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NGFS Details Progress Made By Supervisors on Climate Risk

Network plans to launch a capacity building initiative for supervisors, develop policy recommendations to bridge data gaps, and further build on its climate scenarios work.

The Network for Greening the Financial System (NGFS) has released a new report detailing the progress made by supervisors in integrating climate‑related and environmental risks into their supervisory activities.

Through the progress report and upcoming NGFS initiatives, the NGFS seeks to facilitate a continual uplift in supervisory capabilities and convergence of global supervisory practices.

Based on five recommendations made in the May 2020 NGFS Guide for Supervisors, the report provides updated and granular guidance structured around twelve focus areas, supported by case studies on global supervisory practices and actionable tools.

The report includes a deep dive into environmental risks and disclosure, informed by surveys of financial institutions and NGFS supervisors conducted between late 2020 and early 2021.

The report enables supervisors to learn from the experience of others and decide whether to adopt or adapt the good practices accordingly to suit their domestic needs, the NGFS says.

Findings

Among its key findings, the report says most supervisors (94%) have progressed in developing a clear strategy, establishing an internal organisation and allocating adequate resources to address climate‑related risks.

Similarly, most supervisors (64%) have already implemented or are in the process of implementing climate‑related risks assessments, and work is underway in a number of jurisdictions to develop analytical tools, models (both quantitative and qualitative) and key risk indicators to monitor the transmission of physical and/or transition risks.

Further, 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, the report says.

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.

Looking ahead

The report acknowledges that further progress is needed to fully embed climate‑related and other environmental risks into supervisory frameworks, and address the challenges reported by NGFS supervisors.

The most common challenges cited by supervisors include data gaps, a lack of harmonised methodologies and risk metrics, and insufficient internal capacity and resources.

To help address these challenges, work is underway within the NGFS across numerous areas, including:

  • to identify and prioritise data needs, enhance the availability, reliability and comparability of climate‑related data, and develop policy recommendations bridge data gaps (final report to be published towards year-end);
  • to deepen work on risk assessment methodologies and metrics, including to build on the second iteration of the NGFS scenarios by providing additional sectoral granularity and using case studies to inform practical application of the scenarios;
  • to further examine risk differentials between green and non‑green assets, which the NGFS says may contribute to the review of regulatory frameworks that its members and observers are conducting or intend to conduct;
  • to continue to explore whether and how central banks and supervisors can play a role in addressing the risks posed by biodiversity loss and the knowledge gaps around it; and
  • to roll out a “multi-year capacity building programme” for NGFS members, which aims to address the needs expressed by supervisors in implementing practices highlighted in the NGFS Guide, this progress report, and other NGFS material

The report is part of the NGFS’ contribution to the 2021 United Nations Climate Change Conference (COP26), which kicks off in Glasgow this weekend.

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