Climate Risk and Financial Intermediaries: Regulatory Framework, Transmission Channels, Governance and Disclosure (Palgrave Macmillan Studies in Banking and Financial Institutions)

Climate change is defining structural modifications that affect the economy and the financial system. Within Europe, supervisors and supervised entities are increasingly focusing on the consequences of environmental, social and governance (ESG) risks, as they impact the soundness and stability of the financial system or interfere with the transmission channels of monetary policy and price stability, as well as raising sustainability financing issues. Focusing on climate-related risks within the broader theme of the ESG risks, this book, structured in six chapters, analyzes the evolving overall regulatory framework, the climate risk transmission channels, the peculiarities of climate risk transmission channels with reference to specific business models of financial intermediaries, and the governance and disclosure implications of climate risks. It will be of interest to academics, practitioners, and students in the fields of banking, financial services, sustainability, ESG, and climate risk. Disclaimer Contents About the Authors List of Figures List of Tables 1 Climate Risk Scenario References 2 Regulatory Framework, Standards, and Best Practices for the Financial Sector 2.1 The European Union (EU) Context 2.1.1 The European Banking Authority (EBA) 2.1.2 The European Central Bank (ECB) 2.2 The International Context 2.2.1 Supranational Organizations Basel Committee on Banking Supervision—BCBS Financial Stability Board (FSB) and Task Force on Climate-Related Financial Disclosures (TCFD) Network of Central Banks and Supervisors for Greening the Financial System (NGFS) United Nations Environment Programme Finance Initiative (UNEP FI) 2.2.2 The UK and the US Authorities The UK Authorities BoE-PRA FCA CFRF The US Authorities 2.3 Stress Test Exercises at a Glance 2.3.1 Climate Stress Test Exercises Performed by the ECB The ECB Economy-Wide Climate Stress Test Climate Risk Stress Test 2.4 Conclusions References 3 Transmission Channels of Climate Risk 3.1 Transmission Channels and Mechanisms 3.2 The Transmission Channels of Physical Risks 3.3 The Transmission Channels of Transition Risks 3.4 New “Climate-Driven” Transmission Channels: Impact on Risk Modeling 3.5 Conclusions References 4 Integrating Climate Risk into Commercial Banks Operations 4.1 The Risk Integration Process: Climate Scenarios and Models 4.2 The Lending Process 4.2.1 Retail Counterparties 4.2.2 Corporate Counterparties 4.2.3 Micro, Small, and Medium-Sized Enterprises (MSMEs) 4.2.4 The Role of Product Mix in Corporate Risk Management 4.2.5 Transfer of the Climate Risk on the Creditworthiness Measurement Systems of the Borrower 4.3 Climate Risk and the Finance Area 4.3.1 Treasury, ALM, and Property Portfolio 4.3.2 Derivatives Desk, Investment Banking, Corporate Solutions, and Trading Portfolio 4.3.3 Climate Risk and Asset Management 4.4 Conclusions References 5 Insurance Companies 5.1 Impacts of Climate Change Risk on the Insurance Business 5.2 The Integration of Climate Change Risk into the ORSA 5.3 The Impacts of Climate Risk on the Business Model of Insurance Companies 5.4 Conclusions References 6 Governance Implications: The Challenge of Disclosure 6.1 ECB Expectations on Information and Disclosure 6.2 Standards of Disclosure 6.2.1 International Initiatives Taskforce on Climate-Related Financial Disclosures (TCFD) CDP—Carbon Disclosure Project SABS Standards SBTi—Science-Based Target Initiative NZBA – Net-Zero Banking Association 6.2.2 EU Initiatives NFRD—Non-Financial Reporting Directive—And CSRD—Corporate Sustainability Reporting Directive EU Taxonomy—EU Regulation 2020/852 6.3 Reporting to Management Bodies 6.4 Communication with the Market and Investors 6.5 Conclusions References List of Contributors Scientific Coordinators AIFIRM Coordinators Steering Committee PMO Coordinators—PROMETEIA References Index