Climate-related financial risks require new methodologies that account for the unpredictable and long-term nature of climate change, according to this paper from the Bank for International Settlements.
The report looks at how banks and supervisors are currently approaching the measurement of climate-related risks. It finds that to date they have focused on the near-term effects of the transition to a low-carbon economy and primarily on credit risk, with less attention given to other categories.
The findings are informed by a survey conducted among members of the Basel Committee’s Task Force on Climate-Related Financial Risks and workshops with the banking industry in 2020.
The report points out that the systemic nature of climate change is likely to imply many interconnections and feedback loops, non-linearities and tipping points. In order to provide a comprehensive assessment of its risks, banks and supervisors will need to evaluate technological, policy and market shocks which might only be material beyond the horizons they usually use.
This page was last updated October 22, 2021
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