Helping regs get their heads around climate risks

As financial regulators around the world step up efforts to grapple with the financial impacts of climate-related risks, the Financial Stability Board (FSB) is launching a consultation on emerging supervisory approaches to these risks.

The global policy group published a consultation paper that aims to provide guidance to the world’s regulators on developing oversight mechanisms for monitoring and managing systemic risks that arise due to the effects of climate change on financial sector firms.

Among other things, the guidance is intended to promote consistency in the regulation of this developing area.

The paper focuses on three main issues: ensuring consistent comparable reporting of climate-related data from financial institutions; systemic supervisory approaches, including stress testing and scenario analysis; and possible macroprudential policies to address systemic risks, such as adopting systemic capital buffers for climate-related risks.

The paper noted that, in Canada, the Office of the Superintendent of Financial Institutions (OSFI) and the Bank of Canada recently published the results of a joint pilot project to examine climate transition scenarios, which found, “a number of potential material risks to the financial system, and that a delayed climate action could produce fairly substantial macroeconomic costs.”

Future work from the Bank of Canada will look at potential systemic implications for both the transition, and physical, risks of climate change, the FSB noted.

At the same time, regulators in Europe are considering the introduction of system-wide buffers to increase banks’ resilience, and to provide incentives to reduce exposures to climate-related risks, the paper said.

“The premise of this buffer is that a disorderly transition would result in greater financial stress and potential losses to the financial system, and therefore, require a larger capital buffer,” it noted — adding, “This buffer could be linked to a carbon-intensive credit-to-GDP ratio and would decrease as banks reduce their carbon-intensive exposures.”

The consultation on this (and other) approaches, runs until June 30.

The FSB said its final recommendations will be published in the fourth quarter.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.