Featured Product

    NGFS Advocates Environmental Risk Analysis for Financial Sector

    September 10, 2020

    NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies. These papers provide important references to the tools and methodologies used by financial institutions for measuring exposure to environmental risks and for assessing the financial implications of these risks in a forward-looking manner, including via stress testing and scenario analysis. Both the publications conclude that, to effectively address climate-related and environmental risks, greater collective efforts are urgently needed from regulators, financial institutions, international organizations, third-party vendors, and academic institutions to promote wider adoption of environmental risks analysis in the financial industry.

    The overview of environmental risk analysis by financial institutions provides wide-ranging examples of how environmental risks translate into financial risks, along with an in-depth review of the tools and methodologies for environmental risk analysis used by financial institutions, including banks, asset managers, and insurance companies. It also identifies the major barriers to wider adoption of environmental risk analysis by the financial services industry, including the lack of awareness of environmental risks, inadequate data, incomplete methodologies, and limited capacity. The overview outlines six opportunities for mainstreaming environmental risk analysis within the financial sector:

    • Enhancing environmental risk analysis awareness—Central banks and financial supervisors should strive to enhance environmental risk analysis awareness among financial institutions by conducting environmental risk analysis and clarifying expectations or standards for financial institutions to implement environmental risk analysis.
    • Capacity building—Industry associations, central banks and supervisors, international organizations, nongovernmental organizations, and academic institutions could organize seminars and training activities on environmental risk analysis methodologies, with some results delivered as public goods to the financial industry.
    • Supporting demonstration projects—NGFS, international organizations, central banks, and supervisors should consider supporting environmental risk analysis projects in key sectors, such as banking, insurance and asset management, and in key regions exposed to substantial environmental and climate-related risks.
    • Disclosing risk exposure and results of environmental risk analysis—A robust and internationally consistent climate and environmental disclosure framework is needed. For countries with more developed environmental risk analysis tools and capacity, central banks and supervisors could encourage financial institutions to disclose their exposures to environmental and climate risks as well as the results of their environmental risk analysis in line with the recommendations of the Task Force on Climate-related Financial Disclosures.
    • Developing Key Risk Indicator and statistics—NGFS and relevant international organizations could conduct research while encouraging other market bodies and academic institutions to develop a Key Risk Indicator that facilitates the identification, measurement, and data comparability of environment and climate-related risks.
    • Developing a taxonomy of economic activities—NGFS calls on policymakers to bring together the relevant stakeholders and experts to develop and adopt green and brown taxonomies that enhance the transparency around the environment, social, and governance characteristics of the economic activities.

    The occasional paper contains a more detailed and in-depth discussion of the tools and methodologies for environmental risk analysis through case studies of more than 30 organizations. The occasional paper aims to inform the financial community of the environmental risk analysis methodologies and inspire interested institutions to further develop and enhance these methodologies. The paper presents a taxonomy of environmental risks, explains how these risks may translate into credit, market, underwriting, and operational risks for financial institutions. The paper also discusses the major gaps between research and application of the environmental risk analysis tools and presents a number of recommendations for stakeholders on ways to promote environmental risk analysis in the financial industry. 

     

    Related Links

    Keywords: International, Banking, Insurance, Securities, ESG, Climate Change Risk, Taxonomy, Stress Testing, Environmental Risk Analysis, Credit Risk, Basel, NGFS

    Featured Experts
    Related Articles
    News

    HKMA Finalizes Policy Modules on Group-Wide Approach and Remuneration

    The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.

    July 29, 2021 WebPage Regulatory News
    News

    EBA Guide to Monitor Threshold for Intermediate Parent Undertakings

    The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).

    July 28, 2021 WebPage Regulatory News
    News

    PRA Finalizes Approach to Supervision of International Banks

    In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.

    July 26, 2021 WebPage Regulatory News
    News

    FCA Issues PS21/9 on Implementation of Investment Firms Regime

    The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.

    July 26, 2021 WebPage Regulatory News
    News

    EBA Proposes Regulatory Standards to Identify Shadow Banking Entities

    The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.

    July 26, 2021 WebPage Regulatory News
    News

    IOSCO Proposes Recommendations on ESG Ratings and Data Providers

    The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.

    July 26, 2021 WebPage Regulatory News
    News

    ESMA Group Issues Recommendations on RFR Switch in Interdealer Market

    The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.

    July 26, 2021 WebPage Regulatory News
    News

    ECB Study Assesses Impact of Basel III Finalization Package

    The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.

    July 26, 2021 WebPage Regulatory News
    News

    ISDA Finds FRTB Results in Higher Capital Charges for Carbon Trading

    The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.

    July 26, 2021 WebPage Regulatory News
    News

    PRA Updates Remuneration Policy Statement Templates and Tables

    The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.

    July 26, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7307