Regulatory expectations for measuring, monitoring, and mitigating climate-related financial risk are rapidly evolving.
Pushed largely by significant and widespread investor demand and facilitated by myriad voluntary disclosure frameworks, financial services companies are working toward measuring, monitoring, and mitigating their climate-related financial risk. Regulatory expectations in this area have experienced sweeping changes that will continue, with rigor, into 2022 under existing and expanded jurisdictional authority. Federal financial agencies must develop, and execute on, a strategy to quantify, disclose, and mitigate the financial risk of climate change on both public and private assets. Public policy seeks to advance “consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk,” and “to mitigate that risk and its drivers, while accounting for addressing disparate impacts on disadvantaged communities and communities of color.”
Explore here insights from the KPMG report Ten key regulatory challenges of 2022.
of US CEOs said they are seeing significant demand for increased reporting and transparency on ESG issues today from stakeholders.
Source: KPMG 2021 US CEO Outlook Survey
Without effective climate governance structures in place, a company may struggle to make climate-informed strategic decisions, manage climate-related risks, and establish and track climate-related metrics and targets. Climate risk is an issue that drives financial risk and opportunity; good governance should intrinsically include effective climate governance. For many companies, however, climate-related financial risk is a complex issue that entails grappling with scientific, macroeconomic, and policy uncertainties across broad time scales and beyond board terms.
Regulators expect companies to:
Although there are not yet formal regulatory requirements in the US to conduct climate-related scenario analysis or stress testing, regulators do expect financial institutions to have systems in place to identify, measure, control, and monitor material risks, including climate risks. Globally, climate scenario analysis is emerging as a vital tool in assessing the impact of climate-related risks on financial institutions and financial stability more broadly.
Climate risk-related impacts and many of the efforts to control them (such as advancing net zero emissions goals and making climate resiliency investments) can exacerbate existing vulnerabilities. Physical risk events (e.g., floods, fires, storms, or rising sea levels) are geographically concentrated and can have spillover effects that place additional burden on vulnerable individuals, businesses, and municipalities such as spikes in insurance rates; impaired values, and potentially impaired usability, of properties and infrastructure; and investor abandonment. Transition risks (e.g., policy changes, consumer behavioral preferences) may initiate abrupt repricing events and result in stranded assets and impaired values.
Policy makers, regulators, institutions, and industry groups are all exploring options, such as:
The year 2022 brings high levels of risk and regulatory supervision and enforcement. Regulatory “perimeters” continue to expand, and regulatory expectations are rapidly increasing. All financial services companies should expect high levels of supervision and enforcement activity across ten key challenge areas. Read the full report to learn more.
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