Financial Risks from Climate Change
Key developments and takeaways from 2020
2021 offers an important challenge to the Financial Services Industry – being able to quantify climate impact. The increased expectations from regulatory authorities has made it a key priority for most financial institutions in 2021 and successfully meeting those expectations calls for a cross-functional team effort. This summary explores some of these expectations, provide insight into Nordic themes and give considerations for how firms can prepare.
Financial services regulators are increasingly expecting industry participants to recognise the importance of climate-related risks and to respond with a coherent climate risk plan to manage the financial risks from climate change (FRfCC). This trend has become global, with supervisory authorities from Hong Kong to Canada accelerating the adoption of climate risk management practices, in varying degrees and some making adoption mandatory. Two jurisdictions – the European Union and the United Kingdom (UK) - serve as notable examples (see timeline below) with numerous papers and consultations published on this topic during 2020. These examples make it clear that there is an increased expectation on banks to adequately address the FRfCC and reassess their strategic resilience to climate change policy. This trend is expected to continue in 2021 with key guidance expected from the European Banking Authority (EBA) on e.g., disclosure of Pillar 3 ESG risks and reports on ESG integration into risk management. Similarly, the UK Prudential Regulatory Authority (PRA) will launch the Bank of England (BOA) 2021 stress test, including climate risk, and banks will be required to have fully embedded approaches to managing climate-related financial risks by the end of 2021.
Financial Services Industry participants are increasingly expected to recognise the importance of climate-related risks and to respond with a coherent climate risk plan
The Nordic regulatory authorities have been largely following European developments rather than issuing their own direct guidance on the topic of assessing and managing FRfCC for the banking sector. Climate-related risks and its regulation are, and will continue to be, a key area of supervisory focus for the foreseeable future. The Danish FSA, the Norwegian FSA and the Swedish FSA announced that they in 2021 will look at how financial firms measure and report climate-related risks.
Supervisory focus on climate risk measurement and reporting in the Nordics during 2021