The largest banks and insurance companies (institutions in supervisory categories 1 and 2) must disclose their most important climate-related financial risks in accordance with FINMA Circulars 2016/1 "Disclosure - Banks" and 2016/2 "Disclosure - Insurers (Public Disclosure)". In doing so, the institutions concerned must outline the impact of climate risks on their business and risk strategy as well as their impact on existing risk categories. They must also disclose the risk management structures and processes they use to identify, assess and address the risks, including quantitative information and details of the methodologies used. Institutions are also required to describe the governance structure they will use to address climate-related financial risks. Ultimately, the institutions concerned must make assessments and document how material they consider the risks to be and explain which assessment methods and criteria underlie this assessment.
Summary of FINMA findings
FINMA has now analyzed the first disclosure on climate-related financial risks, which was made with the institutions' annual reporting for the 2021 financial year and published the most important findings in Supervisory Notice 03/2022. FINMA found that the majority of the institutions concerned had disclosed information on almost all of the required topics in the intended manner (e.g. in the annual reporting). However, the relevant aspects could only be identified with great effort. The reason for this was, in particular, that material information was often mixed with sustainability information that was not related to climate-related financial risks. Furthermore, individual institutions described mainly the general governance structure, which would say too little about the handling of climate-related financial risks. This is because the circulars explicitly require that the key governance features relating to the identification, assessment, management and monitoring of climate-related financial risks are being described. Furthermore, FINMA states in its supervisory communication that the impact of climate-related financial risks on the business strategy and risk profile of institutions was often kept very general in the disclosures and that the specific impact of the institutions from the climate risks mentioned was usually not explained sufficiently. Also, in some cases, the time horizons were not clearly divided into short-, medium-, and long-term phases. In addition, in some cases the descriptions of the risk management structures and processes were still not specific enough. However, the FINMA circulars require institutions to describe how climate-related financial risks are handled and taken into account in their risk management.
Overall assessment and outlook
In summary, FINMA notes that the companies concerned have largely complied with their disclosure obligations, which has increased transparency in particular. However, FINMA criticizes that in most cases it is difficult for the reader to get a concrete picture of the actual relevance of the climate-related financial risks for the respective institution. FINMA has included the results of the analysis with the affected institutions in the supervisory dialogue and communicated the expected improvements for the upcoming climate risk disclosure. In the course of the current year, FINMA plans to review the climate risk disclosure again, whereby the financial market supervisory authority will take a particularly close look at the points mentioned in the discussion with the institutions.
Sources used for the article:
• FINMA publishes guidance on climate risk disclosures
•FINMA Guidance 03/2022
