Climate-related risks

Policymakers have an interest in ensuring that the financial system is resilient to all forms of risk. Recent work by the FSB has focused on how climate risks might impact, or be amplified by, the financial system. Building on this work, the FSB is assessing the availability of data through which climate-related risks to financial stability could be monitored, as well as any data gaps. The FSB is also reviewing regulatory and supervisory approaches to addressing climate risks at financial institutions.

Globally consistent and comparable disclosures by companies of their climate-related financial risks are increasingly important to market participants and financial authorities as a means to give financial markets the information they need to manage risks, and seize opportunities, stemming from climate change. 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 that companies face. The TCFD published its disclosure recommendations in 2017, which set out a comprehensive framework that has been developed by, and is directly responsive to the needs of, users and preparers of financial filings across a range of financial and noon-financial sectors around the work.

Climate-related risks in financial stability monitoring

The FSB is monitoring the potential implications of climate change for financial stability. A stocktake of financial authorities’ experience in including climate-related risks in financial stability monitoring found that around three-quarters of survey respondents consider, or are planning to consider in future, climate-related risks as part of their financial stability monitoring. No approach to quantification provides a holistic assessment of climate-related risks to the global financial system.

Estimated global economic loss from natural catastrophe events
Estimated global economic loss from natural catastrophe events
(Not all natural catastrophes enumerated in the chart result from climate change)
Sources: Bank for International Settlements, Banque de France and MunichRe

The FSB has also examined potential mechanisms within the financial system that might amplify the effects of climate-related risks as well as the cross-border transmission of risks. Current central estimates of the impact of physical risks on asset prices appear relatively contained but may be subject to considerable tail risk. The manifestation of physical risks could lead to a sharp fall in asset prices and increase in uncertainty. A disorderly transition to a low carbon economy could also have a destabilising effect on the financial system.

Climate-related risks – physical and transition risks – may also affect how the global financial system responds to shocks. They may give rise to abrupt increases in risk premia across a wide range of assets. This could alter asset price (co-)movement across sectors and jurisdictions; amplify credit, liquidity and counterparty risks; and challenge financial risk management in ways that are hard to predict. Such changes may weaken the effectiveness of some current approaches to risk diversification and management. This may in turn affect financial system resilience and lead to a self-reinforcing reduction in bank lending and insurance provision.