## Approaches to Climate Risk Analysis in FSAPs

_Staff Climate Notes, July 14, 2022_

## Source details

**Canonical URL:** [Approaches to Climate Risk Analysis in FSAPs](https://www.imf.org/en/publications/staff-climate-notes/issues/2022/07/12/approaches-to-climate-risk-analysis-in-fsaps-519515)

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## Bibliographic details
- Authors: Tobias Adrian, Pierpaolo Grippa, Marco Gross, V. Haksar, Ivo Krznar, Caterina Lepore, Fabian Lipinsky, Hiroko Oura, Sujan Lamichhane, Apostolos Panagiotopoulos
- Published: July 14, 2022
- Series: Staff Climate Notes
- DOI: https://doi.org/10.5089/9798400212895.066

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### Core objective and framing
- Sets out the IMF staff’s emerging approach to assessing the impact of climate change on banking sector stability risks within the Financial Sector Assessment Program (FSAP).
- Emphasizes that understanding climate risks is key to preparing for a successful transition to a lower carbon global economy and unlocking opportunities from technological progress and structural transformation.
- Focuses on methods IMF staff are deploying to raise awareness of risks and adaptation needs, including:
  - need for banks to develop tools to manage climate risks, and
  - need for financial sector supervisory authorities to adequately supervise climate-related risks.

### Primer on climate risk (terminology and concepts)
- Distinguishes two principal categories of climate risk:
  - transition risk
  - physical risk
- Explains technical terms and concepts used in climate risk analysis relevant for FSAP work.

### Modifying standard FSAP risk analysis to incorporate climate risk
- Describes how the standard risk analysis framework used in FSAPs would be modified in broad terms to integrate climate risk considerations.
- Highlights mapping channels from macroeconomic and real-economy effects into banking sector stability risks.

### Approaches to analyzing physical versus transition risk
- Discusses different analytical approaches for:
  - physical risk: impacts across sectors, geographies, and implications for the macro-economy
  - transition risk: policy, technology, and market-driven changes during decarbonization pathways
- Explains how effects on the macro-economy and real sectors vary by sector and geography, and how these heterogenous effects feed into bank exposures and stability assessments.

### Mapping to banking sector and stress testing
- Illustrates how physical and transition risks map into banking sector stability risk assessments undertaken in FSAPs.
- Positions stress testing and scenario analysis as central tools for quantifying potential impacts on bank portfolios and system-wide stability.

### Illustrative applications and examples
- Provides examples from recent FSAPs to illustrate key concepts and methodological choices used in practice.

### Challenges, data gaps, and uncertainty
- Identifies major challenges confronting climate risk analysis in FSAPs, including:
  - data gaps
  - uncertainty regarding climate projections
  - long simulation horizons required for climate risk analysis
- Notes methodological and practical constraints that limit precision but underlines the role of analysis in raising awareness and guiding adaptation.

### Policy implications and recommendations (IMF staff focus)
- Emphasizes the need for:
  - banks to develop tools to manage climate risks,
  - financial sector supervisory authorities to adequately supervise climate risk,
  - integrated analytical approaches within FSAPs to inform policy and supervisory priorities.

*Source: Approaches to Climate Risk Analysis in FSAPs, Staff Climate Notes 2022/005 (July 14, 2022).*

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## Content in this bundle

- **Approaches to Climate Risk Analysis in FSAPs; IMF Staff Climate Note 2022/005; July 2022**
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_Source: https://www.imf.org/en/publications/staff-climate-notes/issues/2022/07/12/approaches-to-climate-risk-analysis-in-fsaps-519515_