The next phase of sustainability-related financial supervision will focus on nature, transition planning and prudential requirements, according to experts.
The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) today launched an updated guide for integrating climate and nature-related financial risks into prudential supervision. The guide was first published in 2020.
Speaking at the launch event, Donald Chen, executive director of the Hong Kong Monetary Authority, said that, if the original version focused on “establishing that climate risk belongs in prudential supervision”, the update “is about what happens once that argument has been accepted”.
Comparing the two documents, he continued, shows “the major changes come from the discussion over nature [and] transition planning, and then more of a concrete discussion over capital treatment”.
The NGFS is also putting more emphasis on the role of climate adaptation and forward-looking resilience measures in “shaping the materiality of climate risks and informing the supervisory assessment of residual risks”, according to the report.
The update is based on a survey of 67 supervisory authorities and numerous case studies from the network’s members, including the European Insurance and Occupational Authority.
It makes five recommendations to provide “a practical roadmap for supervisors seeking to strengthen the resilience of supervised entities to climate and nature-related risks”.
One of the five is to ensure that investors and other financial institutions keep on top of their climate- and nature-related risks “and take mitigating supervisory action where appropriate, including by considering how such risks may be addressed within the prudential framework”.
Earlier this month, French investment house Eurazeo published proposals on how to channel more capital into environmental solutions in Europe, which included updating the IORP Directive to ease “certain prudential constraints” so that pension funds could invest more easily in private market funds that satisfy Article 9 of the Sustainable Finance Disclosure Regulation (SFDR).
From a risk perspective, the NGFS said “further exploration is warranted on how micro-prudential and macro-prudential tools may address climate and nature-related vulnerabilities and support evidence-based supervisory responses”.
It also suggested that it could explore “the development of integrated climate-nature risk assessments, the better incorporation of adaptation and mitigation measures into risk analysis, and the continued advancement of climate and nature scenario analysis by both supervisors and financial institutions”.
