Analytical framework and toolkit
The Financial Stability Board (FSB) published a report on the assessment of climate-related vulnerabilities. Building on the FSB Financial Stability Surveillance Framework and work carried out by members, the report provides an analytical framework and toolkit to assess climate-related vulnerabilities, particularly from a cross-border and cross-sectoral perspective.
Climate shocks trigger the typical vulnerabilities in financial stability assessments – such as credit, market and liquidity risks – but they are more complicated to analyse given their nature and uncertainties around timing and magnitude. The analytical framework traces how physical and transition climate risks can be transmitted and amplified within the global financial system.
The toolkit will help identify the drivers of climate risks and related exposures in the financial system and real economy, and to quantify their financial impact. It comprises three categories of metrics to monitor climate-related vulnerabilities from a forward-looking perspective. These are:
- proxies to provide early signals on potential drivers of transition and physical risks;
- exposure metrics to gauge the extent of direct and indirect exposures in the real economy and the financial system; and
- risk metrics to quantify the impacts for financial institutions and the system as a whole.
While these metrics are already used by some FSB members domestically, various methodological and data challenges need to be overcome for them to be used for global monitoring.
The framework and toolkit will be refined as understanding of climate-related vulnerabilities evolves and as methodological and data issues are resolved.
