Investors and policymakers want greater transparency and comparability regarding climate risks in the banking and insurance sector. If not properly assessed, evaluated and monitored, climate risks are the new drivers of value decrease.
To close this information gap and enhance comparability, regulatory climate risk reporting obligations will be imposed and compliance will be supervised by FINMA and the auditors. FINMA opened a consultation to impose transparency obligations on large banks and insurance companies in Switzerland, namely institutions in categories 1 and 2. These institutions will be obliged to report climate risks in a transparent and consistent way and not only on a voluntary basis as some of them currently do. The institutions will be required to incorporate climate risks into their current risk framework alongside credit risk, market risk, liquidity risk, insurance risk and operational risk.
The climate risk reporting obligation will be included in the regulations by amending FINMA circulars 2016/1 "Disclosure - Banks" and 2016/2 "Disclosure - Insurers (Public Disclosure)". The new obligations are aligned with the international standard set by the TCFD (Task Force on Climate-related Financial Disclosures), although currently no scenario analysis is required. That being said, we recommend that our clients carry out scenario analysis. Institutions will have to disclose information on the following elements in their annual report:
- Governance: description of how the Board of Directors fulfils its oversight responsibilities in respect of climate-related financial risks.
- Strategy: description of the key climate-related financial risks identified – short-term, medium-term and long-term risks, as well as their impact on business strategy, the business model and financial planning.
- Risik management: description of the risk management process for identifying, evaluating and addressing climate-related financial risks.
- Quantitative information/metrics and targets: description of criteria and assessment methods used to determine materiality and climate-related financial risks, as well as quantitative data on climate-related financial risks.
Why is it relevant for the Swiss financial market?
The consequences of climate change carry a significant financial risk. In particular, climate change entails physical risks (e.g. flood, drought, fire) for insurance companies and transition risks (e.g. stranded assets, disruptive technologies) for banks. While conducting mandatory climate risk reporting, all in-scope institutions will be required to assess, evaluate and monitor climate risk.
The consultation on the amendments to the circulars will last until 19 January 2021. We expect the revised FINMA circulars to enter into force in mid-2021. The transparency obligations must be met for the first time for the 2021 financial year, while the qualitative and quantitative disclosures will be applied for the first time in 2022 for the 2021 financial year.
How can PwC help you?
Climate risk reporting is just one step to supporting the transition to a sustainable and future-oriented economy: other regulations will follow in Switzerland, as has been the case in the EU with the EU Action Plan on Sustainable Finance. In this action plan, transparency and comparability is central to achieving a sustainable economy (e.g. portfolio disclosure, investor information, incorporation of sustainability risk into the investment decision-making process).
Preparation is half the battle. Our dedicated sustainablity experts are here to support you in this transition phase.
Please see our dedicated service offering for climate risk reporting and other services to help you in the transition to a sustainable business. Let us do the work, so that you can focus on your core business.