NGFS, the Network of Central Banks and Supervisors for Greening the Financial System, announced the addition of eight new members to the group. The U.S. FED formally announced that it has joined NGFS as a member, though it began participating in NGFS discussions and activities more than a year ago. Other regulatory authorities to join NGFS are the central banks of Paraguay, Iceland, and Uruguay as well as the Financial Regulatory Authority of Egypt, the Financial Services Authority of Indonesia, the Polish Financial Supervision Authority, and the European Securities and Markets Authority. DNB announced that NGFS also published a progress report on the implementation of sustainable and responsible investment practices in portfolio management of central banks, along with the results of a survey to assess the degree of preparedness of central banks to address climate risks in their monetary policy operations.
The progress report on implementation of Sustainable and Responsible Investment practices assesses the steps taken by central banks toward the adoption of sustainable and responsible investment practices over the last year. The report is a follow-up to the guide on sustainable and responsible investment, which NGFS had published in October 2019. The progress report builds on a dedicated survey among 40 NGFS members worldwide and to report on the steps central banks have taken over the last year. Similar to last year, the report concludes with case studies of first‑hand experiences by NGFS members. The report highlights that more central banks have either taken steps to integrate Sustainable and Responsible Investment practices in one or more of their portfolios or are planning to do so. The report also highlights that awareness of reputational risks and the desire to set a good example are still considered as key motivations for the adoption of Sustainable and Responsible Investment by central banks. Central banks have varying Sustainable and Responsible Investment objectives and many are still exploring what combination of investment strategies would best align with their portfolio characteristics. There is indeed still much work to be done, including with regard to the quality and comparability of ESG data. While further work is still needed on data issues, disclosures, and a global taxonomy, awareness is growing among central banks.
The survey on monetary policy operations and climate change examines how prepared central banks are to take account of climate-related risks in their monetary policy operations. The survey builds on the report on initial takeaways regarding monetary policy and climate change, which NGFS had published in June 2020. NGFS conducted a review of 107 central banks with the aim of analyzing their institutional frameworks and balance sheet features, in addition to deriving insights from a questionnaire that was sent to central banks worldwide to identify whether they are contemplating adjusting their operational frameworks to take account of climate-related issues in the implementation of monetary policy. Twenty-six central banks representing 51 countries participated in the survey, affording a comprehensive and geographically diverse overview of the latest developments in the field. Overall, the survey results confirm an increasing and
shared awareness of climate-related risks among central banks, even if the concrete actions taken have been limited so far. The key findings, based on the survey responses, are as follows:
- All central banks consider climate change to be a challenge, both on account of its potential threat to the economy and its impact on their operational frameworks
- Majority of central banks see scope in their respective mandates for adjusting their operational frameworks to reflect climate-related risks, albeit with considerable institutional differences across central banks.
- While majority of respondents are considering climate-related measures in general terms, the implementation of specific measures in their operational frameworks is still at a very early stage.
- The key incentive for central banks to adopt protective measures is stated as being the mitigation of financial risks stemming from exposures to climate-related risks on their balance sheets.
- The main argument in favor of adopting proactive measures reflects the primary objective of most central banks—that is, supporting an orderly transition toward a low-carbon economy to ensure a smooth monetary transmission over the long-term.
- Central banks see international coordination as key to facilitating the integration of climate-related risks into their operational frameworks.
Keywords: International, US, Americas, Banking, Insurance, Securities, Sustainable Finance, ESG, Climate Change Risk, Governance, Disclosures, NGFS, FED, DNB
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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