On 24 January 2023, FINMA issued its Guidance 01/2023 on developments in the management of climate risks. Building on previous communications, the guidance reiterates the importance of an appropriate management of climate risks by supervised institutions.

Background

Guidance 01/2023, issued by FINMA on 24 January 2023, should be read together with a number of other recent communications made by the Swiss regulator in relation to climate risks and their management. In past years, FINMA stressed the importance of adequately capturing the potential consequences of climate change, as those may raise significant risks for financial institutions in the mid to long term. More specifically:

  • In 2019, FINMA integrated, for the first time, climate risks to its annual Risk Monitor, as one of the key risks for Swiss financial institutions and the Swiss financial market over the longer term. Climate risks have been part of the Swiss regulator's Risk Monitor ever since. In its most recent 2022 edition, FINMA named climate risks as one of the most important risks for Swiss financial institutions.
  • In 2021, FINMA revised its Circulars 2016/1 and 2016/2 and requires banks and insurance companies in supervisory categories 1 and 2 to disclose qualitative and quantitative information relating to their management of climate-related financial risks as part of their annual report (for banks) or financial condition report (for insurance companies), starting with the 2022 issue covering the year 2021.
  • In November 2022, after assessing the first reports issued by Swiss banks and insurance companies, FINMA shared its findings in its Guidance 03/2022, highlighting a number of areas of improvement for future climate reporting. Areas of improvement included:
    • Structuring of the reporting to clearly distinguish climate-related disclosures from other sustainability reporting;
    • A more specific and detailed description of the governance and risk management structures and processes framing climaterelated financial risks; and
    • A clearer disclosure of quantitative information (targets and key data) related to climate-related financial risks.

FINMA's expectations as regards climate risk management

With Guidance 01/2023, FINMA adds to the climate-related risk discussion by reminding Swiss financial institutions that climate-related risks should be covered by the institutions' overall strategies, risk management framework, internal control systems and governance structure. FINMA adds three key regulatory focuses as regards the implementation of appropriate climate risk management:

  1. Proactive engagement with guidance and recommendations issued by international bodies, notably:
    • The International Association of Insurances Supervisors ("IAIS"): IAIS's 2021 Application Paper on the Supervision of Climate-related Risks in the Insurance Sector and ICP Guidance provide illustrations of how to integrate climate risks in an insurers' risk management and how to build a consistent international regulatory approach in this respect.
    • The Basel Committee on Banking Supervision ("BCBS"): BCBS's Principles for the effective management and supervision of climaterelated financial risks includes specific recommendations in relation to the integration of climate risks to a bank's corporate governance, internal control framework, capital and liquidity management, risk management processes and scenario analyses. BCBS also issued, in December 2022, a set of Frequently Asked Questions, aiming to facilitate the interpretation of existing Pillar 1 minimum standards in relation to climate risks.
  2. Consideration of best practices in the market that would be relevant depending on risk profile and business model of the relevant institution.
  3. Critical scrutiny of the instruments and processes used, which, where necessary, should be developed in a forward-looking manner, tailored to the specific risk profile of the institution.

not only applies to large banks and insurance companies (category 1 and 2), it also extends to smaller institutions. These are expected to address the topic of climate risks applying a proportionate and risk-based approach.

Outlook

The publication of both Guidance 01/2023 and Guidance 03/2022 is timely: Starting in 2024, all large Swiss public companies, banks and insurance companies will be required to report publicly on climate-related risks as part of their statutory annual report on non-financial matters (see January 2023 Newsflash). This reporting, which dovetails a similar approach at the EU level, will shed light on the internal risk management measures taken by those entities to address climate-related risks.

Climate risks and their management are expected to be a key topic in the years to come for large Swiss financial institutions which are subject to mandatory climate disclosures. Other financial institutions should also be mindful of the issue: As FINMA states in Guidance 01/2023, the regulator expects climate risks to form an integral part of strategic discussions and internal risk management and control processes, following a risk-based approach.

A similar trend is apparent in the EU. Like FINMA, the European Central ("ECB") has recently communicated its expectations on this topic: EU banks are expected to (i) categorize climate risks and conduct an impact assessment by March 2023, (ii) fully integrate climate risks in their strategy, governance and risk management framework by the end of 2023, and (iii) turn to other climate-related supervisory expectations (e.g., integration in capital requirements) by the end of 2024.

It is expected that FINMA will follow international developments closely, both at an European and a wider international level, refine its guidance on the topic, strengthen its scrutiny and progressively tighten expectations where efforts are, in its view, lacking.

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