Addressing Physical Climate Risk Disclosure Gaps in Financial Institutions

A review of publicly available disclosures indicates that the identification, measurement, and disclosure of climate-related physical risks by financial institutions are currently incomplete and inadequate. Less than half of surveyed financial institutions report on physical risk analysis. Approximately a quarter of assessed banks conduct some form of physical risk scenario analysis, with fewer than 20% of those assessing the impact on their businesses. Current scenario-based assessments often focus on a limited set of hazards and sectors. While historical data is useful, it should not replace forward-looking climate model data for assessing future risks.

Financial institutions have a critical duty to account for risks, the failure of which can have severe consequences for individual institutions and the entire financial sector. With a changing climate, factoring in associated risks is increasingly vital. This includes not only transition risks to a low-carbon economy but also physical risks like rising sea levels, changing weather patterns, and shifting ecosystem dynamics. Financial institutions have predominantly focused on transition risks, often neglecting or insufficiently assessing and disclosing physical climate risks.

In 2017, the Financial Stability Board (FSB) launched the Task Force on Climate-related Financial Disclosures (TCFD), categorizing risks into transition and physical risks. Financial institutions' disclosures have shown a 'physical risks blind spot,' with quantitative disclosures more common for transition risks. Regulators like the European Central Bank (ECB) and the U.S. Securities and Exchange Commission (SEC) have also identified this gap. The TCFD updated its guidance in 2021 to drive wider disclosure, and supervisors have emphasized the equal importance of both physical and transition risks. This report aims to highlight key physical risk elements for climate-related disclosure.

This report focuses on physical risk disclosure practices by financial institutions, offering resources for their development. The authors identified good practices and developed guidance through three main methods: desk research, engagement with financial institutions (via webinars, surveys, and workshops), and a review of disclosures from leading financial institutions committed to net-zero under the Glasgow Financial Alliance for Net Zero (GFANZ). These institutions were chosen for their 'double materiality' approach, considering both their impact on the climate and the climate's impact on their businesses. The report covers three TCFD thematic areas: Strategy, Risk Management, and Metrics and Targets, focusing on eight of the eleven recommended disclosures relevant to physical risks.