The Financial Stability Board (FSB) has released a report detailing an analytical framework and toolkit designed to assess climate-related vulnerabilities within the global financial system. This initiative aims to help the FSB and its members identify drivers of climate risks, exposures in the financial system, and quantify their financial impact.
This new framework builds on the existing FSB Financial Stability Surveillance Framework and leverages work by its members. It focuses on assessing climate-related vulnerabilities from both cross-border and cross-sectoral perspectives.
Climate shocks pose typical vulnerabilities like credit, market, and liquidity risks but are complex due to uncertainties regarding timing and magnitude. The framework outlines how physical and transition climate risks can be transmitted within the global financial system.
The accompanying toolkit includes three categories of metrics for monitoring these vulnerabilities: proxies for early signals of potential risks, exposure metrics to gauge direct and indirect exposures, and risk metrics to quantify impacts on financial institutions. These tools face methodological challenges that need resolution for effective global monitoring.
Sarah Breeden, Deputy Governor for Financial Stability at the Bank of England, stated: “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.” Nellie Liang from the US Treasury Department added: “The framework is a welcome addition to the FSB’s financial stability surveillance.”
Both documents will evolve as understanding improves regarding how climate-related vulnerabilities could affect financial stability. The FSB plans further development through operationalizing this toolkit and conducting detailed analyses of specific vulnerabilities with potential global implications.
The work aligns with the FSB Roadmap endorsed by G20 Leaders in July 2021, which addresses firm-level disclosures, data, vulnerability analysis, regulatory practices, among other areas. The FSB continues coordinating international efforts involving national authorities across 24 countries along with various international bodies.
Klaas Knot chairs the FSB which is headquartered in Basel under the hosting of Bank for International Settlements.