At the global level, supervisory efforts are increasingly focused on addressing climate risks via better quality data and innovative use of technologies such as generative artificial intelligence (AI) and blockchain. One such initiative is the recent Bank for International Settlements (BIS) TechSprint, which calls for technology solutions to address data-related gaps in sustainable finance. While the Network for Greening the Financial System (NGFS) also recently published beta version of the conceptual framework for nature-related risks to guide policy actions, addressing climate-related litigation risk looks to emerge as a new focus area at the supervisory level.
Below are the key highlights of the latest developments in these areas of climate-related financial risks:
- Climate-related litigation risk. NGFS recently published two reports, one of which outlines trends in climate litigation risks while the other report brings in focus the micro-prudential supervision of risks associated with the increase in climate-related litigations. The micro-prudential supervision report sets out potential supervisory options and suggests that supervisors adopt a risk-based approach. Prudential regulators may consider how to assess climate-related litigation risk through exposure analysis at a jurisdictional and entity level. Supervisory options explored include awareness building exercises, risk mitigation and transfer considerations, establishment of governance and risk management expectations to be assessed in prudential reviews, climate-related litigation disclosures, testing of resilience through scenario analysis, and regulatory capital considerations.
- Framework for nature-related risks. This NGFS publication aims to define nature-related financial risks and related concepts that are needed for a high-level understanding of these risks. It also offers a framework to help central banks and supervisors identify and assess nature-related financial risks. The principle-based risk assessment framework consists of three phases: identify sources of physical and transition risks; assess economic risks; assess risk to, from and within the financial system. Finally, it outlines the next steps to be taken by the NGFS Taskforce, including bridging the modeling and data gaps (notably on the development of nature-related scenarios), and using emerging datasets to support the alignment of policies on environmental sustainability and inform the assessment of nature-related financial risks.
- TechSprint on Climate Risk Solutions. BIS, COP28 Presidency, and the Central Bank of the United Arab Emirates (CBUAE) launched a TechSprint to drive progress in climate action. The Sprint calls for the development of technological solutions for sustainable finance and to combat climate change. The Sprint has three problem statements: The first statement is focused on AI, including gen AI, solutions for sustainable finance reporting, verification, and disclosure in the financial services industry. The second calls for blockchain solutions for auditing and enhancing transparency, traceability, and accountability in sustainable finance. The third problem statement is focused on the internet-of-Things and sensor technology solutions for sustainable finance to ensure informed assessments of impact, risk, or compliance. The TechSprint is open to technology developers and innovators from around the world. Potential participants must submit a technology proposal to one or more problem statements by October 06, 2023.
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.
- NGFS Reports on Climate-Related Litigation Risks
- NGFS Framework for Nature-Related Financial Risks
- BIS TechSprint on Climate Solutions
Keywords: International, Banking, ESG, Regtech, Nature-Related Risks, Conceptual Framework, Climate Change Risk, Climate Litigation Risk, TechSprint, NGFS, BIS
Hasan leads Moody’s Analytics ESG methodology development. He is expert on carbon transition, nature related risks and is a guest lecturer at ESSEC Business school on sustainable finance.
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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