Climate Risk - Definitions, Measurement, Current Practices and Regulatory Oversight (June 2022)

The first thought leadership paper from the Alliance for Green Commercial Banks provides a primer on climate risk and its broad reverberations in the financial services industry. It offers an overview of the effects of climate risk on financial institutions and financial markets, discusses new techniques for measuring climate risk, and explores the evolving practices of financial institutions in tackling it, as well as the related regulatory initiatives. The paper concludes with a few considerations regarding climate resilience going forward. This thought leadership paper was prepared by the Alliance for Green Commercial Banks in partnership with the Hong Kong Institute for Monetary and Financial Research, the research arm of the Hong Kong Academy of Finance.

The key takeaways of the paper are as follows:

  • Climate risk can disrupt financial institutions’ operations, lending and underwriting activities, and investments in affected securities. The research findings show that it also affects the prices of real estate, equities, and bonds.
  • Various climate risk indicators and scenario-based methods are being developed to measure climate risk. However, challenges still exist due to the availability, reliability and comparability of data and methods.
  • Regulators are developing mandatory and standardized climate risk disclosure frameworks. Climate stress tests are being conducted to assess the resilience of a financial system to climate risk.
  • The paper also highlights the importance of raising the awareness of climate risk, adopting a holistic and coherent approach to address climate risk, and developing capabilities in capacity, resources, and expertise to face the challenges that climate risk may pose in the future.