FINMA circular on nature-related financial risks

The new circular for banks and insurance companies extends the existing climate-related financial risk obligations and shifts them towards a holistic nature-related perspective. The document is based on the current recommendations of the international standard-setters, in particular the Basel Committee on Banking Supervision (BCBS) and the International Association of Insurance Supervisors (IAIS), as well as some of the recommendations of the Network for Greening the Financial System (NGFS).

The circular has implications if you’re a bank or insurance company. What are they?

Definition of nature-related financial risks

The circular defines nature-related financial risks as the short-, medium- and long-term risks of direct or indirect financial losses or other negative effects on an institution resulting from its exposure to natural phenomena. Nature-related financial risks are more holistic, also containing financial risks related to factors of nature in addition to the climate. Natural risks, including climate risks, are thus risk drivers that can be reflected in the institution’s existing risk types as nature-related financial risks through various transmission channels In particular, these channels include credit risks (including counterparty credit risks), market risks, liquidity risks, operational risks (including legal and compliance risks), insurance risks, business risks and reputational risks.

Nature-related risk governance requirements

The circular requires that the institution define and document all the tasks related to nature-related risk governance as part of the competencies and responsibilities of the board of directors and its committees, the executive board, the independent control bodies and control functions, the internal audit function and the other relevant business or organisational units, in accordance with their roles under the FINMA guidelines. The maturity of the risks must be considered to define levels of control and governance required.

Scenario analysis/stress testing

In accordance with FINMA Circular 2026/1, institutions are required to do a materiality assessment of the potential impact of nature-related risks on their financial risk profiles. This assessment must be performed using different scenarios. In other words, it should encompass a range of plausible adverse scenarios, including low-probability events with potentially significant impacts, and consider both direct and indirect impacts over various time horizons. The findings from these scenario analyses should be integrated into the institution’s risk management and internal reporting processes.

Timeline

The timeline is ambitious. The circular requires a phased transition to climate- and nature-related risks, so it’s important to start assessing the implications for your organisation. While the general focus has been on climate risks in the recent years for most organizations, an immediate attention and action plans are needed to make organizations compliant in time to the requirements.

What?
The circular concerns the risks of direct or indirect financial losses and negative effects from an institution’s exposure to nature-related risks.

Where?
The circular focuses on risk drivers that manifest across various existing risk categories within institutions, concerning Swiss companies with reporting obligations under the CO2 Act.

Who?
The circular is addressed to banks and insurance companies; full implementation for all institutions must be completed by 1 January 2028.

How?
The requirements are principle-based, and technology-neutral, focusing on the areas of governance and risk management.

Why?
The circular is designed to improve the management of nature-related financial risks and strengthen resilience.

Given the ambitious timeline, it’s important to start addressing a number of questions right now:

• Are nature-related risks part of our strategic and risk discussions?
• How are nature-related risks currently embedded in our risk and compliance governance, including our key processes, policies, metrics and disclosure?
• Are nature-related risks part of the board and C-suite agenda along with other ESG risks, especially the audit and/or risk committee?
• How do you distinguish between climate scenarios and nature-related scenarios and consider the second-round effect and feedback loops?

Our solution

Our approach to helping you comply with the new circular has three basic components: risk governance integration, scenario analysis and stress testing, and an express and affordable health check.

Review and reshape of your risk management framework

We assist you in the review of the current approach of how climate- and nature-related risks are managed and support you in strengthening your risk management framework across all relevant business units, including identification, selection of methodologies, necessary data points, key risk indicators, risk appetite, controls and incorporation of external and internal risk reporting.

Risk governance

We help you leverage your existing risk governance to embed nature-related risks in your entire strategic and risk governance value chain. We also make sure all lines of defence, including the business, control functions and audit, are involved. The aim is to be regulatory-compliant and disclosure-ready.

Scenario analysis and stress testing

Building on our extensive experience in climate scenario analysis, we help financial institutions develop and implement scenario analyses and stress tests tailored to nature-related financial risks. Our approach aligns with the latest scientific findings and industry best practices, ensuring a comprehensive assessment of potential impacts.

We guide you through defining relevant nature-related scenarios, considering both physical risks—such as biodiversity loss and ecosystem degradation—and transition risks associated with shifts toward sustainable practices. By conducting thorough assessments, we help identify your organisation’s contributions to environmental impact, vulnerabilities arising from disrupted ecosystem services due to climate change, and potential financial consequences of ecosystem collapse.

Our methodology incorporates frameworks from leading organisations, ensuring that our scenario analyses and stress tests are grounded in the most current and robust standards. This provides you with actionable insights to enhance your risk management strategies and support sustainable decision-making.

Express & affordable readiness assessment check
We offer an independent, time-efficient assessment of your readiness based on your specific documentation and organisational set-up, helping you gain confidence with the new provisions. We also offer a dedicated workshop with your key decisionmakers.

The new FINMA circular on nature-related financial risks could have significant implications for banks and insurance companies, and the tight timeline means it’s wise to start thinking about these matters now. If you think you might be affected, contact us and click here for a downloadable version.