From a more macro perspective, these risks may impair productivity and also cause a reallocation of resources, not only of physical capital, but also of labour, through migration. Special features of climate change risk factors In general, these risks can be considered to manifest themselves in financial institutions through the traditional financial risk categories (credit, market, liquidity, operational and reputational risk). However, climate change incorporates some fundamental special features into these traditional risks, which must be taken into account if they are to be managed and supervised appropriately.7 First, the consequences of climate change are unprecedented and will occur over a very prolonged period. Historical experience is thus of little use to assess their magnitude and evolution, and therefore the uncertainty associated with how and when they will materialise is very high. Second, that uncertainty is exacerbated by the fact that the physical and transition risks are interrelated non-linearly, and possibly subject to tipping points. This, in essence, means that the magnitude of the effects of their materialisation could be greater than expected and will affect economic agents more generally and more abruptly than other risks. Third, the problem has a global dimension. There is little any one country can do on its own to avoid the problem and there may always be free-riders. That is why utmost collaboration and cooperation are required. International organisations and institutions therefore need to play a key role in this area.

At European level, the European Commission’s proposal for a Corporate Sustainability Reporting Directive (CSRD) is also a significant step forward in terms of improving the information available to market participants and supervisors. This initiative, still in the negotiation phase, revises and strengthens the sustainability reporting standards for companies operating in Europe and establishes mandatory sustainability reporting standards for more than 50,000 firms, including all large and listed firms, although simpler standards will apply to listed SMEs.14 In January this year, the EBA published disclosure standards for environmental, social and governance (ESG) risks. These provide the basis for publication by the European banking sector of comparable quantitative information on how climate change risks affect their balance sheets. Compliance with these standards will undoubtedly require a significant effort on the part of banks, which ultimately depend on the information available on their counterparties. As a result, the EBA has introduced certain transitional features in the standards to facilitate the adaptation process. In any event, providing this information to the market will encourage banks to improve their information systems and databases. Moreover, improving public information will ultimately enhance the ability of financial market participants to discriminate. The BCBS is playing a notable role globally. In November 2021 it publicly communicated its support for the creation of the ISSB.15 At the same time it indicated its intention to explore in parallel how to use the bank disclosure framework (Pillar 3) to promote a common disclosure baseline for climate-related financial risks across internationally active banks.