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Financial Stability Board Issues Report on Implications of Climate Change for Financial Stability

Mayer Brown
09/12/2020

The G20’s Financial Stability Board (FSB) issued a report, “Implications of Climate Change for Financial Stability,” on November 23, 2020 (Report).

In the Report, the FSB:

  • discusses the potential implications of climate change for financial stability;
  • investigates channels through which climate-related risks might impact the financial system; and
  • examines potential mechanisms within the financial system that might amplify the effects of climate-related risk as well as the cross-border transmission of risks.

The Report identifies how risks to financial stability from climate change may differ from risks from other vulnerabilities or forms of structural change, noting that the effects of climate change may be far-reaching in their breadth and magnitude, affecting a wide variety of firms, sectors and geographies in a highly correlated manner. The FSB also notes that different types of climate-related risks (e.g., physical and transition) may occur simultaneously, which might amplify their effect on the financial system. Finally, the FSB states that risks to the financial system from climate change tend to be particularly uncertain in both their severity and timing.

The FSB notes the difficulty of quantifying risks to financial stability from climate change precisely and states that the future path of climate change and its impact on the financial system are highly uncertain. The FSB also notes a current shortage of data by which to measure financial institutions’ exposures to climate-related risks. It is unclear whether the financial system’s responses to past climate-related shocks have amplified their economic impact.

Somewhat controversially (as some had hoped that the FSB would provide more specific guidance now), the Report concludes by stating that the FSB will conduct further work to assess the availability of data through which climate-related risks to financial stability could be monitored as well as any data gaps.