FSB publishes final report on approaches to climate risk

The Financial Stability Board has published its final report on supervisory and regulatory approaches to climate-related risks, offering recommendations to banking and insurance regulators charged with managing the financial risks associated with accelerating global heating.

Focusing on data, analytical tools and policy, the document calls for a more consistent global approach to addressing these risks while warning that how easily its recommendations can be applied may differ depending on the mandate of individual authorities.

The report incorporates feedback received during a public consultation on a draft version published in April 2022 and is built on the FSB’s roadmap to address climate-related financial risks, endorsed by the G20 in 2021. A progress report on the roadmap was published in July 2022.

Regulatory authorities are encouraged to “accelerate the identification of their data needs” for supervisory and regulatory objectives, particularly the data and metrics they may require from financial institutions. The use of climate scenario analysis and stress tests for macroprudential purposes is also recommended, along with “early consideration” of other potential macroprudential policies and tools, including capital frameworks.

Acknowledging that “microprudential tools alone may not sufficiently address the cross-sectoral, global and systemic dimensions of climate-related risks, the report also presents examples of early thinking on macroprudential policies and tools. These include examining the potential use of systemic risk buffers by the European Central Bank and ongoing analysis of possible adjustments to capital adequacy requirements at the Bank of England.

“Under current prudential frameworks, there might be scope to use principle-based supervisory expectations and capital requirements to address particular aspects of climate-related financial risks,” the report suggests.

The FSB is considering a peer review of climate-related supervisory and regulatory practices across jurisdictions in 2024, comparing them against the report’s recommendations. It is also considering an update to the report’s recommendations in 2025.

Alongside the supervisory and regulatory report, the FSB also published a progress report on climate-related disclosures. That report outlines the work of the International Sustainability Standards Board in developing a global baseline climate reporting standard, along with progress on climate-related disclosure practices in different jurisdictions. Of the 24 jurisdictions examined, 20 reported having taken “additional actions in relation to setting requirements, guidance or expectations” on climate-related disclosures since March 2021.

Both reports were delivered to G20 finance ministers and central bank governors prior to their October 2022 meeting.

Established by the G20 in the aftermath of the 2008 financial crash, the FSB promotes the development and implementation of coordinated regulatory, supervisory, and other financial sector policies in the interest of global financial stability. It is currently chaired by Klaas Knot, president of De Nederlandsche Bank.