Addressing climate-related financial risks in climate transition plans is key to improving financial stability assessments, a report by the Financial Stability Board (FSB) revealed.
The report – The Relevance of Transition Plans for Financial Stability – looked at financial and non-financial firms’ transition plans, and specifically, how a firms’ measurement of climate-related risks can influence financial stability.
It found that transition plans can help address climate-related financial risks in three ways. The first is by facilitating a firms’ strategy to move towards a sustainable economy, which contributes to better risk management. This includes the transition to net-zero and the other decarbonisation goals from a risk perspective, where transition plans help to structure a firm’s approach to sustainability.
Second, transition plans can help inform investment decisions, mainly because they are produced to inform stakeholders on the firm’s exposure and preparedness. Third, these plans also support authorities’ macro-monitoring of transition and physical risks in the financial system and the real economy.
However, the report found that conditions must be met to enable a wider use of transition plans for financial stability purposes. These include enhancing the coverage, transparency, credibility, comparability and availability of information in those plans.
For example, FSB noted some of the information in transition plans may be unreliable because they are “strategic, forward-looking documents, and the data in them may change as conditions evolve.” As a result, the reliability of the information disclosed must be monitored.
The report noted, however, last October the International Auditing and Assurance Standards Board (IAASB) approved its International Standard on Sustainability Assurance (ISSA) 5000. This includes a range of guidance and application materials that may enhance the consistency, comparability and reliability of sustainability-related information provided in transition plans.
Satoshi Ikeda, deputy commissioner for International Affairs and Chief Sustainable Finance Officer at Japan’s Financial Services Agency – who also chaired the FSB group – said: “Due to their forward-looking perspective, transition plans could help improve the monitoring of climate-related financial risks by financial authorities, but more work is needed to enhance their coverage, transparency, reliability and comparability.”
