Supervisory expectations relating to risk management and disclosure.
Climate change and environmental degradation are sources of structural change that
affect economic activity and, in turn, the financial system. Climate-related and
environmental risks are commonly understood to comprise two main risk drivers:
Physical risk
Refers to the financial impact of a changing climate, including more
frequent extreme weather events and gradual changes in climate, as well as of
environmental degradation, such as air, water and land pollution, water stress,
biodiversity loss and deforestation. Physical risk is therefore categorised as
“acute” when it arises from extreme events, such as droughts, floods and storms,
and “chronic” when it arises from progressive shifts, such as increasing
temperatures, sea-level rises, water stress, biodiversity loss, land use change,
habitat destruction and resource scarcity. This can directly result in, for
example, damage to property or reduced productivity, or indirectly lead to
subsequent events, such as the disruption of supply chains.
Transition risk
Refers to an institution’s financial loss that can result, directly or
indirectly, from the process of adjustment towards a lower-carbon and more
environmentally sustainable economy. This could be triggered, for example, by a
relatively abrupt adoption of climate and environmental policies, technological
progress or changes in market sentiment and preferences.
A complimentary document on Principles of Values-Based Banking.
Re-published: 8 May 2022
Best regards,
David James Connolly