Japanese regulators find methodology gaps in climate-risk scenario planning

Financial institutions need to enhance the underlying methodologies in their scenario planning for climate-related risks prior to developing strategy, according to a report from Japan’s Financial Services Agency (FSA) and the country’s central bank, the Bank of Japan (BOJ). The analysis was conducted in cooperation with three banks and three insurance companies and used scenarios developed by the Network for Greening the Financial System. According to the report, scenario planning outcomes could vary based on model assumptions, data comparability, risk estimation and variable selection. The report says: “To utilise the scenario analysis in the business strategy development and risk management, financial institutions need to further enhance the methodology, including addressing the issues identified in the exercise, taking into account their risk profiles as well as international discussions and developments in practice.” The FSA and BOJ said they would continue holding discussions with financial institutions on the methods and practical application of scenario analysis.