3.3 Analysis of financial sector climate risks progresses

Climate change creates risks for the financial sector, too. The location and size of the risks and their significance to the functioning of the financial system are not yet fully understood. The Bank of Finland participates in various international working groups for the development of risk analysis methods and monitoring.

Climate change causes two types of stability risks to the financial sector. Physical risk refers to material damage to, for example, property caused by climate change and extreme weather events. Transition risk refers to the decline of asset values in carbon-intensive sectors in connection with transition to a low-carbon economy.

The COVID-19 pandemic affects the treatment of climate change in the financial sector

By early 2020, the financial stability risks related to climate change had become part of the work streams of several working groups at, for example, the Bank of Finland, the European Central Bank (ECB) and in the NGFS climate network of central banks and financial supervisors (Network for Greening the Financial System).

As the pandemic spread, resources had to be re-allocated to analysing the impacts of the pandemic and the containment measures.

In mid-2020, it became clear that the impacts and transmission channels of the COVID-19 pandemic and climate change are partly similar, and their solutions are closely linked.

The COVID-19 pandemic has plenty of negative social and economic impacts. To minimise these impacts and to promote economic recovery, several public support measures have been introduced, some of which target investment.

Allocating investments to environmentally sustainable projects enables the resolving of problems caused by the COVID-19 pandemic and the mitigation of climate change (Finnish).

The weakening of economic activity caused by the COVID-19 pandemic has been reflected as a global reduction in emissions. Achieving the goals of the Paris Agreement on Climate Change requires that the 2020 level of emission reductions is maintained each year in the coming decades. The challenge is to achieve this goal without adverse economic and social effects.

The Bank of Finland is actively developing analysis of climate risks

In 2020, the Bank of Finland examined as part of our financial stability analysis, the banking sector’s exposure to physical risks.

The focus was particularly on analysing the share of banks’ credit claims and collateral that is located in areas where sea floods may in future pose a large threat to property.

As to transition risks, the Bank published an overview of the companies’ value chains and their risks (Finnish).

The Bank of Finland has also examined the statistical data gaps and problems related to climate change and the related impacts and has sought to resolve these problems.

The Bank of Finland participated in the working group of the European System of Central Banks (ESCB), which examined data and research projects on climate change.

The working group prepared in 2020 a proposal on how the ESCB's statistical function could support a wider discussion on climate change, the economy and the financial system.

The Bank of Finland is an active participant in the NGFS climate network

The Bank of Finland participated in bridging the data gaps also as a member of the NGFS climate network. This work was launched in 2020 and will continue in 2021.

The NGFS climate network's work on scenarios continued throughout the year, and one of the most significant outcomes was the publication of climate scenario models in summer 2020.

These scenarios by the NGFS can be used for assessing the impacts of climate policy in various situations. The climate scenario models are available to everyone, and the Bank of Finland wants to promote their use in Finland.

To promote the use of scenario models, the Bank of Finland published two articles, the first of which describes scenario modelling and the NGFS scenarios more generally (Finnish) and the second describes the models used in the calculation of the scenarios (Finnish).