Climate change is not just an environmental issue; it's a financial one too. The Financial Stability Board (FSB) has been at the forefront of addressing the financial risks associated with climate change. Their 2023 progress report on the "FSB Roadmap for Addressing Financial Risks from Climate Change"1 provides valuable insights into the progress made and the challenges ahead. 

Progress Made

The FSB has made significant strides in several key areas:

Firm-level Disclosures: The final guidelines for general sustainability-related disclosures (IFRS S12) and climate-related disclosures (IFRS S23) have been released by the International Sustainability Standards Board (ISSB). These guidelines will act as an international framework for sustainability disclosures, allowing businesses all across the world to make disclosures consistently. Entities must disclose relevant information regarding their exposure to climate-related risks and opportunities under IFRS S2, which expands on the recommendations of the FSB's Task Force on Climate-related Financial Disclosures (TCFD). The disclosures concentrate on the business's governance, strategy, and risk management as well as the measurements and targets employed to gauge, track, and manage the opportunities and hazards associated with climate change. Additionally, entities must report any transition plans they may have that are relevant to climate change. 

The report outlines additional efforts to improve the comparability, consistency, and decision-usefulness of climate-related financial disclosures in addition to the ISSB's criteria. For instance, the European Union has finished its public consultations on standards for reporting on sustainability and is about to adopt those standards in their entirety4. Additionally, the US Securities and Exchange Commission suggested rule changes that would mandate the inclusion of specific climate-related information in periodic reports and registration statements5.

The report highlights the significance of compatibility between the global disclosure framework for climate change developed by the ISSB and the unique criteria established by national and regional jurisdictions. To prevent any possibility of double reporting by enterprises, the ISSB's Jurisdictional Working Group and the ISSB as a whole are having bilateral negotiations with various jurisdictions.

The Basel Committee on Banking Supervision (BCBS), which developed a consultation document on a proposed Pillar 3 disclosure system for climate-related financial risks, is also acknowledged in the report. With a set of disclosure obligations tailored specifically for banks, this framework seeks to improve upon and supplement the ISSB's disclosure standards.

Data: The FSB has been focusing on improving the availability, quality, and cross-border comparability of climate data. The objective is to create global repositories that enable open access to data and the use of measures that reliably and consistently reflect climate-related hazards across industries and governments.

In order to create climate scenarios for use in risk analysis, the Network for Greening the Financial System (NGFS) has played a crucial role in this process. The NGFS is also working on a data gaps programme67 that attempts to identify and address the data requirements that supervisors and central banks need in order to monitor risks associated with climate change.

Another programme that has been attempting to increase the accessibility and calibre of climate data is the Global Monitoring Environment (GME). A worldwide environmental data plan is being created by the GME with the goal of improving the accessibility, usefulness, and quality of environmental data.

The work carried out by the International Monetary Fund (IMF) as part of the Data Gaps Initiative (DGI) is also highlighted in the report. The DGI strives to enhance the quality and availability of data required for financial sector policy formulation and risk assessment. The IMF has been focusing on enhancing the scope, specificity, and quality of data on non-financial firms' exposures and vulnerabilities to climate-related risks as part of this project.

These organisations have played a critical role in increasing climate data's accuracy, consistency, and quality, which is essential for supporting exercises in scenario analysis and climate risk assessment.

Vulnerabilities Analysis: The creation of conceptual frameworks and measures for tracking climate-related vulnerabilities is progressing. The development of "Scenario analysis," a method used by financial institutions to evaluate the potential effects of various climate-related scenarios on their operations and financial performance, is explicitly mentioned. The NGFS, which has been creating climate scenarios for use in risk analysis, is highlighted in the paper89. 

Despite these developments, the study stresses the need for additional work to integrate climate scenarios into the monitoring of financial vulnerabilities and to deepen understanding of the cross-border and cross-sectoral transmission of climate shocks in order to acquire insights into financial stability. This includes the need to comprehend how climate change may affect financial stability, how risks associated with the environment can spread across industries and borders, and how the financial system may amplify certain hazards.

The report also emphasises the significance of advancing adequate risk management procedures and enhancing the financial system's resistance to climate change concerns. This includes the requirement for financial institutions to keep enhancing their risk management procedures and boosting their resistance to hazards associated with climate change.

Regulatory and Supervisory Practices and Tools: There are ongoing efforts to include climate-related risk into risk management and prudential frameworks. A Transition Plans Working Group is being established by the FSB to create a conceptual understanding of the value of transition plans for both financial and non-financial enterprises. The role of transition plans of financial institutions and non-financial corporates is receiving more attention as work on regulatory and supervisory approaches to climate-related risks develops. These plans not only enable an orderly transition, but they also serve as a source of information for financial authorities to assess micro and macroprudential risks.

It will be crucial to guarantee strong coordination between the FSB, standard-setting bodies (SSBs), and other relevant bodies given the number of initiatives that have started or are being explored. The report emphasises that the non-financial corporate sector must make comparable progress in order for financial institutions to address climate-related financial risks in all blocks of the Roadmap, including firm-level disclosures, closing data gaps, and transition plans.

Key Areas for Future Work

Despite the progress, there are significant challenges ahead and key areas that need to be addressed:

Firm-level Disclosures: The steps that follow will be essential to creating internationally consistent, comparable, and relevant disclosures on financial risks and opportunities associated to climate change. The FSB will collaborate with pertinent organisations to encourage the prompt and widespread adoption of the ISSB standards. The work of IOSCO to explore endorsement will be a crucial first step. If IOSCO approves the standards, jurisdictions must act quickly to decide how to adopt, implement, or otherwise make use of the standards. To encourage the adoption of these standards, the ISSB, IOSCO, and the World Bank are all cooperating on capacity building initiatives.

The International Auditing and Assurance Standards Board (IAASB) is creating a new overarching standard for assurance on sustainability-related information, and the International Ethics Standards Board for Accountants (IESBA) is creating ethics and independence standards for sustainability assurance practitioners, both of which are mentioned in the report. By the end of 2024, both requirements must be completed.

Data: To create measures that assess climate-related hazards in the future, more effort is required. To assist climate risk assessment and scenario analysis exercises, it is ongoingly necessary to improve climate data, including its accuracy, consistency, and quality. These initiatives will be essential for increasing the financial system's resistance to hazards associated with the climate.

Vulnerabilities Analysis: In order to get insights into financial stability, further work is required to integrate climate scenarios into the monitoring of financial vulnerabilities and to enhance understanding of the cross-border and cross-sectoral transmission of climate shocks. For the purpose of controlling and reducing financial risks associated with climate change, it will be essential to comprehend the potential routes taken by climatic shocks via the financial system.

Regulatory and Supervisory Practices and Tools: The role of transition plans of financial institutions and non-financial corporates is receiving more attention as work on regulatory and supervisory approaches to climate-related risks develops. These plans not only enable an orderly transition, but they also serve as a source of information for financial authorities to assess micro- and macroprudential risks. Financial institutions are increasingly required to modify their risk management procedures and boost their resistance to climate-related hazards as the regulatory environment changes. This includes the requirement for financial institutions to keep enhancing their risk management procedures and boosting their resistance to hazards associated with climate change.

Annex: Key Actions and Deliverables for the Roadmap

The FSB's report also includes an annex titled "Key Actions and Deliverables for the Roadmap". This section is a crucial part of the report as it outlines the specific objectives, measurable actions, and deliverables that are expected to be achieved as part of the roadmap. 
The annex offers a concise and organised plan that divides the challenging task of mitigating financial risks associated with climate change into actionable and manageable actions. It outlines the most important steps that must be followed, who is in charge of each step, and the anticipated time frame for completion. This strategy makes sure that everyone is in agreement about what has to be done, who needs to accomplish it, and by when. It offers a plan of attack and a structure for accountability, guaranteeing that advancement can be followed and gauged over time.
It is crucial to include indicative timelines since they create a sense of urgency and a precise time frame for action. It makes sure that everyone involved is aware of how urgent the current work is and how important it is to act quickly.
In summary, the annex offers a precise and practical path for dealing with the financial risks brought on by climate change. It outlines the primary steps that must be followed, designates who is in charge of each step, and offers a schedule for completion, ensuring that progress can be monitored and evaluated over time.

Personal Opinion

I am encouraged by the FSB's progress in tackling the financial risks related to climate change as an observer of the financial landscape. It is excellent that attempts have been taken to establish a worldwide framework for sustainability disclosures and enhance the calibre of climate data. The path ahead, meanwhile, is not without obstacles. Interoperability requirements and the creation of a worldwide assurance framework for corporate reporting on sustainability are significant tasks which require for global commitment and cooperation.

The next 12 months will be crucial. The timely adoption of the ISSB standards and the continued reporting to the G20 are steps in the right direction. However, it is important to remember that the success of these initiatives depends not only on the financial sector but also on the non-financial corporate sector. Both sectors must work together to address climate-related financial risks effectively.

The coming year will be significant. Adopting the ISSB criteria on schedule and continuing to report to the G20 are positive moves. It is crucial to keep in mind that the non-financial corporate sector is just as critical to these projects' success as the finance sector is. To properly manage financial concerns associated to climate change, both sectors must collaborate.

The financial landscape related to climate change is intricate and dynamic. However, I think we can successfully navigate this environment with continuing advancement and cooperation, maintaining financial stability while addressing the pressing issue of climate change.

Closing Remarks 

The FSB's 2023 progress report on mitigating financial risks from climate change offers a thorough review of the advancements made in the four important areas of firm-level disclosures, data, vulnerabilities analysis, and regulatory and supervisory methods. The study underlines the tremendous progress made thus far and emphasises the significance of coordinated worldwide efforts to address these challenges.

The report also emphasises the necessity of more effort and advancement in each of these areas. It will take the combined efforts of all stakeholders to navigate the complicated path to a financially viable future. It is obvious that there is still a long way to go, and the next decisions will have a significant impact on how the financial industry will develop in the face of climate change.

The report serves as a personal reminder of the urgency and significance of the task at hand. The progress gained thus far is encouraging, and the financial sector has a crucial role to play in the international response to climate change. There is no space for complacency, though, given the size and complexity of the problem.

Maintaining the momentum acquired, continuing to innovate and adapt, and, most importantly, making sure that the financial industry is robust and ready for the dangers and possibilities that climate change provides will be crucial as we move forward. The path ahead may be difficult, but with persistent work and cooperation, we can guarantee a stable and prosperous financial future.

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1  https://www.fsb.org/wp-content/uploads/P130723.pdf 
2  https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s1-general-requirements/
3  https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s2-climate-related-disclosures/
4  https://www.efrag.org/lab6 
5  https://www.sec.gov/rules/proposed/2022/33-11042.pdf 
6  https://www.ngfs.net/sites/default/files/medias/documents/final_report_on_bridging_data_gaps.pdf 
7  https://www.grantthornton.com.cy/insights/quantitative-risk-articles/ngfs-series-bridging-data-gaps--the-future-of-climate-data/ 
8  https://www.ngfs.net/sites/default/files/medias/documents/ngfs_climate_scenarios_for_central_banks_and_supervisors_.pdf.pdf 
9  https://www.grantthornton.com.cy/insights/quantitative-risk-articles/ngfs-scenarios-for-central-banks-and-supervisors--phase-iii-scenarios/ 

Authors

Andreas Spyrides
Andreas Spyrides
Quantitative Risk Leader
Nicosia
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