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Climate Change: Regulatory Expectations for Financial Institutions in 2022

This commentary provides an overview of the climate-related expectations central banks and regulators have for financial institutions across the jurisdictions covered by DBRS Morningstar: the U.S., Canada, Europe, the U.K., Japan, and Australia.

Key highlights:

• Climate regulatory exercises focus on financial institutions’ resilience to climate change, however, the magnitude and scope of the climate-related exercises vary significantly across the different jurisdictions covered by DBRS Morningstar.

• Expertise in modelling climate-related risks is still in its early stages. Nonetheless, detailed climate scenarios are available and provide consistency and comparability of results.

• Awareness and disclosures by financial institutions on how they manage climate risk will increase. No penalties or increased capital requirements are expected in 2022, but results will be used to drive decisions (regulatory expectations, risk management) and establish best practices.

“We view that developing further climate-related stress-testing capabilities is going to be increasingly key to better understand how financial institutions are exposed to climate change. We also expect results from current climate-related exercises will help shape regulatory expectations in most of the jurisdictions we cover. In the meantime, awareness and disclosures by financial institutions on how they are managing climate risk will likely increase. Climate risk factors will also likely become more important within DBRS Morningstar’s analysis of ESG risk factors on financial institutions’ credit ratings.” said Vitaline Yeterian, Senior Vice President from the DBRS Morningstar Global Financial Institutions team.