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NGFS Status Report on Financial Institutions’ Experiences

The Network for Greening the Financial System (NGFS) has performed a survey to assess whether a risk differential could be detected between green, non-green and brown financial assets. It aims to present a point-in-time snapshot of current practices among financial institutions. The striking result from the study was the diversity of methods, results and motivations for whether to undertake a climate- and environment-related risk assessment.

Key points

Overall, it appears that it is only possible to track the risk profile of green, non-green and brown assets in very few jurisdictions. An important reason for this is that the prerequisites, e.g. a clear taxonomy and available granular data, are not yet in place in most jurisdictions. These results illustrate the challenges for banks and insurance companies to assess their exposure in the absence of common classifications and the inherent limits of backward-looking analysis in a rapidly developing area.

Many respondents stressed the lack of harmonised client data as the main obstacle for defining the greenness of an asset. Respondents also stressed the internal challenges posed to their organisations. The integration of climate- and environment-related risk assessment into their usual risk analysis requires the build-up of internal knowledge as well as investment to adapt existing IT systems to track
this emerging risk.

Given the increasing magnitude of climate change and its impact on the financial system, forward-looking methodologies are necessary to assess the impact on individual financial institutions. Such assessments were performed at the portfolio level by twelve respondents (22%). Of these forward-looking studies, scenario analyses and stress tests are the most common. These types of analyses are typically at an early stage and often stem from international initiatives such as the TCFD and the UNEP FI pilot, in which some respondents participated.