Featured Product

    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.

     

    Related Links

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

    Featured Experts
    Related Articles
    News

    BIS Paper Outlines Vision for Future Financial System

    In a recent paper, the General Manager of Bank for International Settlements (BIS) and the Indian entrepreneur (Infosys co-founder) Nandan Nilekani have laid out a vision for the Finternet, which is proposed to be a network of multiple financial ecosystems, much like the internet.

    April 29, 2024 WebPage Regulatory News
    News

    BCBS Issues Discussion Paper on Climate Scenario Analysis

    The Basel Committee on Banking Supervision (BCBS) issued a discussion paper on the use of climate scenario analysis to strengthen the management and supervision of climate-related financial risks.

    April 29, 2024 WebPage Regulatory News
    News

    OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.

    April 25, 2024 WebPage Regulatory News
    News

    CFIT to Chair Open Finance Taskforce Announced by UK Government

    The UK government announced the formation of an industry-led Open Finance Taskforce, chaired by the Center for Finance, Innovation, and Technology (CFIT).

    April 25, 2024 WebPage Regulatory News
    News

    BIS and Central Banks Experiment with GenAI to Assess Climate Risks

    A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe

    March 20, 2024 WebPage Regulatory News
    News

    Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures

    Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.

    March 18, 2024 WebPage Regulatory News
    News

    Singapore to Mandate Climate Disclosures from FY2025

    Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies

    March 18, 2024 WebPage Regulatory News
    News

    SEC Finalizes Climate-Related Disclosures Rule

    The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.

    March 07, 2024 WebPage Regulatory News
    News

    EBA Proposes Standards Related to Standardized Credit Risk Approach

    The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU

    March 05, 2024 WebPage Regulatory News
    News

    US Regulators Release Stress Test Scenarios for Banks

    The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).

    February 28, 2024 WebPage Regulatory News
    RESULTS 1 - 10 OF 8962