The second report provides an overview of conceptual issues related to climate-related financial risk measurement and describes banks' and supervisors' current and emerging practices.
Key points to note
- Climate-related financial risks have unique features, which means that sufficiently granular data and forward-looking measurement methodologies have to be developed and conventional risk management tools may need to be adapted to incorporate those risks.
- Currently credit risk measurement has attracted the most effort, with a lesser focus on other risk categories.
- The work done by banks is continuing to gather pace. Banks and supervisors are in the initial stages of translating climate risks into robust, quantifiable financial risks. Initial scenario analyses and stress tests have focused on selected portfolios or exposures for transition risks, and selected hazards for physical risks.
- A range of methodologies is currently in use or is being developed; however, challenges remain in the estimation process, including data gaps and uncertainty associated with the long-term nature and unpredictability of climate change. As banks address these challenges, their ability to estimate and effectively mitigate climate-related financial risks will improve.