In the face of numerous environmental and climate risks, the creation of a low-carbon economy is one of the major challenges facing society. The financial sector is also exposed to environmental and climate risks. In addition, the sector faces transition risks. The financial sector could contribute to a successful transition by adequately assessing future investment risks and opportunities, thus helping to make capital allocation more efficient.

Given its great economic and social importance, this group of issues is acquiring its own momentum across countries, industries and market players: for example, many market participants are considering adopting the recommendations published in June 2017 by the sector-led Task Force on Climate-related Financial Disclosure (TCFD) established by the Financial Stability Board (FSB). The disclosure of environment-related financial risks outlined there is intended to help market participants to take account of environmental and climate risks systematically in their risk management and investment decisions.

At the same time, various parties representing, among others, the scientific community and non-governmental organisations, are engaged in scenario analysis in order to model the potential impact of climate change on the portfolios of entire industries as well as individual market participants.

On 8 March 2018, the European Commission presented an action plan for sustainable finance¹, which is based on the recommendations of the EU's High-Level Expert Group on Sustainable Finance (HLEG) published in January 2018.²

Among other things, this action plan is expected to focus on the development of details for the concept of fiduciary responsibility in capital investment decisions in order to create a clear framework for investments in sustainable financial products. This shows that the focus of the international debate is expanding from the previous mainly risk-based consideration of climate risks towards the larger group of issues relating to green/sustainable finance.

BaFin is actively involved in this group of issues: it is working jointly with other supervisory authorities and central banks towards an internationally harmonised regulatory framework, engages in exchanges with relevant players, and emphasises the importance of environmental and climate risks in its own supervisory activities.

However, in his New Year speech delivered on 17 January 2018, BaFin's President Felix Hufeld warned against granting regulatory favours, "without fact-based analysis, the assessment of risk profiles, default probabilities, risk-return ratios, et cetera". People who did that, he said, were sowing the seed for a new financial crisis: "The creation of owner-occupied housing for low-income households in the United States was a legitimate political goal that received praise from all sides in the early 2000s. Only in combination with inadequate and to some extent silent financial regulation did it become, as we all know, a disaster."