Sustainability and Climate Risk (SCR) — Question 3

As climate change poses new financial risks to a central bank’s monetary policy operations, the bank decides to adapt operations with NGFS guidelines. Because the central bank does not include climate change in supervision practices, the bank consults subject matter experts (SMEs) to develop a proposal for central bank action on climate change. After completing the risk assessment, SMEs recommend the bank incorporate microprudential and macroprudential measures to embed climate change into supervision practices.
Which action are SMEs likely to recommend?

Answer options

• A. Conduct climate stress tests with standardized policy scenarios and feedback loops as a microproduential measure.
• B. Increase internal resources and establish an external review process for climate risk integration as a macroprudential measure.
• C. Adhere to disclosure best practice when integrating climate risk by following TCFD disclosure recommendations as a microprudential measure.
• D. Implement the widely adopted macroprudential measure of a procyclical capital buffer to increase equity capital during periods of carbon-intensive credit.

Correct answer: C

Explanation

The correct answer, C, is appropriate as it focuses on adhering to TCFD disclosure recommendations, which is essential for integrating climate risk into supervision practices. Options A, B, and D, while relevant, do not specifically address the integration of climate risk through best practice disclosures, which is a critical aspect of microprudential measures.