons, and actions today may determine the severity of risks in the years ahead. The breadth of climate-related risks – including their possible simultaneous occurrence across multiple jurisdictions and sectors – also has implications for the resilience of the financial system. The actions needed are therefore both bottom-up and top-down, to address risks to individual entities and those to the system as a whole.
FSB roadmap for addressing climate-related financial risks
The FSB published in July 2021 a roadmap for addressing climate-related financial risks, including steps and timeframes needed to do so.
Stylised overview of the FSB’s roadmap for addressing climate-related financial risks
The roadmap coordinates work across standard-setting bodies and other international bodies to assess and address financial risks of climate change. It covers four main, interrelated areas:
Globally consistent and comparable disclosures by companies of their climate-related financial risks are increasingly important to market participants and financial authorities, in order to give financial markets the information they need to manage risks, and seize opportunities, stemming from climate change.
Climate-related financial Disclosures
The FSB created the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 to develop a set of voluntary disclosure recommendations for use by companies in providing decision-useful information to investors, lenders and insurance underwriters about the climate-related financial risks and opportunities that companies face. The TCFD, which brings together a wide range of users and preparers of financial reports, published its disclosure recommendations in 2017. Since then, over 3,800 organisations have expressed their support for the TCFD recommendations. The recommendations have become a widely-used basis for climate-related reporting, first through voluntary private-sector adoption and more recently through jurisdictional initiatives to make such disclosures mandatory or promote voluntary implementation.
The TCFD continues to promote and monitor adoption of its recommendations worldwide. As well as its annual status report, which tracks progress in companies’ implementation of its recommendations, the TCFD has issued supplementary guidance to support implementation.
The FSB welcomes the programme of work by the International Financial Reporting Standards Foundation to further promote consistency of disclosures through the recently established International Sustainability Standards Board, which has developed an Exposure Draft for a baseline global climate-related disclosure standard, alongside a more general sustainability disclosure standard. This draft standard builds upon the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and incorporates industry-based disclosure requirements.
The specific nature of climate-related risks has implications for the data needed to monitor and assess their implications for financial stability. The FSB is working to establish a basis of comprehensive, consistent and comparable data that can be used to monitor and assess climate-related financial risks faced by both individual companies and by the financial system. This data should:
Capture exposures of financial firms to climate-related risks, particularly those of a scale or concentration that might threaten financial stability.
Support a global comparison and aggregation of financial firms’ exposures to climate-related risks.
Support forward-looking assessments of climate-related risks to financial stability.
Capture climate-related risk transfer and mitigation.
In July 2021, the FSB published a report examining the availability of data with which to monitor and assess climate-related risks to financial stability. As a result of this analysis, the FSB has identified important data gaps hindering such assessments and priority areas of work to address this. These include:
Data on the drivers of climate-related risks to non-financial entities
Data on non-financial entities’ exposure to climate-related risks
Data with which to monitor and assess the exposures of financial institutions to climate-related risks
Data to assess mitigants of financial institutions’ exposures to climate-related risks
Data to assess the potential for widespread changes in risk premia due to climate change
Data to assess the potential resilience of the financial system to widespread increases in risk premia
Availability of data with which to perform scenario analysis
Priority areas of work to address data gaps in climate-related financial stability risks
The global, yet highly uncertain, nature of climate risks calls for further efforts to develop and refine the analytical tools used to assess climate-related vulnerabilities.
The FSB’s work aims to more systematically assess and better understand climate-related financial vulnerabilities and potential financial stability impacts. Our reports The implications of climate change for financial stability and Stocktake of financial authorities’ experience in including physical and transition climate risks as part of their financial stability monitoring are foundational for building greater understanding of the macro-level financial stability risks of climate change.
Regulatory and supervisory practices and tools
Supervisory and regulatory approaches to climate-related risks should be fully integrated within the overall supervisory and regulatory approaches to address financial risks.
In April 2022, the FSB published a consultation report on supervisory and regulatory approaches to climate-related risks. The report aims 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.
In October 2022, the FSB published a report on supervisory and regulatory approaches to climate-related risks. The report aims 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.
Progress is being monitored in consultation with the standard-setting bodies and other relevant international bodies. The FSB delivers an annual progress report to the G20.
In November 2022, the FSB published a joint report with the Network for Greening the Financial System (NGFS) on climate-related scenario analysis. The report provides a synthesis of the findings from climate scenario analysis exercises undertaken by financial authorities at the individual firm level, at the level of the different financial sectors, and at the overall financial system level.