Trends and Challenges in Financial Institutions Addressing Climate-Related Risks

Trends and Challenges in Financial Institutions Addressing Climate-Related Risks



In June 2023, the Financial Services Agency (FSA) in Japan released a report detailing the actions and challenges faced by financial institutions regarding climate-related risks. This publication follows their earlier framework established in July 2022, which aimed to guide financial institutions in managing climate-related risks and aiding their clients in reducing these risks.

The FSA has engaged in discussions with various financial organizations to understand their progress and challenges concerning climate action. The recent report compiles insights from these dialogues, focusing on the significant steps taken by financial institutions and the hurdles they encounter. The financial establishments surveyed recognize climate change as a crucial issue and have begun implementing measures appropriate to their scale and specifics of their operations.

Key Findings



One of the notable findings is that the surveyed institutions view addressing climate risks as a primary concern. They are taking steps to evolve their practices by integrating climate risk management into their operations effectively. However, the challenges remain considerable. Given that climate-related risks can manifest over a medium to long-term horizon, traditional risk management frameworks often fall short of addressing these emerging threats comprehensively.

Additionally, many institutions reported issues related to financial support for their clients' transition to more sustainable practices, acknowledging that such support can temporarily increase financed emissions—in other words, greenhouse gases produced by investments before they lead to greener outcomes.

Continuous Engagement



The FSA plans to maintain dialogue with financial institutions to adapt their approaches based on different scales and characteristics. It acknowledges that strategies for addressing climate risk will vary among institutions, highlighting the importance of tailored solutions that fit the specific context of each organization.

The current efforts also tie into broader global initiatives pushing for sustainable finance, where financial institutions are increasingly expected to play a proactive role in facilitating the transition toward a low-carbon economy. This involves not only risk management but the identification and financing of opportunities that align with climate goals.

In conclusion, while the financial sector in Japan is recognizing the urgency of climate change and making strides in addressing related risks, the journey is accompanied by significant challenges. Continued support and tailored strategies from regulatory agencies like the FSA will be essential in navigating these complexities.

For more information on the FSA's sustainable finance initiatives and related policies, you can visit their website or contact them directly at their offices.

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For further inquiries, contact:
Financial Services Agency, Tel: +81-3-3506-6000
Climate-Related Risk Monitoring Office, General Policy Bureau; Extension: 3472

Topics Financial Services & Investing)

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