Climate-related risks need to be identified and managed

The Swedish Central Bank, Riksbank, has published its new Climate Report 2023 which basically includes three key elements:
1. a description of why climate change risks matter and who is affected by climate change risks. In this context, Riksbank also urges all financial market participants to take adequate measures to identify, monitor, and mitigate climate change risks – before they become major threats not only to companies, but to the financial market resilience as a whole.
2. a description of how climate change risk affects the (policy) work of the regulator and is taken into account in the following areas, among others:
– the creation and maintenance of an adequate monetary policy;
– the bank’s asset management policies and investment criteria;
– the bank’s work on financial stability; and
– the bank’s regulatory work with respect to supervised financial institutions.
3. a first discussion of Riksbank’s intention to introduce a new climate change risk stress tests for banks. Therein, Riksbank describes currently ongoing work with respect to the development of adequate climate change risk scenarios for banks which – at the current time – would include a drastic increase in the price of emission allowances to simulate the effects on loans to corporate entities, among others. In this context, the Bank also notes that it currently expects transition risks to pose a greater threat to financial institutions than do physical risks due to the fact that transition risk affect everyone, from households, to investors, to corporate entities – e.g. via rising energy costs, thus less spendable income, thus increasing consumer and wholesale prices, thus rising inflation, etc. Therefore, Riksbank plans to focus on transition risk with one of the variables being the prices of emission allowances. The stress test would be primarily used to determine a bank’s financial resilience and capital adequacy.
Finally, Riksbank also briefly describes its mandate under the new Sveriges Riksbank Act in view of climate risk mitigation which requires the Bank to identify climate change related risks that could possibly affect financial stability in Sweden and to take measures to counteract such risks.
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Details on the report may be found in the enclosed document or if you follow above noted link.