- Analytical framework will help the FSB and its members assess the build-up of climate-related vulnerabilities in the global financial system.
- A new toolkit of forward-looking metrics based on this framework will help identify the drivers of climate risks and related exposures in the financial system and real economy, and to quantify their financial impact.
- The framework and toolkit will be refined as understanding of climate-related vulnerabilities evolves and as methodological and data issues are resolved.
The Financial Stability Board (FSB) published a report on the assessment of climate-related vulnerabilities. Building on the FSB Financial Stability Surveillance Framework and work carried out by members, the report provides an analytical framework and toolkit to assess climate-related vulnerabilities, particularly from a cross-border and cross-sectoral perspective.
Climate shocks trigger the typical vulnerabilities in financial stability assessments – such as credit, market and liquidity risks – but they are more complicated to analyze given their nature and uncertainties around timing and magnitude. The analytical framework traces how physical and transition climate risks can be transmitted and amplified within the global financial system.
A toolkit accompanying the framework comprises three categories of metrics to monitor climate-related vulnerabilities from a forward-looking perspective. These are: (i) proxies to provide early signals on potential drivers of transition and physical risks; (ii) exposure metrics to gauge the extent of direct and indirect exposures in the real economy and the financial system; and (iii) risk metrics to quantify the impacts for financial institutions and the system as a whole. While these metrics are already used by some FSB members domestically, various methodological and data challenges need to be overcome for them to be used for global monitoring.
“The framework provides a forward-looking approach to be able to capture the unique aspects of climate risks while staying rooted in traditional financial stability analysis”, said Sarah Breeden, deputy governor for Financial Stability at the Bank of England and chair of the FSB group that prepared the report, in a statement.
Nellie Liang, under secretary for Domestic Finance at the US Treasury Department and chair of the Standing Committee on Assessment of Vulnerabilities (SCAV) that oversaw the preparation of the report, said in a statement: “The framework is a welcome addition to the FSB’s financial stability surveillance. The case study in the report examining the potential consequences of the crystallization of climate physical risks via real estate markets and changes in insurance coverage illustrates how the framework can be applied in practice.”
The framework and toolkit are live documents, subject to refinement as understanding evolves on how climate-related vulnerabilities could affect financial stability. The FSB will continue to develop the framework by operationalizing the toolkit and conducting in-depth analyses of specific climate vulnerabilities that may have global financial stability implications.