On 17 December 2024, the Swiss Financial Market Supervisory Authority (FINMA) issued its groundbreaking circular titled “Nature-related Financial Risks”. This directive establishes comprehensive guidelines for banks and insurers to identify, manage, and mitigate financial risks associated with climate and other nature-related factors. Aimed at bolstering the resilience of Switzerland’s financial sector, the circular aligns with international frameworks and introduces a proportional approach tailored to institutions of varying complexity and size. Following extensive consultations with stakeholders, the directive responds to industry and civil society feedback, balancing practical implementation with ambitious regulatory standards.
FINMA’s circular defines nature-related financial risks as those resulting from exposure to climate change and ecological degradation. These include physical risks such as floods, storms, and droughts, as well as transition risks associated with policy shifts, technological developments, and market changes toward sustainability. The circular mandates that institutions evaluate both direct and indirect impacts of these risks on their operations and financial stability.
The guidelines apply to banks, insurers, and associated financial groups. FINMA has tailored its expectations based on institutional size and complexity. Larger, more complex institutions in Categories 1 and 2 must comply with stringent requirements earlier, while smaller entities (Categories 3 to 5) benefit from extended timelines to ensure adequate preparation.
Governance and Risk Management
Governance structures must clearly delineate responsibilities for managing nature-related financial risks. Senior management and board members are expected to possess expertise in these areas, ensuring robust oversight. Institutions must periodically identify material risks through scenario analyses, categorising them as short-, medium-, or long-term. These findings should inform institution-wide risk management strategies, integrating thresholds, limits, and forward-looking indicators to monitor risk exposure effectively.
Stress Testing and Scenario Analysis
Institutions in Categories 1 and 2 are required to incorporate nature-related risks into their stress testing frameworks. These analyses evaluate the impact of adverse scenarios, including rare but significant events, on financial resilience. Insurers must address these risks through their Own Risk and Solvency Assessments (ORSA), ensuring comprehensive evaluation across all operational dimensions.
Sector-Specific Guidelines for Banks and Insurers
- Banks must account for climate and nature-related risks in credit, market, and liquidity management. This includes revising lending criteria, adjusting client ratings, and monitoring potential volatility impacts.
- Insurers are tasked with integrating these risks into underwriting, pricing, claims reserving, and asset management. They must also align their activities with sustainability commitments and assess the financial implications of climate-related factors on their solvency and operations.
The circular will be implemented in phases, with the first stage addressing climate-related financial risks starting 1 January 2026 for Categories 1 and 2. Smaller institutions (Categories 3 to 5) have until 1 January 2027 to comply. By 1 January 2028, all institutions must adhere to the full scope of the circular, encompassing both climate- and broader nature-related risks.
(Source: https://www.finma.ch/en/~/media/finma/dokumente/dokumentencenter/myfinma/rundschreiben/finma-rs-2026-01.pdf?sc_lang=en&hash=8D72D84C2DF2489DA571190B3C760C90, https://www.finma.ch/en/news/2024/12/20241207-mm-rs-2026-01-naturbezogene-finanzrisiken/)
