Their response in turn will affect how financial institutions interact with businesses going forward. Beginning from July this year, financial institutions have started reporting their climate related risk exposures based on the Climate Change and Principle-based Taxonomy developed for the financial sector to assess and classify economic activities within their portfolios. Aside from building a strong foundation for risk assessments and disclosures, the taxonomy is expected to encourage the flow of capital towards supporting transition activities. We recognise the need to minimise macroeconomic and social dislocations in the short term as we transition to a low carbon economy. The financial sector taxonomy therefore does not adopt a binary classification of green and brown activities, but also recognises credible efforts by businesses to actively reduce the harm that their operations might pose to the environment during transition. Based on an analysis of their material exposures to climate-related risks, financial institutions would be required to take actions to address high and unmitigated exposures. We have also strengthened the standards that we expect financial institutions to meet in managing climate related risks. This includes an expectation for financial institutions to work with and support their customers in managing their transition. More to the point, if businesses are committed and willing to undertake changes to reduce their GHG emissions and green their operations, the financial sector should help them make the transition. This may take the form of appropriate financing or protection solutions and advisory services.
The competent parties must endeavour to find solutions that combine the necessary market regulation and supervision with the advantages inherent in capital mobility. A completely regulated market reduces capital flows and generates large fluctuations in market prices, leading in turn to welfare losses. But neither is a market without any common rules and supervision an ideal remedy. Operations in financial markets need some degree of supervision but this must not paralyse the potential for developments that can contribute to higher prosperity in the global economy. BIS Review 23/1999  8