Introduction

The report recognises the importance of coordinating the work of national financial authorities and international standard-setting bodies to promote effective regulatory, supervisory and other financial sector policies. This report focuses on the inclusion of physical and transition climate risks in such monitoring.

The inclusion of climate-related risks in authorities’ financial stability monitoring

Around three-quarters of financial authorities, surveyed at the national and international levels worldwide, consider climate-related risks as part of their financial stability monitoring. These include physical risks, e.g. extreme climate-change related weather events eroding the value of financial liabilities and transition risks that occur from adjustments towards a low-carbon economy.

Channels of risks to financial stability that financial authorities consider

There are various channels that financial authorities consider fall under the risk categories such as physical and transition, these include the implications of climate-related risks for financial institutions, the potential for cross-border spillovers, and feedback effects, proving the interconnected nature of climate related risks.

Quantification of climate-related risks to financial stability

The report discusses the challenges that authorities face when conducting quantitative assessments of climate-related risks. These assessments involve translating pathways for climate change into those for extreme weather events as well as for relevant macroeconomic and financial variables. All these remain subject to considerable uncertainty and may give rise to differences in the scenarios used by different authorities and the interpretation of scenarios by firms.

Supervisory approaches to increasing financial institutions’ resilience to climate-related risks

Supervisory awareness and expectations are fundamental to increasing the resilience of financial institutions to climate-related risks. Consequently, the report highlights the importance of supervisory expectations that financial institutions conduct their scenario analysis and disclose climate-related risks. Through the implementation of such supervisory approaches, it is hoped that firms will consider these risks more fully and assist in integrating such risks as part of their financial stability monitoring.

Recommendations

The report recommends that financial authorities focus on assessing the channels through which physical and transition risks could impact the financial system, how they might interact, and the potential cross-border effects of these risks. Further, the report recommends developing available data on climate-related risks that can be monitored and addressing any data gaps. There is an emphasis on supervisory work to monitor and manage the risks from climate change as part of financial stability monitoring.

Summary

In conclusion, this report highlights the need for financial authorities to consider climate-related risks in financial stability monitoring, with around three-quarters of them already undertaking this work. This stocktake additionally considers the quantification of climate-related risks to financial stability and the challenges that authorities face in conducting quantitative assessments of such risks. Supervisory awareness and expectations that financial institutions conduct their own scenario analysis and disclose climate-related risks prove fundamental to increasing the resilience of financial institutions to these risks.

Finally, the report makes recommendations to close gaps in the available data on climate-related risks and to supervise and manage the various risks from climate change, incorporating them as part of financial stability monitoring to mitigate any potential risks to the global financial system.