Climate Risk in Finance Part 2: Parsing the Current Global Regulatory Landscape

The pressure to measure the impact of climate risk on the financial system and for regulators to devise the methods to do so is mounting fast and furiously.  The United Nations’ most recent report on climate change released in February 2022 said that climate change is arriving faster than the world is adapting.

In November 2021, the global banking regulator and “central bank” to the world’s central banks, the Basel Committee on Banking Supervision, issued a consultative document “Principles for the effective management and supervision of climate related financial risks” to introduce sweeping rules to govern the growing need to manage financial climate risk.

Local regulators across the globe are in varying stages of testing and developing comprehensive methods and stress tests for banks to test their vulnerability to climate risk scenarios. 

 

Read: Climate Risk in Finance Part 1: The Concepts, the Impact and the Resources

UK/Europe

British and European banking regulators have been quick to call on the banks they supervise to test their resilience against climate risks. 

The Bank of England in February 2022 launched a second round of climate stress tests, the results of which are to be published in May. 

The European Central bank in January launched a supervisory stress test to assess how prepared banks are for dealing with financial and economic shocks stemming from climate risk.

North America 

In July 2021, the Office of the Comptroller of the Currency (OCC), which falls under the U.S. Department of Treasury and which regulates and supervises all national banks, appointed a Chief Climate Risk Officer, Darrin Benhart, in a newly created position. 

In mid-December 2021, the OCC issued a set of preliminary principles for the largest U.S. banks (with $100 billion of consolidated assets or more) to review and manage climate risk exposure.  This was in response to a report issued late last year by the Financial Stability Oversight Board (FSOC was created by the Dodd Frank Act in 2010 in response to the 2007-2008 financial crisis), identifying climate change as a threat to financial stability. 

In the meantime the New York Federal Reserve Bank in September released a report outlining measures for managing climate risks while the U.S. Securities and Exchange Commission is contemplating how the securities industry should best measure and disclose their greenhouse gas emissions. 

The Bank of Canada in tandem with the Office of Superintendent of Financial Institutions in January released results of a pilot program that will help the financial sector identify, measure and disclose climate-related risks.

Asia Pacific

In December 2021, the Hong Kong Monetary Authority (HKMA) issued results of a pilot climate risk stress test – (CRST) to direct banks towards better climate risk management practices. 

Also in December 2021, the Monetary Authority of Singapore issued a Financial Stability Review on risks to the banking system and included a section on climate risk, which explored climate risk management (see page 82 of the linked document). 

In November 2021, the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA) issued a joint statement saying that they would analyze and monitor the implications of climate change on the financial system and provide guidance to the banks they supervise to manage climate-related risks. 

Conclusion 

In sum, governments and regulatory bodies across the globe are paying stricter attention to how any of a number of climate risks could affect the stability of the financial system at large, and are beginning to devise methods to test the resiliency of the banks they monitor. It is only a matter of time before all global banks operating on a large scale will need to begin testing their portfolios and assets and develop clear methods and processes to best manage climate-related financial risk.