The Network for Greening the Financial System (NGFS) is exploring the development of short-term climate scenarios to complement its existing scenario framework of long-term climate scenarios. Thus, NGFS has launched a call for expression of interest from modeling teams, until June 15, 2023, for the analytical implementation of short-term climate scenarios. The analytical implementation is envisaged to start in the third quarter of 2023. In another recent development, NGFS published a report that takes stock of emerging practices related to climate transition plans and assesses the role of central banks and supervisors in relation to transition plans to ensure an orderly transition to meet the Paris climate goals.
Report on transition plans
The report takes stock of transition plans of financial Institutions, along with their relevance to micro-prudential authorities. NGFS also reviewed whether these transition plans could be considered and used most effectively within the supervisory toolkit and in the overall prudential framework. NGFS reviewed available frameworks and emerging literature on transition plans from external bodies. It also analyzed the state of play in the regulatory landscape as it relates to transition plans among NGFS members. The analysis helped to identify the following six key findings as well as steps to advance the work on the relevance of transition plans and planning to micro-prudential authorities:
- While the potential of transition plans is widely recognized, there are multiple definitions of transition plans, reflecting their use for different purposes.
- There is merit in distinguishing transition planning (understood as a process to design a transition strategy) from a transition plan (transparency to a specific audience).
- Existing frameworks speak to a mix of objectives, audiences, and concerns for transition plans but predominantly relate to climate-related corporate disclosures.
- Transition plans could be a useful source of information for micro-prudential authorities to develop a forward-looking view of whether the risks resulting from an institution’s transition strategy are commensurate with its risk management framework.
- There are some common elements to all transition plans that are relevant to assessing safety and soundness.
- The role that micro-prudential authorities play needs to be situated in the context of the actions of other financial and non-financial regulators rather than acting in isolation.
In the report, NGFS also outlines its planned follow-up actions to this assessment. Given the different scope of transition plans as well as their potential relevance to the micro-prudential authorities, NGFS will engage standard-setting bodies, such as the FSB, BCBS, IAIS, and IOSCO, so that they can advance their respective work on transition plans and planning in a coordinated manner. Based on the findings of Phase 1, the sub-team will also take forward additional work to advance the discussion on the relevance of transition plans to micro-prudential authorities’ mandate, supervisory toolkit, and the overall prudential framework. NGFS also identified a number of potential uses for the information within transition plans vis-à-vis financial regulators’ different objectives. Finally, NGFS emphasizes the need for collaboration across financial regulatory as well as with real economy authorities and between jurisdictions, to ensure interoperability of transition plans and reduce regulatory fragmentation and related burden on firms and to prevent “arbitrage” of different emissions regulations and different interpretations of a group transition plan among different entities. Efforts by international organizations such as the FSB, BCBS, IAIS, IOSCO, ISSB, and OECD can help to harmonize such standards.
Analytical implementation of short-term scenarios
Coming back to the introduction of short-term scenarios, these scenarios are aimed to better capture the adverse implications of a disorderly transition and severe natural disasters in the near future. The project requires advanced modeling to provide a detailed set of macro-financial variables for each scenario at the global, country, and sector-level. NGFS is looking for a macroeconomic model that can simulate various shocks related to transition and acute physical risks. Also required is a group of experienced modeling experts to support and guide the working group in understanding the modeling output and making this available to a wider audience. NGFS is open to incorporating the complementary models that capture, for instance, acute physical risk impacts more precisely. The project aims to develop 3 to 5 short-term adverse scenarios in collaboration of the workstream members based on detailed narratives and recommendations in terms of scenario design, shocks and calibration, and model implementation.
- 1 to 3 disorderly transition scenarios, including abrupt implementation of carbon taxation, financial turmoil due to stranded assets, and uncertainty shocks
- 1 scenario representing a fragmentation in transition policies across groups of countries
- 1 scenario with current policies leading to physical hazard
Details about narratives and proposals for shock calibration will be summarized in a conceptual note on short-term scenarios that will be provided to the modeling team by September 2023. The project spans 2024, with most of the model-related work concentrated in the first half of the year. The short-term scenarios should span 3–5-year horizons. The inclusion of longer-term effects beyond these horizons may also be useful.
Keywords: International, Banking, ESG, Climate Change Risk, Scenario Analysis, Stress Testing, Transition Plans, Short-Term Climate Scenarios, NGFS
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