The Network for Greening the Financial System (NGFS) published a report that examines the progress made by NGFS supervisors in integrating climate‑related and environmental risks into their supervisory activities. The analysis uses, as a reference, the five recommendations of the NGFS Guide for Supervisors, which was published in May 2020. The progress report provides an updated and granular guidance structured around twelve Focus Areas and supported by case studies on global supervisory practices. This report is part of the NGFS’ contribution to the 2021 United Nations Climate Change Conference (COP26), which is to be held in Glasgow next month.
The examined Focus Areas span supervisory scope, strategy, and organizations framework; risk transmission and assessment; development and implementation of supervisory expectations; and supervisory expectations with regard to disclosures. The presented case studies illustrate how the Focus Areas have been put into practice, showcase good practices, and importantly support supervisors in their ambition to go further and faster. The report also includes a deeper dive into the areas of environmental risks and disclosures. The report was informed by a survey of the NGFS supervisors in early 2021 and by another survey on disclosure requirements and practices of supervised institutions in late 2020.
The results show that most supervisors (94%) have progressed in developing a clear strategy while 64% of supervisors have already implemented or are in the process of implementing climate‑related risks assessments. Nearly 78% of supervisors have included climate‑related risks in their supervisory activities in one form or another, with many of them having engaged with financial institutions under their supervision to better understand their climate‑related risks exposures. However, the understanding and measurement of environmental risks more broadly are still at a nascent stage. Progress made by supervisors in terms of setting supervisory expectations for climate‑related and environmental risk management has significantly accelerated since 2019, with 83% having developed or developing supervisory expectations for climate‑related risks and 59% for environmental risks. Nevertheless, supervisors have made less headway in effectively integrating these risks into their set of formal and binding supervisory tools, although most of them report ongoing actions or plans to do so.
Through the progress report and upcoming initiatives, NGFS can facilitate a continual uplift in supervisory capabilities and convergence of global supervisory practices. Notably, a multi-year capacity building program is being rolled out for NGFS members and will contribute to global efforts—namely the Climate Training Alliance coordinated under the COP26 agenda. In line with the priorities identified in this progress report, NGFS is planning work on the following areas to better support supervisors:
- Launching a capacity building initiative to address the needs expressed by supervisors in implementing practices highlighted in the NGFS Guide, this progress report, and other NGFS material.
- Continuing its work to identify and prioritize data needs, enhance the availability, reliability and comparability of climate‑related data and develop policy recommendations to bridge the data gaps identified. A final report will be published toward the end of the year.
- Deepening its work on risk assessment methodologies and metrics, including building on the second iteration of NGFS scenarios. On the Phase II NGFS scenarios, further work will be undertaken to provide additional sectoral granularity, while building on case studies to inform their practical application.
- Further examining risk differentials between green and non‑green assets, which may contribute to the review of regulatory frameworks that many of its members and observers are conducting or intend to conduct in the coming years.
- Continuing to explore, via the Joint NGFS‑INSPIRE Study Group on Biodiversity and Financial Stability, whether and how central banks and supervisors can, within the remit of their mandates, play a role in addressing the risks posed by biodiversity loss and the knowledge gaps around it.
Keywords: International, Banking, Climate Change Risk, Disclosures, COP 26, ESG, Guidance, NGFS
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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