(Bloomberg) -- The international organization that monitors the global financial system urged supervisory authorities to pay more attention to climate risk.
In a report published on Friday, the Financial Stability Board said that “supervisory and regulatory risk assessments and policies need to better incorporate understanding of the channels through which climate-related risks to financial institutions may be transferred across sectors or borders.”
Regulators around the world are struggling to figure out how best to prepare the financial industry for potential losses from climate change, as extreme weather events such as wild fires, flash floods and extended droughts become more common. The process of decarbonizing the global economy is also expected to bring with it an era of stranded assets, lower collateral values and increased litigation risks.
The global watchdog recommended extended use of stress testing and scenario analyses that forecast potential outcomes, as well as consistent regulation across countries. It also warned that measures targeted at individual financial institutions may not be enough.
“As climate change is likely to represent a systemic risk for the financial sector, potential macroprudential tools or approaches would complement microprudential instruments,” the FSB said.
It’s now seeking comment on its proposals through June 30.
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