Weather & The Global Financial System

The Financial Stability Board (FSB) is an international body that monitors the global financial system and generates advices in that field. The body established the Taskforce on Climate-related Financial Disclosure (TCFD) for the purpose of advising regarding “more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks.

The taskforce’s mission relates to market transparency and stability. The board is convinced that better information will allow companies to incorporate climate-related threats and opportunities into their risk management and strategic planning processes. It is undeniable that firms’ and investors’ understanding of the financial consequences associated with climate change will strengthen.

The Financial Stability Board promotes international financial stability. The organisation strives to achieve this by coordinating national financial authorities and international standard-setting bodies. The idea is to assure strong regulatory and supervisory policies. The goal is to harmonise and realise a coherent implementation of these policies across sectors and jurisdictions.

An increasing focus on climate-related risks has become a major driver of the demand for financial products offering protection to adverse outcomes related to weather and climate change. As a result of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), companies, like credit rating agencies, and other organisations, are examining their exposure to climate-related risks. A report by the US Climate-Related Market Risk Advisory Committee (MRAC), a body of the Commodity Futures Trading Commission’s (CFTC), stretched the growing need for utilisation of derivative markets to manage climate-related risk resulting directly from the impacts of climate change.

The increased awareness of climate-related risk has contributed to intensified activity in weather derivatives trading volumes. It has also led to the influx of new market participants in the weather markets. This includes financial players, like hedge funds and asset managers.