Climate Change – A Key Risk to Financial Stability

Although numerous financial regulators have moved towards incorporating climate-risk assessments into their planning and supervisory activities, climate change has been flagged as the most significant emerging risk for the Department of Treasury to address. Financial institutions must act by creating (or enhancing) a green strategy, while also managing their own financial exposures.  Both are essential to climate-risk management.

Financial institutions should consider the following related to climate-risk management:

  • Does an enhanced ERM or governance framework need to be established and implemented?
  • Does the governance structure need to be enhanced?
  • Should the current risk assessment be reevaluated and revamped?
  • Does the current modeling for analyzing and stress-testing need to be enhanced?
  • Is the business and credit strategy aligned?

Areas of focus have also emerged relating to increased coordination globally and to public and private partnering since the financial system must be prepared for credit and market risks related to any climate-related events. Rising expectations from investors and clients have also added to this push for alignment on climate risk.

Additionally, increased regulations are requiring financial institutions to effectively manage climate risk.  The Department of Treasury plays an important role in coordinating these regulatory efforts that relate to measuring and managing this risk. Overall, the global alignment surrounding these efforts is expected to accelerate under the new administration.

 

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