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Principle 5 – Monitoring and reporting of climate-related financial risks

5.The financial firm should ensure that internal reporting systems are capable of monitoring material climate-related financial risks and producing relevant, accurate and timely information to inform effective board and senior management decision-making. Such information should be reported to the board, senior management and relevant stakeholders, where required to do so. The financial firm should address identified information and data gaps.
 
5.1The board and senior management should ensure that the financial firm has systems and resources in place to collect, analyse and aggregate climate-related financial risk data. Senior management should incorporate climate-related financial risk information in internal reporting, monitoring, and escalation processes, where relevant. This will facilitate timely and sound decision-making across the firm.
 
5.2The financial firm should establish procedures to provide the board and senior management with relevant information on its material climate-related financial risk exposures, including monitoring and mitigation actions. The extent, form and frequency of internal reporting should be based on the nature and scale of the risks to which the financial firm is exposed.
 
5.3Financial firms should develop metrics to monitor and report climate-related financial risks appropriate to their size, complexity, risk profile and activities. Like all risks, climate-related financial risks should be closely monitored; the higher the impact, the higher the review frequency.
 
5.4Financial firms should ensure that risk monitoring captures the potential impact of climate-related risk drivers on the financial firm’s third-party arrangements and business continuity planning.
 
5.5Given the evolving nature of climate-related financial risks, financial firms should monitor developments and seek to understand and, where possible, manage the impact of climate-related financial risk drivers on other material risks where additional transmission channels are identified. This should feed into the risk identification, assessment, measurement, mitigation and monitoring processes of these material risks.
 
5.6Where appropriate, financial firms should consider building capabilities to address any information and data gaps. For example, data collection processes may need to be enhanced, such as strengthening the engagement with clients to develop a better understanding of the impact of climate-related financial risks on clients’ businesses, obtaining more climate-related or environmental information from clients, and using appropriate data proxies where necessary.
 
5.7Financial firms should develop an adequate data governance framework that covers the nature and level of the risks to which they are or might be exposed and which allows them to use sufficiently forward-looking and granular climate-related risk information in their risk management and governance strategy.