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Key initiatives and trends in the management of climate-related risks

In 2015 Mark Carney, the then-governor of the Bank of England, delivered a seminal speech on the tragedy of the horizon around climate change and the risks it poses to the financial sector. Since then, assessing and managing climate-related risks is increasingly seen as part of good financial and risk management practice.

In 2015 as Governor of the Bank of England, Mark Carney highlighted the financial risks to the financial sector and society with both the low-carbon resilient transition of economies, as well as the physical impacts of climate change. He called for improved information and disclosures to help financial instiuttions as well as corporate actors to better assess and manage these risks.

A few weeks later, the Financial Stability Board launched the Task-force on Climate-related Financial Disclosures (TCFD). Since then, it has produced recommendations and guidance that have been used by groups of financial institutions to develop approaches, tools and methodologies to assess their exposure to climate-related financial risks relying on forward-looking scenario analysis.

The number of approaches, tools and methodologies increased over the past few years and are now available for different types of institutions, and may be used to conduct assessments at the portfolio level, at the project level, at the asset level, at the counterparty level or at the country level. Nevertheless, further improvements and increased transparency remain key issues for assessment approaches – as well as how to integrate results into broader financial risk management practice.

The management of climate-related risk is also a key topic for financial regulators and supervisors. For example, it is a priority area of work of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) that has provided recommendations on key methodological issues including the choice of reference scenarios.

The assessment and integration of climate-related risks are in most cases conducted on a voluntary basis as part of sound market practice. However, regulators in multiple jurisdictions are increasing their focus on overseeing the integration of climate-related risks. In 2021, the G7 Finance Ministers and Central Bank Governors’ Communiqué supported moving towards mandatory climate-related financial disclosures.

 

Key initiatives:

  • Central Banks and Supervisors Network for Greening the Financial System (NGFS): This group of Central Banks and Supervisors aims to contribute to the development of environment and climate risk management in the financial sector.
  • Task-force on Climate-related Financial Disclosures (TCFD): This task-force was mandated by the G20’s Financial Stability Board to “develop voluntary, consistent climate-related financial risk disclosures”. These recommendations promote disclosures in four different areas: governance, strategy, risk management, and metrics and targets.
  • UNEP FI: Following the publication of the TCFD recommendations in June 2017, UNEP FI began a series of ‘TCFD Pilot Projects’ for banks, investors, and insurers. Participants in these pilots explored physical and transition risks (and litigation risks for insurers) and also pioneered practical approaches for evaluating these risks using climate scenario analyses.
  • Equator Principles: The Equator Principles are a set of 10 Principles for financial institutions aiming at “determining, assessing and managing environmental and social risk in projects”, based on the policies and guidelines of the World Bank and International Finance Corporation (IFC).