Transitioning to a low-carbon, and subsequently zero-carbon, economy entails both risks and opportunities for the financial sector. Strong corporate governance can drive and enable financial firms to identify and take the strategic steps necessary to develop and deploy new and more sustainable approaches and technologies, to strengthen business models and to improve both business and sustainability metrics. Importantly, enhanced risk management is critical for financial firms to identify and manage these risks better and to be able to demonstrate this to their clients and supervisors.
11.
Climate-related financial risk refers to the financial risks arising from climate change, including physical, transition and liability risks. Such risks could impact the viability and soundness of individual financial firms and have broader implications for financial stability.
12.
Physical risk refers to potential economic and financial losses from climate and weather-related events and the long-term progressive impact of climate change.
13.
Transition risk refers to the financial risk related to the process of adjustment towards a lower-carbon economy, which can be prompted by, for example, changes in climate policy, technological changes or change in market and social sentiments.
14.
Liability risk refers to climate-related compensatory claims and/or direct legal actions against financial firms. Liability risk can be considered as a separate risk but can also be treated as a subset of physical and transition risks.
15.
Climate-related financial risks are not bound by timelines and can emerge within the short, medium, and long-term. They can materialize through transmission channels in the balance sheets of financial firms and within the traditional categories of financial risks, including credit, market, operational, underwriting, reputational and liquidity risks.
16.
The reference to the board and senior management throughout the Principles is to be understood in accordance with their respective roles and responsibilities and is meant to include the members of the board of directors (or equivalent) and senior management. The Principles do not presume or endorse a specific board or senior management structure, nor do they advocate for a specific approach to assigning climate-related financial risk responsibilities within a financial firm.