The FSB introduces a new framework and toolkit to assess climate risk

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The Financial Stability Board (FSB) recently published a report containing a framework and an analytical toolkit to assess vulnerabilities related to climate change in the global financial system. The report introduces an analytical framework to gain a more detailed understanding of the impacts of climate risks, both physical and transition, on financial institutions and markets. The main goal is to provide regulators and financial institutions with adequate tools to identify and mitigate climate risks before they can compromise global economic stability. The framework is based on the FSB's current Financial Stability Surveillance Framework and focuses on a holistic assessment of climate vulnerabilities, taking into account cross-border and cross-sectoral impact, while the toolkit provides metrics to proactively and systematically monitor such vulnerabilities.

Climate change vulnerabilities in the financial system stem primarily from two categories of risk: physical risks and transition risks. Physical risks include extreme weather events, such as hurricanes, floods, and wildfires, which can cause direct economic losses and destabilize financial markets. Transition risks, on the other hand, are related to the adoption of policies to reduce greenhouse gas emissions, technological advances, and changes in consumer preferences, which can affect asset values and create instability for businesses and investors.

The framework developed by the FSB is based on an integrated approach that considers how climate risks can transmit and amplify within the global financial system. The goal is to understand how climate disruptions can affect banks, insurance companies, investment funds, and financial markets as a whole. A key element of the framework is the analysis of risk transmission channels. The FSB has identified three main mechanisms through which climate risks can influence financial stability: the direct impact on assets and financial exposures, macroeconomic and systemic effects, and risks arising from political and regulatory responses.

To support the framework, the FSB has developed an analytical toolkit that provides useful metrics and indicators for monitoring climate vulnerabilities. This toolkit is structured into three main categories:
1. Proxies: early indicators that signal key drivers of climate risk;
2. Exposure Metrics: tools to measure the extent of direct and indirect financial exposures to climate risks;
3. Risk Metrics: tools to quantify the economic and financial impacts of climate risks.
They may include climate stress test simulations, scenario models, and potential loss assessments for the financial system. The use of these metrics allows investors, regulatory authorities, and financial institutions to take a more proactive approach to managing climate risk, reducing the potential negative impact of future shocks.

The introduction of the framework and toolkit by the Financial Stability Board (FSB) represents an important step towards a greater resilience of the global financial system to climate risks. With a more accurate assessment of climate vulnerabilities, financial institutions will be able to adopt more effective mitigation measures, preventing systemic crises and protecting long-term economic stability. Implementing this approach will require collaboration between governments, regulatory bodies, and financial sector operators to ensure that the data and methodologies used are consistent and shared globally. Additionally, the growing focus on sustainable finance and ESG (Environmental, Social, and Governance) regulations will make the integration of climate risks into business strategies and risk management tools increasingly essential.

This article was created as part of the project "Biodiversity services EU expansion" (CUP: E43D22000480009) funded by the Lombardy Region's call "PR FESR 2021-2027 – INTERNATIONALIZATION LINE 21-27", aimed at supporting the internationalization of Italian companies. 3Bee is the naturetech company that develops innovative technologies for the monitoring, protection, and regeneration of biodiversity, supporting companies in defining personalized climate strategies based on the analysis of their impacts and dependencies on nature. With an established portfolio in Italy, Germany, and France and significant partnerships, 3Bee continues its expansion in international markets to create a concrete impact through technology.