Climate change and the associated regulatory measures bring opportunities and risks for the financial economy. Various national and international initiatives have been launched to address this subject. FINMA is involved in work being carried out by the federal authorities on sustainability in the financial economy and is supporting the analysis being conducted by the working group on sustainable finance headed by the State Secretariat for International Finance (SIF) with its technical expertise. FINMA has also been a member of the Network for Greening the Financial System (NGFS) since 2019. This network of international central banks and supervisors is committed to better understanding and managing the financial risks of climate change.
In line with its mandate, FINMA is primarily responsible for supervising compliance with the legal requirements in the financial market area. In accordance with the financial market acts, FINMA’s mission is to protect creditors, investors, and insured persons as well as to ensure the proper functioning of the financial markets. It follows from this that its focus in connection with the climate issue is also on the potential risks for prudentially supervised institutions. From a consumer protection perspective, the risk of greenwashing in the provision of financial services and the distribution of financial products is of significance for FINMA.
Climate change is an increasing risk factor for the economy and for society at large. The effects of climate change could also pose significant financial risks for financial institutions in the longer term. On the one hand, climate change entails physical risks for market participants, particularly for insurance companies, for example in the form of rising natural catastrophes and their associated costs. On the other hand, financial institutions can be indirectly affected by so-called transition risks as a result of action taken on climate policy. For example, illiquid assets in affected sectors can be exposed to increased valuation risks in the balance sheets of financial institutions. With respect to these potential climate-related financial risks for the financial market, FINMA deems it important that the supervised institutions are managing these risks appropriately. The onus is on them to minimise potential climate risks and, where necessary, to develop their instruments and processes to this end. These climate-related financial risks can be translated into the traditional risk categories of credit, market, insurance or operational risks and should be identified using these. Thus, this is not a new risk category, but a new risk driver. In principle, financial institutions can build on their existing risk management. However, new developments and risk drivers must also be identified effectively and managed appropriately as part of risk management.
For its part, FINMA analyses where there could be increased risks in connection with climate change for supervised Swiss institutions (see Risk Monitor 2019). The process for this is comparable to that for other risk drivers. By conducting its own analyses and entering into dialogue with the supervised institutions, associations, non-governmental organisations and academia, increased financial risks at individual institutions can be identified. FINMA’s main focus here is on the biggest supervised institutions, where institution-specific analyses are being conducted.
From a consumer protection perspective, FINMA is also addressing the risks of greenwashing in the provision of financial services and the distribution of financial products. Consumers may not be deceived by exaggerated or misleading claims about “green” properties, for example in the case of investment products.
In addition, FINMA is reviewing approaches for improved disclosure of financial climate risks. More comprehensive and uniform disclosure of their own climate-related financial risks by the biggest financial market players can improve transparency and market discipline.
In view of the still ongoing discussion regarding the exact definition of climate policy measures, FINMA also considers it important to raise awareness of the corresponding risks among the supervised institutions. Collectively, financial institutions and supervisory authorities around the world are still in the process of developing an established practice. In particular, they are working to develop and adopt suitable approaches and instruments to measure and minimise the risks as well as to ensure the transparent disclosure of the corresponding risks. In the supervisory authority and central bank context, a leading role in this respect is played by the Network for Greening the Financial System (NGFS).