In terms of risk identification and management, some firms are beginning to assess how gradual changes in climate impact operational resilience and the potential for business disruption. Several conduct periodic disruption simulations with predictive weather modeling as part of their resiliency programs. This work builds on experience managing risks posed by disaster events, including severe weather, to their operations and infrastructure such as branches, equipment and data centers. This includes updating disaster response playbooks and business continuity plans to address the resultant operational risks. In terms of credit and market risk, some firms are building ex-ante climate risk assessments into sectoral or industry reviews, while others are considering the role of climate change within traditional ex-post assessments of exposures and loss estimates related to severe weather events like wildfires, hurricanes, and flooding. Examples include: heightened monitoring of mortgage concentrations in high-risk areas, modified risk limits or reduced tenors for transactions to certain carbon-intensive sectors, and consideration of climate risk disclosures in offering documents. Climate-related scenario analysis is an emerging practice at multiple firms to identify lending portfolio sensitivity to both physical and transition risks. For physical risk scenarios, this might include stressing mortgage lending in discrete geographies against both publically available natural hazard scenarios and internally generated severe weather simulations. For transition risk scenarios, some firms are using their energy lending portfolios as a starting point to model transition mechanisms.

From that perspective, climate change introduces challenges for supervisors related to time horizon, data limitations, and inherent complexity. 7 One question that gets particular attention centers on time horizon and prioritization. More specifically, given the many risks that financial firms face—cybersecurity, geopolitical uncertainty, and the credit cycle to name a few—and the relatively long time horizon around climate change, why should supervisors focus on this particular risk? I think that is a fair question and there are good answers. First, we are already observing the impacts of climate change on financial firms. Evidence continues to grow that climate change is affecting economic and financial outcomes.8 Moreover, evidence from climate science suggests that some further physical climate impacts are lockedin due to past emissions.9 Some investors consider an assessment of sustainability to be integral to their fiduciary responsibilities.10 And, as I described earlier, supervised firms are choosing to build capacity in this areas, so supervisors need to understand and assess these changes. This is a risk management question for today with direct implications for safety and soundness. Second, given the complexity of the problem, we all need time to build data, models, and intellectual capacity to address risks as they arise in the future. It took the better part of a decade to approach a steady-state in central bank stress testing capabilities for more familiar and arguably less complex risks like credit card losses or shocks to asset values from interest rate spikes.