Prioritise climate risk management to protect your future: The impact of climate-driven regulatory initiatives on Swiss financial institutions - Banking blog

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Swiss financial institutions will need to adhere to enhanced climate-risk disclosure obligations, in line with new ambitious targets for reducing domestic emissions of CO2. Companies operating in the financial services industry should take a proactive approach to understanding the implications of climate risk for their business and reporting requirements. They should also ensure that any reporting is assured by an independent third party to establish its reliability and gain the confidence of stakeholders.

Lead the change. The regulatory agenda is moving forward

Climate and environmental risks occupy all five top risks in the World Economic Forum’s Global Risk Perception Survey, so it is not surprising that business leaders, regulators and other stakeholders are demanding more transparency and impact reporting. The Swiss authorities are adopting global regulatory initiatives and regulatory engagement has accelerated visibly:

On 14 November 2019, Andréa M. Maechler and Thomas Moser from the Swiss National Bank (SNB) described the central bank’s close interest in climate risk and its implications for the national economy and financial sector. Since then the COVID-19 pandemic has demonstrated the vulnerabilities of modern economies and societies and the need to develop greater resilience and counter-measures against sustainability risks. 

On 26 June 2020 FINMA announced that it is addressing the subject of climate-related financial risks as part of its supervisory remit. It is also reviewing its regulatory approach to improving transparency about the climate-related risks of major financial institutions.

On 11 August 2020 FINMA held a round table with representatives of the Swiss financial industry, NGOs, scientific institutions and public authorities, to share views about a proposed approach to incorporating climate risk into existing regulations. We expect the opening of an official consultation process soon.

On 19 August 2020 the Swiss government ratified its 2020-25 action plan to combat climate change.

On 25 September 2020, after considering the matter for three years, the Swiss Parliament held a final vote on the revised Swiss Carbon Law. This sets out a more ambitious target for reducing domestic CO2 emissions and introduces stringent measures across multiple industry sectors. It also requires that financial capital flows and regulations should be in alignment with the climate targets. More specifically, it requires that the Swiss Financial Markets Supervisory

Authority (FINMA) and the SNB should review their approach to carbon emissions and the regulations regarding them.

Frame and shape your response now

 “The financial risks associated with climate change could be considerable for Swiss financial institutions. Accordingly, they must give them due consideration in their risk processes. Disclosure obligations can encourage institutions to address these risks.”- FINMA CEO Mark Branson

Customers, employees, investors and society in general now show greater concern about sustainability reporting. The following are implications of this:

  • Recommendations issued by the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD) provide a widely adopted reference framework for disclosing clear, comparable, and consistent information about the risks and opportunities arising from climate change. Using this as a basis for developing a climate risk management response for your own institution would be a good first step. However the expectations of regulators and stakeholders continue to evolve; and we recommend that you should adopt a proactive rather than a reactive approach to climate risk management.
  • The TCFD framework describes a holistic climate-related risk reporting framework. According to the TCFD climate risk covers the physical and transitional risks that affect the individual organization and also the national economy more generally. We expect that climate risk and reporting requirements will be defined and implemented in line with the TCFD framework.
  • Climate risks are not a new category of risk, but a new driver of risk. This should be reflected in the overall risk framework in order to measure and manage its impact sufficiently. An understanding of the relationship between climate risk and other risks is essential. Given the financial impact of the physical and transitional risks on an institution’s balance sheet, we can expect climate risk evaluation and disclosure to be included in FINMA's regulation of financial risk assessment and reporting. Integration of climate risks into existing risk frameworks is not merely about extending the current list of risk categories. It also involves re-imagining how in the future they could manifest themselves as concrete risks relevant to business and strategy—and managing them accordingly. The materiality of climate risks can change quickly from non-material to material.
  • It is expected that FINMA regulation will initially target the most important market participants (category 1 and 2 banks and insurance companies). However expect that pressures from stakeholders and market forces will lead to an extension to other supervision categories.
  • The expected approach to improving disclosures of financial risks will focus initially on qualitative disclosures (governance, strategy, risk management), but stakeholders will increasingly demand quantitative disclosures for their decision making purposes.
  • Where quantitative data are made available, the methodology used for their calculation – the criteria and valuation methods by which climate-related financial risks are assessed – should be disclosed. This approach would also enable future referencing, for a time when materiality standards are defined and recognized.
  • Enhanced financial risk disclosure obligations are likely to be incorporated into existing disclosure regulations applicable to banks and insurance companies (FINMA circulars 2016/01 and 02).
  • The increasing attention to disclosures will inevitably drive expectations about their reliability. Independent third party assurance of reporting would build trust and stakeholder confidence in its reliability.
  • A big challenge for institutions is the lack of robust frameworks and analytical approaches, based on common taxonomies and data standards for climate risk measurement. Gathering relevant data to support the analysis of the impact of climate change across markets, sectors and geographies will be a major undertaking, as will the adoption of scenario analysis and the development of new quantitative models for stress testing the effects of climate change on various activities. Climate risk affects nearly every aspect of risk measurement and eventually this may call for a systematic re-evaluation of traditional risk parameters. Given the long term horizon of climate risk, banks may also need to analyse long-term scenarios for addressing the increasing uncertainty. We anticipate initial regulation to be predominantly principle based yet expect fast evolution towards more enhanced requirements.

Conclusion and next steps

It is important to understand the implications that both existing and future regulations will have on your business operations and stakeholder expectations. Adhering to climate risk reporting obligations will necessitate a framework and methodology that is aligned with the TCFD requirements. Digital technologies can be used to identify and flag potential issues, leading to effective and automated climate risk reporting.

Deloitte will be happy to guide you through the necessary steps and best practices for ensuring that your climate risk reporting adheres to local, regional and international standards, and is relevant to your business operations, and that it also meets your business objectives and stakeholder expectations.

 

Sandro

Sandro Schönenberger - Partner, Financial Services

Sandro acts as the deputy leader of the bank audit & assurance team of Deloitte Switzerland. He is a financial services partner supporting you as auditor or adviser in effectively managing capital, risk and reputation. Sandro brings more than 15 years of experience as auditor and advisor of international financial institutions and he is lead partner on a number of audit or regulatory remediation engagements, in particular with focus on wealth management, capital markets and family office services.

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Marcel

Marcel Meyer - Partner, Financial Services

Marcel leads Deloitte Switzerland’s Sustainability services, Investment Management practice and is a member of the Board of Directors. He has 20 years of experience auditing and advising domestic and international clients primarily in the financial services industry, but also in real estate, trading and technology. As head of Sustainability services, he helps clients integrate sustainability in their strategy and operations focusing in particular on climate change and sustainable finance. He also provides independent assurance on sustainability reports and compliance with necessary regulatory requirements.

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Nadine

Nadine Esposito - Assistant Manager, Risk Advisory

Nadine is an Assistant Manager in our Sustainability team based in Zurich with a focus on sustainable finance and the role the financial industry plays in achieving sustainability objectives. She is also a climate risk advisor with a background in assurance and quality risk management.

Nadine holds certifications in sustainable finance, modern slavery and soon in sustainability and climate risk.

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