ESMA Puts Climate Risk Under Separate Category in Monitoring Framework

A Brief Summary
The regulator of EU markets, the European Securities and Markets Authority (ESMA), announced a new category that puts climate risk separately in its risk management, assessment and monitoring framework, alongside other categories, including liquidity, market, credit, contagion and operational risk.
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ESMA was established in 2011 with the primary goal to protect, promote and regulate financial markets, assess the investors' risk, enhance financial stability etc.
Recently, ESMA released its semi-annual Trends, Risks and Vulnerabilities (TRV) report, in which the regulator added the new category "Environmental Risks", and it said that focus initially would be on climate as it is the most prominent risk under this category.
The new category will capture physical, transitional and potential risks associated with green finance.
ESMA said: “There is broad agreement that climate change has become the challenge of our generation, with potentially substantial consequences for the global economy and economic agents (households, businesses and governments). As such, climate change will also have major implications for the global financial system, even as public understanding of the potential ramifications and transmission channels between climate change and financial risks is still progressing.
"In recent years, a broad consensus has nonetheless formed around one fundamental message: the potential costs of inaction over the many decades to come to appear disproportionately high compared to those of actions taken today to address climate change or mitigate its impact.”
The article discusses the regulators' perspectives on how environmental hazards could affect EU securities markets and participants, as well as ESMA's strategy to incorporate environmental risks into the risk assessment and monitoring framework.
The regulator's primary core risks include abrupt changes in market sentiment, such as those caused by a shift in investors' perceptions of climate risk, greenwashing, and weather-related hazards, all of which can result in losses in physical assets or financial holdings, as well as policy and legislative action.
ESMA discussed the need for enhanced disclosure for green financial products, increased transparency through increases in labelled sustainable finance products, and the development of climate-specific risk monitoring indicators as some of the focus areas discussed to address the defined risks.