Climate Risk in Banking: Who Are the Regulators and Other Key Players?

by | Apr 11, 2024 | Climate Risk | 0 comments

This blog series explores initial industry research into managing climate risk so that you understand what is at stake for your financial institution (FI), as well as how to get started with measuring and mitigating this emerging source of risk. Read the first post in the series for an explanation of the different types of climate risk and why analyzing the potential impact of climate change on your FIs portfolio is important.

 

So that you can attend your first meetings on climate risk, and have a beginner level of understanding, it is worth reviewing the following entities and reading up-to-date reports, case studies, and publications.

What is not listed here are your country’s data and statistical agencies which will have employment, industry, and climate information for your use. For example, the Government of Canada has historical weather data, climate data, and related information for numerous locations across Canada[i].

From what we have seen around the world, you should consider your central bank and regulators as your primary resources for direction when push comes to shove.

Financial Stability Board (FSB)

Started in 1999, the FSB sets internationally agreed policies and minimum standards that its members commit to implementing at a national level. For example, here you can find an annual report that takes stock of the progress by standard-setting bodies and other organizations in addressing the financial risks from climate change.

Network of Central Banks and Supervisors for Greening the Financial System (NGFS)

A network of central banks originally established at the “One Planet Summit” in December 2017, its purpose is to help strengthen the global response required to meet the goals of the Paris climate agreement. This is the source of the most widely-used climate change scenarios, which can be found here, as well as frequent updates and improvements made to methodologies by financial institutions, found in their publications library.

Climate Analytics (CA)

CA was formed in 2008 to bring cutting-edge science and policy analysis to bear on human-induced climate change. It contributes to NGFS scenarios mainly through the procurement and organization of physical risk pathways. Here you can explore physical climate scenarios at a national or sub-national level that correspond to the NGFS scenarios mentioned above.

When financial firms might have to reveal their climate risk

Following extensive public discourse spanning two years, the U.S. Securities and Exchange Commission endorsed the country’s inaugural national climate disclosure regulations on March 6, 2024. These rules outline obligations for publicly traded firms to disclose their climate-related risks and, in certain instances, their greenhouse gas emissions.

What is the Climate Financial Risk Act?

Introduced on May 28, 2021, this legislation focuses on addressing the risk of climate change and its potential effects on the financial sector. It mandates the Federal Reserve Board to conduct financial risk assessments concerning climate change for designated large nonbank financial firms and bank holding companies.

International Financial Reporting Standards Foundation (IFRS)

The IFRS Foundation is a not-for-profit, public interest organization established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards. IFRS has two standard-setting boards, the International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB). The ISSB has issued two standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.

Task Force on Climate-related Financial Disclosures (TCFD)

Created by the FSB to improve and increase reporting of climate-related financial information, with the goal of standardizing the information available to investors, insurance underwriters and others. The TCFD was recently disbanded and its responsibilities were transferred to the IFRS Foundation upon the publication of IFRS S1 and IFRS S2.

What is the TCFD and climate risk program?

UNEP FI’s Climate Risk and TCFD program takes a leadership role in developing good practices to identify, measure, disclose, and manage climate risk in the financial sector.

Taskforce on Nature-related Financial Disclosures (TNFD)

Broadening the scope from climate to nature-related financial risk, this is a new organization with similar goals as the TCFD and the ISSB. Their recommendations for nature-related financial disclosures can be found here.

National Institute of Economic and Social Research (NIESR)

A charity founded in 1938, independent of all party-political interests and recipient of no core funding from government, this is Britain’s longest-established independent research institute. NIESR is the creator of the National Institute Global Econometric Model (NiGEM) (Twitter feed here) used by many central banks and international organizations. The model accepts inputs and assumptions from many climate science researchers and forms the basis of the NGFS scenarios mentioned above.

Below are the institutions creating three main sets of inputs to the NiGEM model mentioned above. As a start, it’s likely enough to know that they exist, but their contributions to climate risk analysis shouldn’t be ignored.

Joint Global Change Research Institute (JGCRI)

Established in 1998 as a partnership between Pacific Northwest National Laboratory (PNNL) and the University of Maryland and known for its research, modeling and integrated analyses at the interface of human, energy, and environmental systems. This institution produces the Global Change Analysis Model (GCAM) inputs to NiGEM and forms one set of the NGFS scenarios.

International Institute for Applied Systems Analysis (IIASA)

Formed in 1972, an international research institute originally created to bridge the Cold War divide that advances systems analysis and applies its research methods to identify policy solutions to reduce human footprints, enhance the resilience of natural and socioeconomic systems, and help achieve sustainable development goals. This institution produces the MESSAGEix-GLOBIOM (energy and land use modeling) inputs to NiGEM and forms another set of the NGFS scenarios.

Potsdam Institute for Climate Impact Research (PIK)

Founded in 1992, a German-based worldwide leading institution in the fields of inter-disciplinary climate impact research for global sustainability and enabling a safe and just climate future. This institution produces the REMIND MAgPIE (REgional Model of Investment and Development/Model of Agricultural Production and its Impacts on the Environment) inputs to NiGEM and forms the third set of the NGFS scenarios.

Next up: How can your FI begin drafting a climate risk action plan?

Which agencies issue principles for climate-related financial risk management for large financial institutions?

In the U.S., the OCC, Board, and FDIC (together, the agencies) are jointly issuing principles that provide a high-level framework for the safe and sound management of exposures to climate-related financial risks (principles). Globally, other key players setting climate risk disclosure regulations include IFRS, IIASA and PIK, among others.

Is the FDIC involved in climate change risk?

The FDIC is not responsible for climate policy and does not tell banks which customers to serve. Financial institutions should fully consider climate–related financial risks—as they do all other risks—and continue to take a risk–based approach in assessing individual credit and investment decisions.

[i] Historical Climate Data https://climate.weather.gc.ca/

Joey Doyle, business analytics consultant with FRG, has more than 15 years of experience in risk analysis. With a background in pure mathematics and education, Joey tends to build analytics from the ground up using first principles and innovative thinking. His experience includes modelling, strategy, provision and stress testing analytics.

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