This report of the Network for Greening the Financial System builds on the network’s October 2018 progress report, in which members acknowledged that “climate-related risks are a source of financial risk. It is therefore within the mandates of central banks and supervisors to ensure the financial system is resilient to these risks.” And it provides 6 recommendations:

Recommendation n°1 – Integrating climate-related risks into financial stability monitoring and micro-supervision

a) Assessing climate-related financial risks in the financial system by:
mapping physical and transition risk transmission channels within the financial system and adopting key risk indicators to monitor these risks;

  • conducting quantitative climate-related risk analysis to size the risks across the financial system, using a consistent and comparable set of data-driven scenarios encompassing a range of different plausible future states of the world;
  • considering how the physical and transition impact of climate change can be included in macroeconomic forecasting and financial stability monitoring.

b) Integrating climate-related risks into prudential supervision, including:
Engaging with financial firms:

  • to ensure that climate-related risks are understood and discussed at board level, considered in risk management and investment decisions and embedded into firms’ strategy;
  • to ensure the identification, analysis, and, as applicable, management and reporting of climate-related financial risks.

Setting supervisory expectations to provide guidance to financial firms as understanding evolves.

Recommendation n°2 – Integrating sustainability factors into own-portfolio management 

Acknowledging the different institutional arrangements in each jurisdiction, the NGFS encourages central banks to lead by example in their own operations. Without prejudice to their mandates and status, this includes integrating sustainability factors into the management of some of the portfolios at hand (own funds, pension funds and reserves to the extent possible). Notwithstanding that the focus of central banks incorporating environmental, social and governance (ESG) aspects into their portfolio management has been on own funds and pension portfolios, some voices have called for an extension of this approach to monetary policy. Going forward, the NGFS considers exploring the interaction between climate change and central banks’ mandates (beyond financial stability) and the effects of climate-related risks on the monetary policy frameworks, paying due regard to their respective legal mandates.

Recommendation n°3 – Bridging the data gaps 

The NGFS recommends that the appropriate public authorities share data of relevance to Climate Risk Assessment (CRA) and, whenever possible, make them publicly available in a data repository. In that respect, the NGFS sees merit in setting up a joint working group with interested parties to bridge the existing data gaps.

Recommendation n°4 – Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing 

The NGFS encourages central banks, supervisors and financial institutions to build in-house capacity and to collaborate within their institutions, with each other and with wider stakeholders to improve their understanding of how climate-related factors translate into financial risks and opportunities. The NGFS also encourages relevant parties to offer technical assistance to raise awareness and build capacity in emerging and developing economies.

Recommendation n°5 – Achieving robust and internationally consistent climate and environment-related disclosure 

The NGFS emphasises the importance of a robust and internationally consistent climate and environmental disclosure framework. NGFS members collectively pledge
their support for the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The NGFS encourages all companies issuing public debt or equity as well as financial sector institutions to disclose in line with the TCFD recommendations. The NGFS recommends that policymakers and supervisors consider further actions to foster a broader adoption of the TCFD recommendations and the development of an internationally consistent environmental disclosure framework.

Recommendation n°6 – Supporting the development of a taxonomy of economic activities

The NGFS encourages policymakers to bring together the relevant stakeholders and experts to develop a taxonomy that enhances the transparency around which economic
activities (i) contribute to the transition to a green and low-carbon economy and (ii) are more exposed to climate and environment-related risks (both physical and transition).
Such a taxonomy would:

  • facilitate financial institutions’ identification, assessment and management of climate and environment-related risks;
  • help gain a better understanding of potential risk differentials between different types of assets;
  • mobilise capital for green and low-carbon investments consistent with the Paris Agreement.

Read the report