Central banks and supervisors have published a paper on how to integrate climate adaptation into financial institutions’ transition plans.
The Network for Greening the Financial System (NGFS) worked with International Transition Plan Network on the guidance, which could inform work being done on the subject by a G20 working group.
The influential body argued that, as the physical effects of climate change intensify around the world, “adaptation should become a more central element of risk management and strategic planning”.
“The NGFS calls on policymakers, supervisors, financial and non-financial institutions, and academics to accelerate their efforts to embed adaptation within transition plans, alongside mitigation actions,” it continued.
AXA Investment Managers is among the entities highlighted for good practice, because it has developed a tool to assess its exposure to natural disasters. It also has a process for modelling the physical risk to its property investments, based on their location, use and physical characteristics.
“The in-house catastrophe modelling tool was used to understand the average annual loss of [AXA’s] investments,” explained NGFS.
“Of the €45bn in property investments analysed in 2022, the branch has established that the highest risks in the portfolio are floods (39% of the total), hail (32%) and windstorms (28%).
”The paper goes on to propose a framework to embed adaptation across climate transition plans, including guidance for developing targets and metrics.
“Making adaptation a core component of transition plans can support the alignment of capital flows with the needs of climate resilience and enable institutions to manage physical risks more effectively.”
Protections for climate transition plans
Last week, the UK’s Financial Conduct Authority published a policy statement that included a requirement for issuers to incorporate climate transition plans in their investment prospectuses.
The requirement would only apply to companies with an existing plan containing material information.
Climate transition plans are a priority for rule-makers in the UK, with the Government currently consulting on potential disclosure requirements.
Some companies have expressed concern that publishing a transition plan could open them up to liability risks if they fail to achieve it – particularly if they are required to have them audited and presented alongside financial information.
To reduce the risks, the FCA said it would treat climate transition plans published in prospectuses as ‘protected forward-looking statements’.
This means that investors wishing to pursue a case against an issuer for failing to achieve its transition plan would have to prove the company was dishonest or reckless when it developed the plan.
This differs from the usual approach to forward-looking statements, in which the burden of proof sits with the issuer, which has to demonstrate it was not negligent.
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