NGFS Publishes Recommendations to Better Manage Environmental Risks
CMF announced the publication of two documents prepared by the Network for Greening the Financial System (NGFS) on better management of climate-related and environmental risks. One of the documents is a guide for supervisors that sets out five recommendations on action to be taken by the NGFS members as well as the broader community of banking and insurance supervisors to integrate climate-related and environmental risks into their work. The second document is status report on the experiences of financial institutions on working with green, non-green, and brown financial assets and a potential risk differential; this document also offers an overview of industry definitions and practices on quantification and mitigation of environmental risks.
Guide for Supervisors. The content of the guide is based on input received from NGFS members and work done by supervisors outside the network. The outcomes clearly show that worldwide supervisors are taking action. The practices showcased in the guide aim to further inspire supervisors and help them accelerate their efforts. The guide sets out the following recommendations for supervisors:
- Determine how climate-related and environmental risks transmit to the economies and financial sectors in their jurisdictions and identify how these risks are likely to be material for the supervised entities
- Develop a clear strategy, establish an internal organisation, and allocate adequate resources to address climate-related and environmental risks
- Identify the exposures of supervised entities that are vulnerable to climate-related and environmental risks and assess the potential losses should these risks materialize
- Set supervisory expectations to create transparency for financial institutions in relation to the supervisors’ understanding of a prudent approach to climate-related and environmental risks
- Ensure adequate management of climate-related and environmental risks by financial institutions and take mitigating action where appropriate
NGFS Status Report. This report highlights the main findings of a survey conducted by the NGFS among 49 banks and five insurance companies around the globe. The survey was intended to understand how financial institutions kept track of the specific risk profiles of green, non-green, and brown financial assets; developed specific risk metrics; and analyzed potential risk differentials. Although not conclusive on the existence of a risk differential, the report shows positive trends among financial institutions to better account for climate related risks of their assets and suggests encouraging ways forward in the analysis via forward-looking methodologies. The report recalls the impossibility for a complete assessment without harmonized green and brown taxonomies.
Looking ahead, two other documents dedicated to climate scenario-analysis will be published by the NGFS shortly. NGFS will also start working on the data and metrics needs for the assessment of climate and environmental risks and investigate the possible access limitations. Additionally, NGFS announced that twelve new members have joined the Network since the beginning of 2020. These are Central Bank of Brasil, Central Bank of Armenia, Central Bank of Cyprus, Central Bank of Georgia, Central Bank of West African States, Danish Financial Supervisory Authority, Bank of Estonia (Eesti Pank), Financial Market Authority Austria, Bank of Latvia (Latvijas Banka), Bank of Lithuania (Lietuvos Bancas), Malta Financial Services Authority, and National Bank of Cambodia. CMF is involved in the micro-prudential oversight work of the NGFS and has formed a Climate Change Working Group that is developing supporting documents for the Board of the Commission. The issues being addressed include climate risk monitoring, climate risk information dissemination, and the development of a green financial market. CMF also participates as a technical advisory body to the Green Finance Bureau of the Ministry of Finance.
Related Link (in Spanish): Press Release
Keywords: International, Banking, Insurance, Securities, Climate Change Risk, ESG, Sustainable Finance, Green Assets, NGFS, CMF
Michael Denton, PhD, PE
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.
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
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