Policymakers have an interest in ensuring that the financial system is resilient to all forms of risk. The FSB is undertaking work on the financial stability implications of climate risks. In 2015 it established the Task Force on Climate-related Financial Disclosures and in 2020 it published a stocktake of climate-related risks in financial stability monitoring.
Climate-related risks in financial stability monitoring
In July 2020 the FSB published a stocktake that considers financial authorities’ experience in including climate-related risks in financial stability monitoring. It draws on information provided by FSB member national authorities, international bodies and a workshop with the private sector.
Inclusion of climate-related risks in their financial stability monitoring : Do you consider risks from climate change as part of your financial stability monitoring?
The stocktake found that financial authorities vary in terms of whether – and to what degree – they consider climate-related risks as part of their financial stability monitoring. 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.
The FSB will conduct further work by October 2020 to assess the channels through which physical and transition risks could impact the financial system, and how they might interact. Particular focus will be given to the potential amplification mechanisms and cross-border effects, and to prioritising channels that could materialise in the short-to-medium term. The FSB will also consider the scope for work to assess available data through which climate-related risks can be monitored, as well as any data gaps. This work will build upon, and be coordinated with, that taking place in other relevant international fora.
Climate-related financial disclosures
In April 2015 the G20 asked the FSB to consider climate risk and in December 2015 the FSB launched the industry-led Task Force on Climate-related Financial Disclosures (TCFD) to develop recommendations on climate-related financial disclosures by companies. The Task Force published its final recommendations in June 2017.
Disclosure of climate-related financial information is a prerequisite for financial firms not only to manage and price climate risks appropriately but also, if they wish, to take lending, investment or insurance underwriting decisions based on their view of transition scenarios.
Michael R. Bloomberg is Chair of the Task Force, which includes users and providers of disclosures from a wide range of backgrounds. The members of the Task Force, who are drawn from a wide range of industries and countries from around the globe, finalised the recommendations after extensive public engagement and consultation, including public consultation on a draft of the recommendations in December 2016. Once implemented the recommendations will facilitate consistent, comparable, reliable, clear and efficient climate-related disclosures by companies. The recommendations apply broadly to financial and non-financial firms.
The TCFD developed four recommendations on climate-related financial disclosures that are applicable to companies across sectors and jurisdictions. The recommendations are structured around four thematic areas:
Governance: The organisation’s governance around climate-related risks and opportunities.
Strategy: The actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.
Risk Management: The processes used by the organisation to identify, assess, and manage climate-related risks.
Metrics and Targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
In June 2019 the TCFD published a status report on adoption of the TCFD recommendations. The Task Force reviewed financial filings, annual reports, integrated reports, and sustainability reports. It found that:
Disclosure of climate-related financial information has increased since 2016, but is still insufficient for investors.
More clarity is needed on the potential financial impact of climate-related issues on companies.
Of companies using scenarios, the majority do not disclose information on the resilience of their strategies.
Mainstreaming climate-related issues requires the involvement of multiple functions.
The FSB has asked the Task Force to publish a further status report in November 2020.