FINMA has also identified risks that could have an impact on the Swiss financial centre over the longer term. These include risks relating to climate change, which we explore in more detail below. Other long-term risks include an ageing society, the increasing individualisation of insurance based on big data, and risks for wealth management in a market with falling values of financial instruments.
The Paris climate agreement states that the financial industry has a role to play in the transition to a more sustainable economy. On the one hand this presents opportunities, but on the other both climate change and its repercussions also represent potential financial risks for financial institutions.
Given its legal mandate, FINMA’s focus here is on finance-related climate risks to financial institutions. These risks can be broken down into two categories, physical risks and transition risks. Physical risks encompass increasing damage and cost to the economy as a result of climate-related natural catastrophes and gradual climate change. Risks of this kind could result in significant losses for insurance and reinsurance companies. Transition risks arise as a result of action taken on climate policy or disruptive technological breakthroughs. These could trigger rapid price adjustments of assets that have not yet been adequately anticipated by markets, e.g. in highly carbon-intensive sectors such as energy, manufacturing or transportation. The more countries delay in taking effective measures to achieve climate targets, the more invasive such measures are likely to be. There is a possibility that the markets will not price in the corresponding risks until a late stage, but will then do so aggressively. The losses on the investments (asset side of the balance sheet) of banks, wealth managers and insurance companies could weigh on their profitability. Climate risks have very specific characteristics, including prolonged time horizons, unclear impact pathways and a number of uncertain variables in the area of climate policy. This makes it difficult for institutions to manage investments appropriately with existing instruments. Financial institutions and supervisory authorities are therefore also working at an international level to integrate climate risks more closely into risk management processes, develop and deploy appropriate approaches and instruments for measuring and mitigating risks, and ensure transparent disclosure of the corresponding risks. In the supervisory authority and central bank context, a leading role in this respect is played by the Network for Greening the Financial System (NGFS).
In the future, FINMA will refine its analyses of climate-related risks in the balance sheets of financial institutions and develop approaches for improved voluntary or regulated disclosure of financial climate risks.
(From the Risk monitor 2019)