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Overview of Environmental Risk Analysis by Financial Institutions

This Overview of Environmental Risk Analysis by Financial Institutions released by the NGFS provides wide-ranging examples of how environmental risks translate into financial risks, and an in-depth review of the tools and methodologies for ERA used by financial institutions including banks, asset managers and insurance companies. The report also identifies the major barriers to wider adoptions of ERAs by the financial services industry, including the lack of awareness of environmental risks, inadequate data, incomplete methodologies and limited capacity.

Key points

The overview concludes with six opportunities for mainstreaming ERA within the financial sector:

  • 1.    Enhancing ERA awareness: Central banks and financial supervisors should strive to enhance ERA awareness among financial institutions by conducting ERA themselves and clarifying expectations or standards for financial institutions to implement ERA.
  • 2.    Capacity building: Industry associations, central banks and supervisors, international organisations, NGOs and academic institutions could organize seminars and training activities on ERA methodologies, with some results delivered as public goods to the financial industry.
  • 3.    Supporting demonstration projects: The NGFS, international organisations, central banks and supervisors should consider supporting demonstration ERA projects in key sectors such as banking, insurance and asset management, and for key regions exposed to substantial environmental and climate-related risks.
  • 4.    Disclosing risk exposures and ERA results: A robust and internationally consistent climate and environmental disclosure framework is needed. For those countries with more developed ERA tools and capacity, central banks and supervisors might encourage financial institutions to disclose their exposures to environmental and climate risks as well as their ERA results in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
  • 5.    Developing Key Risk Indicators (KRI) and statistics: The NGFS and relevant international organizations could conduct research themselves while encouraging other market bodies and academic institutions to develop KRI that facilitates the identification, measurement and data comparability of environment- and climate-related risks.
  • 6.    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 ESG characteristics of the economic activities.

The Overview is a non-technical review of ERA tools and methodologies based on the NGFS Occasional Paper Case Studies of Environmental Risk Analysis Methodologies. The Occasional Paper, the second document published by the NGFS today, presents a more detailed and in-depth discussion of the tools and methodologies for ERA through case studies conducted by over 30 organizations. This paper aims to inform the financial community of the ERA methodologies and inspire interested institutions to further develop or enhance them. Views expressed in the Occasional Paper are those of the individual authors and do not necessarily reflect the views of the members and observers of the NGFS.