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    NGFS Outlines Options for Supervisory Review of Transition Plans

    April 29, 2024

    The Network for Greening the Financial System (NGFS) recently published three reports on the use of transition plans to boost sustainable finance and manage climate-related financial risks. The reports discusses the interlinks between transition plans of financial institutions and the economy, the challenges and policy considerations related to transition plans for emerging markets and developing economies (EMDEs), and the key elements for credibility of transition plans from a micro-prudential perspective.

    The report on transition plans from a micro-prudential perspective builds on a previous report published in May 2023, which took stock of emerging practices on climate transition plans and assessed the role of central banks and supervisors in relation to transition plans. The recently released report describes the proposed elements of credible transition planning and plans from a micro-prudential perspective and the potential ways forward for micro-prudential authorities that supervise transition planning and/or plans to assess the credibility of these plans. The considerations to operationalize supervision include implementation of an appropriate monitoring approach and ensuring availability of resources with the capacity and capability to adequately review and challenge transition planning and/or plans as needed.

    The report describes three potential ways forward to operationalize the transition plan review process by supervisory authorities:

    • Monitoring by Micro-Prudential Authorities. Micro-prudential authorities could take a direct role in reviewing transition plans. This would involve a comprehensive assessment of the plans to ensure they meet the established criteria for credibility and effectiveness. The authorities could use a set of predefined metrics and benchmarks to evaluate the alignment of plans with the broader goals of financial stability and environmental sustainability.
    • Reliance on Third-Party Evaluations. Financial institutions could engage independent third-party organizations to review their transition plans. These organizations would provide an objective assessment of the plans, ensuring they are robust and credible. Micro-prudential authorities could then use these evaluations as part of their oversight process, potentially streamlining the review process and leveraging external expertise.
    • Collaborative Review Process. A joint review process involving both micro-prudential authorities and third-party evaluators could be established. This collaborative approach would combine the regulatory oversight of the authorities with the specialized knowledge of external evaluators. Such a partnership could enhance the thoroughness and credibility of the review process, while also sharing the workload.

    For operationalization of third-party evaluation, jurisdiction-specific, reliable, and standardized evaluation criteria for third parties to follow is crucial. However, one challenge with this is that no international framework exists for accreditation of verifiers for transition planning and plans. The current practices and methodologies of the third-party evaluators are mainly for validating the alignment of corporate greenhouse gas emission reduction targets to broader climate goals and for evaluating the robustness of strategic actions of financial institutions to accomplish the climate goals. Another consideration is the cost implications for both financial institutions and micro-prudential authorities for hiring reputable third-party organizations. Overall, the specific choice of operationalization methodology would depend on the mandates and capacities of the micro-prudential authorities as well as the availability and reliability of third-party evaluators.

    NGFS will continue to further its work on transition plans, particularly in terms of understanding the interaction between scenario analysis and transition planning, strategy setting, and understanding target-setting from supervisory perspectives. NGFS may also work to develop a guide for supervisory authorities on understanding and, where relevant, engaging with financial institutions’ target-setting from a micro-prudential perspective.


    Visit Moody's Analytics Climate and ESG Risk Microsite to learn how you can proactively incorporate climate and ESG insights into your risk assessment process.


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    Keywords: Climate Change Risk, Sustainable Finance, Scenario Analysis, NGFS, ESG, International, Banking, Disclosures, Transition Plans

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