Swiss supervisor focuses on risks of climate change and nature degradation

The Swiss Financial Market Supervisory Authority FINMA is taking various measures to implement the relevant recommendations of the Network for Greening the Financial System (NGFS).

As a member of the network that comprises 119 central banks and financial supervisors, FINMA said that it supports its goals of better understanding and managing the financial risks of climate change and nature degradation.

The Swiss regulator is also preparing a circular on nature-related risk through which it seeks to specify the risk management requirements for banks and insurers on climate and other nature-related financial risks.

The NGFS published a statement on its contribution to the goals of the UN Climate Change Conference 2023 (COP28) on 9 December at the meeting in Dubai.

In this statement the NGFS said that much progress has been achieved in enabling sustainable development in the financial system, as a growing number of financial actors now integrate climate considerations in their strategy and strive for alignment with the objectives of the Paris Agreement.

But it added that, beyond goals and targets, the implementation of climate policies and strategies needs to be “prompt and co-ordinated” as financial stability is increasingly at risk of a delayed transition and the macroeconomic effects of climate change is already manifesting.

“Climate policies need to raise ambition levels beyond that of the current long-term pledges and commitments and be coordinated between public and private actors in developing and advanced economies,” it said.

The NGFS put forward several key points:

• Economic and financial impacts of climate change and nature degradation underline the need for a fast co-ordinated transition to a climate and nature-resilient global economy;
• Fostering macrofinancial stability and enabling finance flows aligned with the objectives of the Paris Agreement and the Global Biodiversity Framework are key contributions to a successful transition; and
• To help bridge the gap in skilling up and scaling up climate-related finance, the NGFS will continue to foster and frame an environmentally sustainable financial landscape.

FINMA has been a member of this network since 2019. Since then, it has gradually integrated climate-related financial risks into its supervisory activities in what it described as a “strategic, proportional and risk-based manner”.

FINMA’s measures are based on the non-binding NGFS recommendations as well as the requirements and guidelines of international standard-setting bodies such as the Basel Committee on Banking Supervision (BCBS) and the International Association of Insurance Supervisors (IAIS).

Together with its efforts to combat greenwashing, FINMA said that it is thus contributing to a more sustainable financial centre. FINMA is currently pursuing the following priority measures:

• Nature-related financial risks. Under this planned circular, FINMA is seeking to specify the risk management requirements for institutions with regard to climate and other nature-related financial risks. The circular will incorporate the current recommendations of the international standard setters, in particular the BCBS and the IAIS, as well as parts of the NGFS recommendations. FINMA will start a public consultation on the circular in the first quarter of 2024.
• Transparency about climate risks. In 2024, FINMA will also review whether a revision of the current FINMA disclosure requirements is necessary due to the many developments in the area of climate and sustainability reporting. FINMA already supported the increase in climate risk transparency called for by the NGFS and other international bodies in 2021 by specifying the requirements for the disclosure of climate-related financial risks for larger banks and insurance companies. From 2024, numerous banks and insurers in Switzerland will also implement the new ordinance on climate reporting. The new ordinance requirements are based on the Swiss Code of Obligations and are in some cases more extensive than the existing FINMA requirements (eg ‘dual materiality’, obligation to disclose transition plans), but are compatible with them, said the supervisor. FINMA is not responsible for monitoring compliance with and enforcing the civil law obligations of supervised institutions. However, systematic compliance with the relevant obligations under civil law by the supervised parties is part of the supervisory requirement of proper business conduct. “The institutions must therefore be organised and managed in such a way that compliance with their obligations under civil law is guaranteed overall,” said the supervisor.
• Strengthening the data basis for assessing climate risks. Just as with its supervised institutions, FINMA also needs data to assess climate risks. To this end, it is currently developing a data collection in this area. This should cover various features and transmission channels of climate risks. The data collection will be carried out for the first time in 2024 and only at larger institutions (supervisory categories 1 to 3). It also serves as an important basis for fulfilling FINMA’s reporting obligation on climate risks as planned by Parliament in the CO2 Act, it explained.
• Integrated view of nature risks. FINMA said that it shares the assessment of the NGFS that an integrated approach to climate risks and other nature-related risks such as the loss of biodiversity makes sense.

“FINMA will increasingly integrate this comprehensive view of nature-related risks into its practice where appropriate and possible, for example in the above-mentioned circular,” it concluded.