Assessing exactly how climate change risk permeates through the financial system is a multi-step process. The first task is to identify the types of risk relating to climate change. These risk concepts are relatively well developed and HSBC Global Research have written about them previously in ‘Keeping it Cool: Assessing Climate Risks’. They relate to how greenhouse gases will be reduced to limit further temperature rises (transition risk) and the impacts of warmer temperatures (physical risk).

    The second, and far more complex task, is to identify exactly how and when these risks could manifest through the real and financial economy, and the associated consequences for the financial system as a whole. With this in mind, risk resilience can be built in. The HSBC Centre of Sustainable Finance started to examine this with risk colleagues in ‘Managing Financial System Stability – A preliminary Guide’ in October 2018.

    Now, the Network for Greening the Financial System (NGFS) is moving this agenda forward. The group, a coalition of 34 central banks and supervisors willing to share best practises and develop climate related risk management in the financial sector, have published their first comprehensive guide; ‘A call for action: Climate Change as a source of financial risk’. The report provides 6 recommendations, mainly aimed at central banks and regulators, for furthering the understanding and management of climate change sources of financial risk.

    1. Integrate climate-related risks into financial stability monitoring and micro-supervision
    2. Integrate sustainability factors into own-portfolio management
    3. Bridging the data gaps
    4. Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing
    5. Achieving robust and internationally consistent climate and environment-related disclosure
    6. Supporting the development of a taxonomy of economic activities

    In practise, the immediate next steps are an exercise in mapping physical and transition risk channels within the financial system and adopting key risk indicators to monitor these risks. Currently, this is mostly about examining risk channels through a narrative rather than modelling process, but, over time, as taxonomies for the green landscape develop and relevant data becomes more widespread, quantitative analysis will be developed and likely become the norm.

    The NGFS group are now working on a handbook on climate and environmental risk management for supervisory authorities and financial institutions to set out detailed and concrete steps for them to better understand, measure and mitigate exposures to climate and environmental risks, as well as voluntary guidelines on scenario-based risk analysis. The HSBC Centre of Sustainable is working with internal and external partners to build knowledge and capacity to progress climate risk analysis for the financial system.


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