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November 16, 2022

FSB, NGFS warn about ‘understated’ risk in climate scenarios

The Financial Stability Board and the Network for Greening the Financial System have published a joint report on the analyses undertaken by central banks and other financial authorities to assess climate-related financial risks, warning that, in many cases, these may be understated.

As part of the study, the FSB and NGFS surveyed 53 institutions from 36 jurisdictions part of their networks that have completed, are conducting or planning to conduct a climate scenario analysis exercise. The report considers analysis at the individual company’s level, at different financial sectors’ level, and the overall financial system level.

Among the key findings, the report notes that “many respondents highlight that measures of exposure and vulnerability are likely understated”. The authors explain that one one of the reasons behind this is that “in many cases, metrics are not capturing
second-round effects, potential climate non-linearities, and the costs and potential further externalities from risk management measures taken by financial and nonfinancial firms.”

Further, the report finds that many climate scenario exercises “also did not consider other potentially large sources of risk, such as those stemming from an abrupt correction in asset prices when transition shocks result in fire sales of assets in exposed sectors.” It also notes that limited data and issues around modelling also suggest that financial authorities’ preliminary findings may understate the actual financial risks and impact of climate change.

It is worth a read.

Read the report

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