Network for Greening the Financial System
First comprehensive report

A call for action
Climate change
as a source of financial risk
April 2019Foreword by Frank Elderson, Chair of the NGFSW

e collectively face the effects of climate change, as it reaches
beyond economies, borders, cultures, and languages.
In 2017, air pollution was a cause of almost 5 million deaths
worldwide while 62 million people in 2018 were affected by natural
hazards, with 2 million needing to move elsewhere due to climate
events. A transition to a green and low-carbon economy is not a niche
nor is it a "nice to have" for the happy few. It is crucial for our own
survival. There is no alternative. Therefore, we need to come together
and take action to create a bright, sustainable future.
Understanding what the magnitude of climate change heralds forfinancial stability, at the initiative of Banque de France, eight central
banks and supervisors established a Network of Central Banks andSupervisors for Greening the Financial System (NGFS) at the Paris“One Planet Summit” in December 2017. Since then, the NGFS hasgrown to 34 Members and 5 Observers from all over the globe.
Climate-related risks are a source of financial risk and it therefore falls
squarely within the mandates of central banks and supervisors toensure the financial system is resilient to these risks. This significant
breakthrough was already acknowledged in the NGFS progress report,
published in October 2018. With this first NGFS comprehensive report, we build upon this insight to issue six recommendations:the first four apply to the work of central banks and supervisors while the last two address policymakers. However, all six call forcollective action and draw a focus to integrating and implementing previously identified needs and best practices for a smoothtransition towards a low-carbon economy. These recommendations are aimed at inspiring central banks and supervisors– NGFS
members and non-members – to take the necessary measures to foster a greener financial system. We need to take action andwe cannot and will not do this alone. We will globally cooperate with policy makers, the financial sector, academia and otherstakeholders to distill best practices in addressing climate-related risks.
The achievements of the NGFS and the rapid expansion of its membership within a year have exceeded my expectations.
However, we are not there yet. These recommendations represent only the Network’s beginnings, as there is much work to bedone in order to equip these aforementioned actors with appropriate tools and methodologies to identify, quantify and mitigate
climate risks in the financial system. Future deliverables include a handbook on climate and environmental risk management,
voluntary guidelines on scenario-based risk analysis and best practices for incorporating sustainability criteria into central banks’
portfolio management. Going forward, the NGFS also expects to dedicate more resources to the analysis of environmental risks.
I am confident that the brain trust of the NGFS will continue to grow and evolve, keeping in mind the aim of having the financial
sector worldwide contribute toward a greener future. As chair, I am very proud of what the NGFS has accomplished in only
16 months since its creation, and I look forward to consolidating our work during the coming years.
Finally, I would like to extend my thanks to the tremendous amount of work done by everyone involved in this endeavour, thechairs and members of the three working groups and my team at De Nederlandsche Bank. In particular I would like to thankthe secretariat at the Banque de France, without whom we would not have stood where we stand today.

NGFS CALL FOR ACTION REPORT

1

Contents

1.

2.

3.

Executive summary

4

Presentation of the NGFS

7

Climate change as a source of economic and financial risks

11

1.1 Climate change is a source of structural change in the economy
and financial system and therefore falls within the mandateof central banks and supervisors

12

1.2 Climate change is different from other sources of structural change

12

1.3 How climate change might affect the economy and financial stability

13

1.4 The future impacts provide a loud wake-up call

17

A call for action: what central banks and supervisors can doand how policymakers can facilitate our work19

2.1 Recommendation n°1 – Integrating climate-related risks into financial
stability monitoring and micro-supervision20

2.2 Recommendation n°2 – Integrating sustainability factors into own-portfolio
management28

2.3 Recommendation n°3 – Bridging the data gaps

29

2.4 Recommendation n°4 – Building awareness and intellectual capacity andencouraging technical assistance and knowledge sharing30

2.5 Recommendation n°5 – Achieving robust and internationally consistentclimate and environment-related disclosure31

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

33

Looking forward: operationalising the work and strengthening
the dialogue

37

List of acronyms

39

Boxes
1 Distinguishing between climate and environment-related risks
2 Designing a scenario analysis framework for central banks and supervisors
3 Case study of quantitative analysis – DNB physical risk CRA tool4 The China Banking and Insurance Regulatory Commission analysis
of default rates of green loans compared to the overall loan portfolio
5 Sustainable investment at the Banque de France
6 Green taxonomies and the cases of China and Europe

NGFS CALL FOR ACTION REPORT

11
21
24
26
29
34

3

Executive summary
In the October 2018 progress report, NGFS members
acknowledged that “climate-related risks are a sourceof financial risk. It is therefore within the mandates ofcentral banks and supervisors to ensure the financial
system is resilient to these risks.” The legal mandates ofcentral banks and financial supervisors vary throughout the
NGFS membership, but they typically include responsibility
for price stability, financial stability and the safety andsoundness of financial institutions. Even though theprime responsibility for ensuring the success of the Paris
Agreement rests with governments, it is up to central banks
and supervisors to shape and deliver on their substantial rolein addressing climate-related risks within the remit of theirmandates. Understanding how structural changes affectthe financial system and the economy is core to fulfillingthese responsibilities.
Climate change is one of many sources of structuralchange affecting the financial system.1 However, it
has distinctive characteristics that mean it needs to beconsidered and managed differently. These include:• Far-reaching impact in breadth and magnitude: climatechange will affect all agents in the economy (households,
businesses, governments), across all sectors and geographies.
The risks will likely be correlated with and potentiallyaggravated by tipping points, in a non-linear fashion.
This means the impacts could be much larger, and morewidespread and diverse than those of other structural changes.
• Foreseeable nature: while the exact outcomes, time
horizon and future pathway are uncertain, there is a highdegree of certainty that some combination of physical andtransition risks will materialise in the future.
• Irreversibility: the impact of climate change is determinedby the concentration of greenhouse gas (GHG) emissions in
the atmosphere and there is currently no mature technology
to reverse the process. Above a certain threshold, scientists
have shown with a high degree of confidence that climatechange will have irreversible consequences on our planet,though uncertainty remains about the exact severity andtime horizon.
• Dependency on short-term actions: the magnitudeand nature of the future impacts will be determined byactions taken today, which thus need to follow a credibleand forward-looking policy path. This includes actions

4

NGFS CALL FOR ACTION REPORT

by governments, central banks and supervisors, financial
market participants, firms and households.
While today’s macroeconomic models may not be able toaccurately predict the economic and financial impact ofclimate change, climate science leaves little doubt: action
to mitigate and adapt to climate change is needed now.
The NGFS recognises that there is a strong risk that climaterelated financial risks are not fully reflected in asset
valuations. There is a need for collective leadership andglobally coordinated action and, therefore, the role ofinternational organisations and platforms is critical.
The NGFS, as a coalition of the willing and a voluntary,consensus-based forum provides six recommendations
for central banks, supervisors, policymakers and financial
institutions to enhance their role in the greening of thefinancial system and the managing of environment andclimate-related risks. The recommendations are not binding
and reflect the best practices identified by NGFS members
to facilitate the role of the financial sector in achieving theobjectives of the Paris Agreement.
Recommendations n°1 to 4 are aimed at inspiring central
banks and supervisors – NGFS members and non-members –to take these best practices on board when it fits within theirmandate. Parts of these recommendations may also be
applicable to financial institutions.

Recommendation n°1: Integrating climate-relatedrisks into financial stability monitoring andmicro‑supervision.

Important steps in this regard include: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;
1 The report focuses on climate-related risks rather than environmentrelated risks.

• conducting quantitative climate-related risk analysis tosize the risks across the financial system, using a consistentand 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 anddiscussed 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 ineach jurisdiction, the NGFS encourages central banks tolead by example in their own operations. Without prejudice
to their mandates and status, this includes integrating
sustainability factors into the management of some of theportfolios at hand (own funds, pension funds and reservesto 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 foran extension of this approach to monetary policy. Goingforward, the NGFS considers exploring the interaction
between climate change and central banks’ mandates(beyond financial stability) and the effects of climate‑relatedrisks 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 publicauthorities share data of relevance to Climate Risk
Assessment (CRA) and, whenever possible, make thempublicly available in a data repository. In that respect, theNGFS sees merit in setting up a joint working group withinterested parties to bridge the existing data gaps.

Recommendation n°4: Building awareness andintellectual capacity and encouraging technicalassistance and knowledge sharing.

The NGFS encourages central banks, supervisors andfinancial institutions to build in-house capacity and tocollaborate within their institutions, with each other andwith wider stakeholders to improve their understanding of
how climate-related factors translate into financial risks andopportunities. The NGFS also encourages relevant parties
to offer technical assistance to raise awareness and build
capacity in emerging and developing economies.
Recommendations n°5 and 6 do not fall directly within theremit of central banks and supervisors but point to actions thatcan be taken by policymakers to facilitate the work of central
banks and supervisors. Parts of these recommendations may
also be applicable to the private sector.

Recommendation n°5: Achieving robust andinternationally consistent climate and environmentrelated disclosure.

The NGFS emphasises the importance of a robust andinternationally consistent climate and environmental
disclosure framework. NGFS members collectively pledge
their support for the recommendations of the Task Forceon 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 thatpolicymakers and supervisors consider further actions to

NGFS CALL FOR ACTION REPORT

5

foster a broader adoption of the TCFD recommendations
and the development of an internationally consistentenvironmental disclosure framework.

Going forward, the NGFS will continue its work as longas its members deem it necessary and useful. The lessondrawn from the first sixteen months of NGFS activity is thatclimate change presents significant financial risks that are
best mitigated through an early and orderly transition.

Recommendation n°6: Supporting the developmentof a taxonomy of economic activities.

To ensure such a smooth transition, there is still a significant
amount of analytical work to be done in order to equip
central banks and supervisors with appropriate tools andmethodologies to identify, quantify and mitigate climate
risks in the financial system. This calls for a close and specificdialogue with academia and for further technical work totranslate the NGFS recommendations or observations into
operational policies and processes.

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 andlow-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, assessmentand 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.

More precisely, the NGFS is planning to develop:(i) a handbook on climate and environment-related risk
management for supervisory authorities and financial
institutions;(ii) voluntary guidelines on scenario-based risk analysis;(iii) best practices for incorporating sustainability
criteria into central banks’ portfolio management(particularly with regard to climate-friendly investments).

To some extent, recommendations n°1-4 require theimplementation of recommendations n°5-6, but this does
not preclude central banks and supervisors from acting now.

This report has been coordinated by the NGFS Secretariat/Banque de France.
For more details, go to https://www.banque-france.fr
or contact the NGFS Secretariat sec.ngfs@banque-france.fr

6

NGFS CALL FOR ACTION REPORTNGFS

Secretariat

Origin of the NGFS
2017

established a Networkof Central Banks and Supervisors
for Greening the Financial System.

T

ON

S

U

central banks
and supervisorsET

DECEMBER

N

E

PLA

M M I

Since then, the NGFS has grown toMembers

Observers

representing 5 continents.

The NGFS
is a coalitionof the willing.

It is a voluntary, consensus-based forum
whose purpose is to share best practices,
contribute to the development of climate–and environment– related risk
management in the financial sector
and mobilise mainstream financeto support the transition towarda sustainable economy.

The NGFS issues
recommendations

which are not binding
but are aimed at inspiring
all central banks and supervisors
and relevant stakeholders
to take the necessary
measures to foster
a greener financial system.

NGFS CALL FOR ACTION REPORT

7

NGFS composition and governance
Chair
Frank Elderson

Secretariat
Morgan Després

Plenary Members
and Observers

Reserve Bank
of Australia
Oesterreichische
Nationalbank

Bankof Thailand

Sveriges
Riksbank

Banque nationale de Belgique/
Nationale Bank van BelgiëDe Nederlandsche Bank

Bancode España

Bancode México

Bank of Canada/
Banque du Canada
Superintendencia
Financiera
De Colombia

Monetary Authorityof Singapore

Danmarks
Nationalbank
Banco
de Portugal

Bank
Al-Maghrib

Finansinspektionen

Steering Committee
Members and Observers

Deutsche Bundesbank
and BaFin

Norges Bank/
Finanstilsynet

Reserve Bankof New ZealandBankof England

Banque de France/
ACPR

Bank Negara
Malaysia

People’s Bank of China
Suomen Pankki
Banque centrale
du Luxembourg
Financial
Services
Agency8

NGFS CALL FOR ACTION REPORTBank of Greece
Bancad’Italia

MagyarNemzeti Bank
Central Bankof Ireland

NGFS members’ jurisdictions cover:31%of the global population
Source: United Nations, 2017.

45%of global greenhousegas emissions

2/3

Supervision ofof the global systemicallyimportant banks and insurers
Source: Financial Stability Board, 2018.

44%of the global GDP
Source: World Bank, 2017.

Source: Global Carbon Budget, 2017.

Functioning of the NGFS
The NGFS aims to accelerate the work of central banks
and supervisors on climate and environmental risk andon scaling up green finance. The NGFS’ work could feed
into the work of existing international regulatory bodies.
It does not aim to replicate the work conducted elsewhere,
but to build on and enrich it where necessary. The NGFS’
diverse membership allows for close coordination between
the various ongoing international initiatives on issues ofcommon interest. To this end, the NGFS has kept close
contact with the Sustainable Banking Network (SBN), theSustainable Insurance Forum (SIF) and the recently createdSustainable Finance Network (SFN), initiated by IOSCO, andthe UNEP Financial Initiative.

The NGFS has structured its work into three workstreams
dedicated to:• supervising of climate and environmental risks (WS1,chaired by Ma Jun from the People’s Bank of China);• analysing the macrofinancial impact of climate change(WS2, chaired by Sarah Breeden from the Bank of England);• scaling up green finance (WS3, chaired by Joachim
Wuermeling from the Deutsche Bundesbank).2

2 Joachim Wuermeling will be replaced by Sabine Mauderer, Memberof the Executive Board of the Deutsche Bundesbank, as chair of the WS3
as of April 2019.

NGFS CALL FOR ACTION REPORT

9

1Climate change as a sourceof economic and financial risks

The Intergovernmental Panel on Climate Change (IPCC)
has concluded that anthropogenic emissions haveincreased since the pre-industrial era, driven largely byeconomic and population growth. This has led to increased
concentrations of GHGs which are unprecedented in atleast 800,000 years.3 This is extremely likely to have been
the dominant cause of the observed warming since themid-20th century. Temperatures are now at least 1°C above
pre-industrial levels.

Climate scientists have concluded that continued emissions
in line with historical rates would lead to warming of 1.5°C
between 2030 and 2052.4 This would cause long-lastingchanges in all components of the climate system, increasing
the likelihood of severe, pervasive and irreversible impacts
for people and ecosystems.

BOX 1

Distinguishing between climate and environment-related risks
The NGFS aims to contribute to the development ofenvironment and climate-related risk management in
the financial sector. By environment-related risks, thisreport refers to risks (credit, market, operational and legalrisks, etc.) posed by the exposure of financial firms and/or
the financial sector to activities that may potentially cause
or be affected by environmental degradation (such as air
pollution, water pollution and scarcity of fresh water, land
contamination, reduced biodiversity and deforestation). By
climate-related risks, the report refers to risks posed by
the exposure of financial firms and/or the financial sector
to physical or transition risks caused by or related to climatechange (such as damage caused by extreme weather eventsor a decline of asset value in carbon-intensive sectors).
This report focuses on climate-related risks rather
than environmental risks for two main reasons: first, thetransition to a low-carbon economy consistent with theobjectives of the Paris Agreement requires a radical shiftof resource allocation and, thus, a seminal response by thefinancial sector. It was first against this background that the

NGFS was founded. Second, climate change itself posesa major challenge – if not the major challenge – of ourtime and its impact will be felt globally, thus demanding astrong international response and multilateral cooperation,
particularly given that the impacts of climate change
may only be felt many years into the future, and yet are
determined by the actions we take today.
Nevertheless, there are compelling reasons why the
NGFS should also look at environmental risks relevantto the financial system. For instance, environmental
degradation could cascade to risks for financial institutions,as reduced availability of fresh water or a lack of biodiversity
could limit the operations of businesses in a specific region.
These could turn into drivers of financial risks and affectfinancial institutions’ exposures to those businesses.1 Also,
it is important to be aware of potential greater impacts dueto the combined effects of climate and environmental risks.
Against this background, the NGFS expects to dedicate
more resources to the analysis of environmental risks
going forward.

1 Schellekens, Van Toor (DNB), Values at risk? Sustainability risks and goals in the Dutch financial sector, 2019.

3 IPCC, Fifth Assessment Report of the Intergovernmental Panel on Climate Change, 2014.
4 IPCC, Global Warming of 1.5°C, Summary for Policymakers, 2018.

NGFS CALL FOR ACTION REPORT

11

1.1 Climate change is a sourceof structural change in the economy
and financial system and therefore
falls within the mandate of central
banks and supervisors
The legal mandates of central banks and financial supervisorsvary throughout the NGFS membership, but they typically
include responsibility for price stability, financial stability
and the safety and soundness of financial institutions.
Understanding structural changes to the financial systemand the economy is core to fulfilling these responsibilities.
Climate change is one source of structural change. 5
As highlighted by the NGFS October 2018 progress report,
climate change may result in physical and transition risks
that can have system-wide impacts on financial stability
and might adversely affect macroeconomic conditions.
Physical impacts include the economic costs and financial
losses resulting from the increasing severity and frequencyof extreme climate change-related weather events (suchas heat waves, landslides, floods, wildfires and storms) as
well as longer term progressive shifts of the climate (suchas changes in precipitation, extreme weather variability,
ocean acidification, and rising sea levels and averagetemperatures).
Transition impacts relate to the process of adjustment
towards a low-carbon economy.6 Emissions must eventuallyreach “net zero” to prevent further climate change. The
process of reducing emissions is likely to have significant
impact on all sectors of the economy affecting financial
assets values. While urgent action is desirable, an abrupt
transition could also have an impact on financial stability
and the economy more broadly.
These risks might have persistent impacts on
macroeconomic and financial variables (for instance,
growth, productivity, food and energy prices, inflation
expectations and insurance costs) that are fundamental
to achieving central banks’ monetary policy mandates.7

Nevertheless, the prime responsibility for ensuring the
success of the Paris Agreement rests with governments. Yet,
it is up to the central banks and supervisors to shape anddeliver on their substantial role in addressing climate‑relatedrisks, although the NGFS remains mindful that not all its
member-central banks have the same mandates for action.
An understanding of the links between broader climate
policy and the mandates of central banks and supervisors
is therefore necessary.

1.2 Climate change is different fromother sources of structural change
Climate change is one of many sources of structural change.
However, it has distinctive characteristics that mean it needs
to be considered and managed differently.
These include:• Far-reaching impact in breadth and magnitude:
climate change will affect all agents in the economy(households, businesses, governments), across all sectors
and geographies. The risks will likely be correlated and,potentially aggravated by tipping points, in a non-linear
fashion. This means the impacts could be much larger,
and more widespread and diverse than those of otherstructural changes.
• Foreseeable nature: while the exact outcomes, time
horizon and future pathway are uncertain, there is a highdegree of certainty that some combination of increasing
physical and transition risks will materialise in the future.
• Irreversibility: the impact of climate change is determinedby the concentration of greenhouse gas (GHG) emissions in
the atmosphere and there is currently no mature technology
to reverse the process. Above a certain threshold, scientists
have shown with a high degree of confidence that climatechange will have irreversible consequences on our planet,though uncertainty remains about the exact severity andtime horizon.
• Dependency on short-term actions: the magnitudeand nature of the future impacts will be determined by

5 Some NGFS members have extended this analysis to broader environmental risks, which are also considered within supervisory and financial stability
mandates.
6 In its work, the NGFS has incorporated the risk associated with emerging legal cases related to climate change for governments, firms and investors,
e.g. liability risks, as a subset of physical and transition risks.
7 See, for instance, the speech by Benoît Cœuré, Member of the Executive Board of the European Central Bank, at a conference on “Scaling up Green
Finance: The Role of Central Banks”, organised by the Network for Greening the Financial System, the Deutsche Bundesbank and the Council on
Economic Policies, Berlin, 8 November 2018.

12

NGFS CALL FOR ACTION REPORT

actions taken today which thus need to follow a credibleand forward-looking policy path. This includes actions
by governments, central banks and supervisors, financial
market participants, firms and households.

system today. Overall, worldwide economic costs fromnatural disasters have exceeded the 30-year average of
USD 140 billion per annum in 7 of the last 10 years.8 Since
the 1980s, the number of extreme weather events has
more than tripled.9

1.3 How climate change
might affect the economy
and financial stability

Over a longer time horizon, progressive changes in thenatural environment will impact the liveability of different
regions, particularly if mean temperatures rise by morethan 1.5 to 2°C compared to pre-industrial levels. Thisis due to the significant risks related to human health,food security, water resources, heat exposure and sea
level rise.10

1.3.1 Understanding the possible impactsof physical risks
Extreme weather events impact health and damage
infrastructure and private property, reducing wealth anddecreasing productivity. These events can disrupt economic
activity and trade, creating resource shortages and diverting
capital from more productive uses (e.g. technology andinnovation) to reconstruction and replacement. Uncertainty
about future losses could also lead to higher precautionarysavings and lower investment.
Physical impacts are not just risks for the future; they
are already impacting the economy and financial

Estimates suggest that absent action to reduce
emissions, the physical impact of climate change on
the global economy in the second half of the century
will be substantial. The more sophisticated studies
suggest average global incomes may be reduced by
up to a quarter by the end of the century.11 In addition,
the increased probability of disruptive events such as
mass migration, political instability and conflict in thesescenarios means that economic estimates are likely tounderstate the size and timing of the associated risks.

8 Munich Reinsurance Company (2019), “Natural Catastrophe Review 2018” Geo Risks Research, NatCatSERVICE.
9 Munich Reinsurance Company (2018), “A stormy year: Natural catastrophe 2017” Geo Risks Research, NatCatSERVICE.
10 IPCC (2018), Chapter 3.
11 See, for example, Burke, Hsiang and Miguel, “Global Non-Linear Effect of Temperature on Economic Production”, Nature Vol. 527, pp. 235-239(12 November 2015).

NGFS CALL FOR ACTION REPORT

13

There have been fewer attempts to quantify the physicalrisks to financial stability rather than for the economy
as a whole, but again losses are likely to be significant.
Studies estimate that the financial value at risk could be up
to 17% depending on the mean average temperature rise.12
If losses are insured, more frequent and severe weather
events affect insurance firms directly through higher claims
and their customers indirectly via higher premiums. If losses
are uninsured, the burden falls on households, companies
and ultimately governments’ budgets. A change in thedebt repayment capacity of borrowers or a fall in collateralvalues can increase credit risks for banks and other lenders.
A change in lenders’ projected earnings would also bereflected in financial markets, impacting investors andasset owners.
Feedback loops between the financial system andthe macroeconomy could further exacerbate these
impacts and risks. For example, damage to assets serving
as collateral could create losses that prompt banks to restrict
their lending in certain regions, reducing the financing
available for reconstruction in affected areas. At the sametime, these losses weaken household wealth and could inturn reduce consumption.

The broad, global averages referenced above masksignificant differences in the distribution of economic
impacts and financial risks across regions and sectors.
This variation is driven not only by differences in the gross
exposure to physical risks, but also by the level of resilienceand adaptation (action taken to prevent or minimise
damage). Countries with less economic diversification, lessclimate resilient public infrastructure, less capital market
flexibility and lower capacity to adapt will be at greater risk.
Particular sectors could be at greater risk too, dependingon their regional footprint.
These estimates represent a lower bound. Currently,
physical impact models for both the economy andfinancial stability are partial. They typically cover only ahandful of the possible transmission channels in order tomake them tractable and neglect wider socio-economic
impacts. Non-modelled impacts are also often estimatedseparately. A more holistic approach is needed to understandthe relationship between different levels of risks, resilienceand adaptation. The non-linearities stemming from theincreasing risk of tipping points, and the potential for theseto accelerate in the near term, are a core part of climate
modelling that need to be better captured in economic
and financial risk models.

Figure 1 From physical risk to financial stability risks
Financial contagion (market losses, credit tightening) feeding back to the economy

Physical risk drivers• Extreme weather
events• Gradual changes inclimateEconomyDirect transmission channels

Business disruption

Lower residential
property values

Capital scrapping
Reconstruction andreplacement
Increase incommodity prices

Lower commercial
property values
Lower household wealth

Financial system
Financial market
losses(equities, bonds andcommodities)

Credit market losses(residential andcorporate loans)

Underwriting losses
Lower corporate profitability andincreased litigation

Operational risk(including liability
risk)

Migration
Indirect transmission channels

Wider economic deterioration (lower demand, productivity and output)
impacting financial conditions

12 One study found that almost 2% of the world’s financial assets are at risk if the global mean surface temperature rises by 2.5°C compared topre-industrial levels (Dietz, Bowen, Dixon and Gradwell “Climate value at risk’ of global financial assets” Nature Climate Change, 2016). Warming of
5°C could result in losses equal to 5% of the global stock of manageable assets (“The cost of inaction: Recognising the value at risk from climatechange”, The Economist Intelligence Unit, 2015).

14

NGFS CALL FOR ACTION REPORT1.3.2 Understanding
the possible impacts of transition risks
The potential severity of the physical impacts of climatechange and the direct correlation with the concentrationof greenhouse gases (GHG) motivated the international
community to commit to reducing emissions in Paris in
December 2015. The Paris Agreement aims to limit the risein global average temperatures to well below 2°C above
pre-industrial levels, and to pursue efforts to limit thetemperature increase to 1.5°C. Signatories agreed to reachglobal peaking of GHG emissions as soon as possible andto undertake rapid reductions thereafter, so as to achieve
net zero emissions in the second half of this century.
The transition to a low GHG economy requires rapid andfar-reaching transitions in energy, land, urban, infrastructure
and industrial systems. The scale of the economic andfinancial transformation related to this transition issignificant, bringing both risks and opportunities for the
economy and the financial system. The Intergovernmental
Panel on Climate Change (IPCC) projects the necessary
additional energy-related investments compatible witha 1.5°C scenario for the period 2016-2050 to reach USD
830 billion annually.13 The European Union alone has
identified an annual investment gap amounting to almost
EUR 180 billion to achieve its climate and energy targets.14
Although the incremental change in total investment
is not large, it would require a significant redirection ofcapital toward green finance.15 For example, the OECDestimates that to achieve the 2°C target, bonds financing
and refinancing in the renewable energy, energy efficiency
and low-emission vehicle sectors have the potential to reach
USD 620 billion to USD 720 billion in annual issuance and
USD 4.7 trillion to USD 5.6 trillion in outstanding securities
by 2035.16
Despite its rapid growth in the last few years, this is wellbeyond what the green bond market amounts to nowadays,
namely an issuance volume of about USD 168 billion in 2018

after USD 162 billion in 2017 and USD 85 billion in 2016.17
Although the green bond market does not account for all
green investments, it provides a signal of the scaling up
of green finance. The increase in volume has spurred thedevelopment of new green financial assets: for example,
in addition to the already dynamic green bond market,
new products have emerged such as green covered bonds
and green securities.
This shift in investment would result in significant structuralchanges in the economy compared to today and somestudies have sought to quantify the impacts of such atransition. Summarising the results of 31 models, the IPCC
(2014) concluded that the costs of limiting warming to 2°C(with a 66% probability) would be between 1-4% of global
aggregate consumption by 2030 compared to current
economic forecasts.
Intuitively, the economic costs of the transition would
stem from a disruptive transition and the need to switch
to – initially more expensive – low-carbon technologies
in some sectors, for instance, aviation or cement andsteel production. However, these costs and the precisetransition pathways will vary from country to country
depending on the existing capital stock and may be moreor less likely due to different political, technological andsocioeconomic conditions. Moreover the costs and pathway
for the transition can change over time depending on future
choices made (e.g. infrastructure investment, a sudden
decision by policy makers to cut subsidies for renewables
energy or a sudden shift of consumers towards greener
choices). Nevertheless, the estimated costs are likely
to be small compared to the costs of no climate action.
In addition, these cost estimates are not universally acceptedand some argue that the economic costs of the transition toa low-carbon economy would be offset by a positive“green
growth” effect. According to this theory, ambitious climate
policies aimed at achieving structural reforms would boost
innovation and job creation and lower production costs.18

13 IPCC, Global Warming of 1.5°C, Summary for Policymakers 2018.
14 European Commission, Action Plan: Financing Sustainable Growth, 2018.
15 The G20 Green Finance Study Group (GFSG, 2016) defines “green finance” as “financing of investments that provide [climate and] environmental
benefits in the broader context of environmentally sustainable development”.
16 OECD, Mobilising Bond Markets for a Low-Carbon Transition, Paris, 2017.
17 Sustainable Banking Network, Creating green bond markets-insight, innovations and tools from the emerging markets, October 2018. Green bond issuances
have been stable in 2018, but the sustainable bond universe grew steadily (Climate Bonds Initiative, Green bonds: The state of the market 2018, 2019).
18 ESRB, Too late, too sudden: Transition to a low-carbon economy and systemic risk, 2016; Finansinspektionen, Climate change and financial stability, 2016.

NGFS CALL FOR ACTION REPORT

15

This would benefit the global economy in the short andmedium term in aggregate.19 This notion is called the “Porter
Hypothesis”.20 However, empirical evidence of this effect,
focusing on smaller scale case studies, is mixed.21
What the literature does show is that, firstly, while thetransition would result in a significant structural change
in the economy – and some regions and sectors will farebetter than others – the overall costs of the transition
would be much lower than those that would arise absent
action, i.e. in a “hot house world”. Secondly, infrastructure
decisions today affect choices in the future. Delaying thetransition to a low-carbon stock means that sharper (andmore costly) emissions cuts would be required in the
future to meet a given policy target. The speed and timingof the transition is crucial: an orderly scenario, with clear
policy signalling, would allow adequate time for existing
infrastructure to be replaced and for technological progress
to keep energy costs at a reasonable level.22 In contrast,
a disorderly, sudden, uncoordinated, unanticipated or

discontinuous transition would be disruptive and costly,
particularly for those sectors and regions that are more
vulnerable to structural change.
Comparing economic estimates is, however, difficult because
the models define a wide range of possible values for
employment, investment, population, productivity and growth.
Further research is needed to narrow the range of plausible
values to be incorporated into economic models, particularly
taking into account country and sectoral differences.
The potential risks to the financial system from thetransition are greatest in scenarios where the redirectionof capital and policy measures such as the introductionof a carbon tax occur in an unexpected or otherwise
disorderly way. So far, scenarios have largely focussed
on the potential for assets to become stranded wheninfrastructure has to be retired before the end of its usefullife in order to meet emissions reduction targets. Stranded
assets will fall in value leading to losses of both capital and19 OECD, Investing in Climate, Investing in Growth, 2017.
20 Porter and van der Linde, “Toward a New Conception of the Environment-Competitiveness Relationship” Journal of Economic Perspectives, Vol. 9 (4):pp. 97-118, 1995.
21 Jaffe, Newell and Stavins, “Technological Change and the Environment”, Working Paper No. 7970, National Bureau of Economic Research, 2000;
Berman and Bui, “Environmental Regulation and Productivity: Evidence from Oil Refineries”, NBER Working Paper No. 6776, November 1998; Grayand Shadbegian, “Environmental Regulation, Investment Timing, and Technology Choice”, Working Paper No. 6036, National Bureau of Economic
Research, May 1997.
22 ESRB, Too late, too sudden: Transition to a low-carbon economy and systemic risk, 2016; Finansinspektionen, Climate change and financial stability, 2016.

16

NGFS CALL FOR ACTION REPORTFigure 2 From transition risk to financial stability risks
Financial contagion (market losses, credit tightening) feeding back to the economy

Transition risk drivers• Climate policy• Technology• Consumer preferences

EconomyDirect transmission channels

Stranded assets

Corporate assets devaluation(fossil fuels,
real estate,
infrastructure,vehicles)Reinvestment andreplacement
Increase inenergy prices

Lower corporate profitability
and increased litigation
Lower residential property values
Lower household wealth

Financial system

Financial market
losses(equities, bonds andcommodities)

Credit market losses(residential
andcorporate loans)

Indirect transmission channels

Wider economic deterioration (lower demand and output) impacting financial conditions

income for owners but also to increased market and credit
risks for lenders and investors.
Many of these studies on the transition risks of climatechange are partial and often focus on the energy sector. A
smaller number of studies are broader in scope, coveringtransition impacts to entire economic segments. Estimatesof losses in these studies are large and range from USD
1 trillion to USD 4 trillion when considering the energy
sector alone,23 or up to USD 20 trillion when looking at
the economy more broadly.24 More research is needed tounderstand how these impacts translate into systemic risks
for financial markets, particularly taking second order effects
into account. A wholesale reassessment could destabilise
markets, spark a pro-cyclical crystallisation of losses andlead to a persistent tightening of financial conditions, which
would constitute a climate Minsky moment.25
Translating economic transition loss estimates into financial
risks is challenging because often the macroeconomic models
used were developed for a different purpose, such as calculating
the social cost of carbon or the cost of meeting a particularemissions target. Linking these macroeconomic models tofinancial portfolios requires granular and holistic outputs at a firm,
regional and sectoral level to better support bottom-up analysis.

1.4 The future impacts
provide a loud wake-up call
If we continue along our current global emissions
trajectory, the physical risks from climate change arelikely to significantly change where and how we live inthe second half of the century. Even though considerable
effects of climate change on the economy are widely
expected, due to various limitations in our economic
models, quantitative estimates today can only give an
indication of how big the impacts on the economy andthe financial system might be.
Measures to smooth the climate-related structuralchanges towards a low GHG economy would minimise
these risks. As mentioned before, the overall costs of thetransition would be much lower than those in a “hot-house
world”. The size and nature of the risks will therefore be
dependent on actions today.

23 See IEA and IRENA, Perspectives for the Energy Transition, 2017.
24 See IEA and IRENA (2017). There is also a difference in the methodology used. The IEA estimates stranded capital while IRENA estimates stranded
value. For instance, in the upstream oil and gas sector, the IEA considers investments that oil & gas firms have made into exploration, which may
not be recouped. IRENA, on the other hand, considers the potential priced-in market value of explored reserves, which, as one might expect, ishigher than the cost of exploration.
25 Bank of England Prudential Regulation Authority (2018), Transition in Thinking: The impact of climate change on the UK banking sector.

NGFS CALL FOR ACTION REPORT

17

2

A call for action: what central banks and supervisors
can do and how policymakers can facilitate our work

While today’s macroeconomic models may not be able toaccurately predict the economic and financial impact ofclimate change, climate science leaves little doubt: action
to mitigate and adapt to climate change is needed now.
At the country level, governments and agencies should
step up their efforts to implement effective policies thatincentivise sustainable practices, while firms should develop
business strategies and risk management controls that
achieve sustainability in the long term.
There is a need for global collective leadership andcoordinated action and, therefore, the role of internationalorganisations and fora is critical. The NGFS, as a coalitionof the willing and a voluntary, consensus-based forum,
acknowledges this fact. It is within this context that we
set out a number of recommendations for central banks,
supervisors and policymakers to do more.

The following six non-binding recommendations reflect
the best practices identified so far by NGFS members tofacilitate the role of the financial sector in achieving theobjectives of the Paris Agreement.
• Recommendations n°1 to 4 are aimed at inspiringcentral banks and supervisors – NGFS members andnon-members – to take these best practices on board as it
fits within their mandate. Parts of these recommendations
may also be applicable to financial institutions.
• Recommendations n°5 and 6 do not fall directly
within the remit of central banks and supervisors but
point to actions that can be taken by policymakers tofacilitate the work of central banks and supervisors. Partsof these recommendations may also be applicable to theprivate sector.

NGFS CALL FOR ACTION REPORT

19

2.1 Recommendation n°1
Integrating climate-related risks into financial stability monitoringand micro-supervision
The NGFS acknowledges that climate-related risks are a source of financial risk and therefore calls on central
banks and supervisors to start integrating climate-related risks into micro-supervision and financial stability
monitoring. Important steps in this regard include:
1) 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 aconsistent and comparable set of data-driven scenarios encompassing a range of different plausible futurestates of the world;• considering how the physical and transition impact of climate change can be included in macroeconomic
forecasting and financial stability monitoring.
2) 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.

2.1.1 Assessing climate-related financial risks
in the financial systemon the assumptions made about how climate policy andtechnology will evolve.

Scenario analysis is an important tool to help central banks
and supervisors assess how climate change will impact themacroeconomy, financial system and safety and soundnessof financial firms. The NGFS has therefore been considering
how it could be implemented into authorities’ toolkits.

The future of climate policy is highly uncertain especiallygiven the extended time horizons and political economy
considerations. Policies must be initiated far in advance ofthe benefits being realised, while costs typically occur more
immediately. Furthermore, the rate of progress in low-carbon
technologies will be instrumental in determining theemissions reductions that are technically and economicallyfeasible. It will also determine the extent of disruption to
current business models in various sectors. Scenario analysis
requires assumptions about whether emissions targets
are met and when and how policymakers choose to act.
These decisions may of course not be uniform in every region.

There are several challenges that need to be highlighted
in the development of workable scenarios for thefinancial impact of climate change. Assessing theimpacts of climate change can be challenging because of
the uncertainties around the course of climate change itself,
the breadth and complexity of transmission channels, theprimary and secondary impacts and the need to consider,in aggregate, some combination of both physical andtransition risks. Even if all these challenges were addressed,
over long time horizons, estimates will be highly dependent

20

NGFS CALL FOR ACTION REPORTGiven the sensitivity of results to these underlying
assumptions, hypothetical transition scenarios can beused to explore the direction and broad scale of outcomes.

BOX 2

Designing a scenario analysis framework for central banks and supervisors

Across these two dimensions there is a continuum ofdifferent outcomes and transition pathways to achieve
them. However, to simplify the analytical exercise, four
representative high-level scenarios have been developedthat take both these dimensions into consideration.
The bottom-right scenario can help central banks andsupervisors consider the long-term physical risks to theeconomy and financial system if we continue on ourcurrent “hot house world” pathway. The bottom-left orderly
scenario can help us understand how climate policy (suchas a carbon price) and other shifts in technology andsentiment to reduce emissions would affect the economy
and the financial system.
The two scenarios at the top can help central banks andsupervisors consider how physical and transition risks could
crystallise in the economy and the financial system overa short time period (for example, in response to extreme
weather events or a shift in climate policy leading to asudden reassessment of future developments).

Based on whether climate targets are met

Disorderly

Met

Transition risks

Transition pathway

In its work so far, the NGFS has undertaken a literature
review of existing scenarios to consider the most importantdesign decisions when sizing macrofinancial risks. The NGFS
has concluded that there are two important dimensions to
consider when assessing the impact of physical risks andtransition risks on the economy and the financial system.
• The total level of mitigation or, in other words, howmuch action is taken to reduce greenhouse gas emissions(leading to a particular climate outcome).
• Whether the transition occurs in an orderly or disorderly way,i.e. how smoothly and foreseeably the actions are taken.

Strength of response

Orderly

To contribute to central banks’ and supervisors’ ongoing workin this area, the NGFS is developing an analytical framework
for assessing climate-related risks, in order to size theimpact of climate-related risks on the economy and thefinancial stability. This includes looking at the different
possible outcomes for climate change and the policies tomitigate it, assessing the financial impact and determining
the timeframes during which risks could materialise.

Not met

Disorderly

Too little, too late

Sudden andunanticipated
response is disruptive
but sufficient enoughto meet climate goals

We don’t do enoughto meet climate goals,
the presence ofphysical risks spurs adisorderly transition

Orderly

Hot house world

We start reducing
emissions now in ameasured way tomeet climate goals

We continue toincrease emissions,doing very little, if
anything, to avert
the physical risks

Physical risks

In the next phase, the NGFS will develop a more detailed
data-driven narrative and quantitative parameters
as a foundation to these scenarios and enable central
banks and supervisors to explore some of these questionsin their own jurisdictions. This will include proposing key
assumptions for policy and technological change. During
this design phase, the NGFS will work with academic
experts, scenario designers and financial firms to ensure
the scenarios are fit for purpose.
Looking ahead, NGFS members may incorporate
these scenarios into their domestic work programmes.
This would provide a case study for other central banks
and supervisors that are considering running similar
exercises and provide some feedback for the calibrationof the scenarios.
Although these scenarios are primarily being developedby central banks and supervisors in support of theirown work and objectives, these scenarios may provide
a useful input for other stakeholders, such as financial
and non-financial firms, in considering how they may be
impacted by climate change.

NGFS CALL FOR ACTION REPORT

21

These scenarios should have a clear, plausible, qualitative
narrative but also be data-driven and provide quantitative
parameters to help anchor assessments of economic
costs and financial risks. They can help identify sectors
or geographies which are particularly vulnerable either
to physical or transition risks or a combination thereof.
Ultimately, they should be suitable to help explore materiallydifferent plausible future states of the world over different
time horizons.
The different states of the world that feature prominently
in the existing literature on scenario analysis (and are key
determinants of risk) include those where international climate
targets are either met or not, and those where the transition toa low-carbon economy occurs in an orderly or disorderly way.
Using a consistent set of transition scenarios can help toenhance the comparability of different analyses. Workto standardise some of the macroeconomic assumptions
in transition scenarios is already underway and could be
developed further.26 However, it is vital that common scenarios
do not unduly constrain or narrow the analysis and results.
Further work is also required to translate these economic
scenarios into financial risk parameters for financial
stability analysis. This would help supervisors assess thefinancial stability risks across the system. Key risk indicators
allow us to track which future scenarios are most likely tomaterialise and whether the economy and financial systemneed to adjust to minimise the potential risks.
Common scenarios should only provide a starting point
for supervisors and firms to carry out bespoke analyses on
the risks to their balance sheet. Financial firms should not
wait for central banks or supervisors (or others) to deliver
some kind of universal, perfect model. Rather, they should
initiate their own structured analytical work to identify risks
and vulnerabilities, which, successively, can become more
and more quantified and sophisticated.

2.1.2 Integrating climate-related risks
into prudential supervision
The NGFS stock-taking exercise on national supervisory
frameworks and practices concluded that the integrationof climate-related factors into prudential supervision
is at an early stage. However, it also shows that over thelast few years, many authorities have made significant
progress within this area, and methods and tools to assess
the financial risks of climate change from both physical andtransition risks are gradually developing.
To contribute to central banks’ and supervisors’ ongoingwork to integrate these issues into their operations, andbased on the experiences and best practices identified
within its membership, the NGFS proposes a high-level
framework summarised in Figure 3.

Raising awareness and building capacity
The first step is for national and supra-national competentauthorities to build in-house capacity and to collaborate
within their institutions.
This in-house capacity building needs to happen
concurrently with integration of climate change into risk
assessment to ensure engagement with firms is effective.
Initiatives to achieve this include:• Increasing awareness of climate issues within
institutions through outreach presentations and bringing
together expertise from multiple departments.
• Providing training courses for frontline supervisors
and financial stability experts. Training can provide anunderstanding of both the financial risks stemming fromclimate change, as well as the distinct characteristics ofclimate issues, e.g. regarding the timing mismatch between
action and impact.
Collaboration with other supervisors and with wider
stakeholders (think-tanks, NGOs, government departments,
environment and climate science experts, and industry
bodies from the financial sector) is also important.

26 See the Shared Socioeconomic Pathways (SSPs) project by the International Institute for Applied Systems Analysis (IIASA).

22NGFS CALL FOR ACTION REPORTFigure 3 High-level framework for the integration of climate-related factors into prudential supervision
Courses of action

Raising awareness and building
capacity among firms

Possible measures by supervisors• Raise awareness of the relevance of climate-related risks publicly and during bilateralmeetings; survey firms on the impact of these risks; lay out a strategic roadmap
for the handling of climate-related risks.
• Build capacity by convening events to progress the translation of scientific findings
to financial analysis; set up working groups with firms, for example, on incorporatingclimate issues into risk management or scenario analysis.

• Develop analytical tools and methods for assessing physical and transition risks
related to climate change both at a micro- (financial institutions) and macro-level(i.e. the financial system).
• Conduct and publish an assessment of these risks at a macro- and micro-level.

Assessing climate-related risks• Analyse potential underlying risk differentials of “green” and “brown” assets.
This pre-supposes that the supervisor and/or jurisdiction have agreed on definitions
and classifications for “green” and “brown” activities.

• Issue guidance on the appropriate governance, strategy and risk management ofclimate-related risks by regulated firms.

Setting supervisory expectations• Train supervisors to assess firms’ management of these risks.

• Set out expectations for firms’ climate-related disclosures in line with

the TCFD recommendations.

Requiring transparency topromote market discipline• Consider integrating climate-related disclosures into Pillar 3.

• Consider applying capital measures in Pillar 2 for firms that do not meet supervisory
expectations or with concentrated exposures.

Mitigating risk throughfinancial resources• Based on the risk assessment outlined above, possibly consider integrating
it into Pillar 1 capital requirements.

As a next step, most authorities are focusing on engaging
with firms to raise awareness and foster capacity building
and discussing how the governance structure and strategyof the firm ensures a proper identification, assessment,
management and reporting of climate and environmentrelated risks. In this regard, some central banks andsupervisors have undertaken formal information gatheringby sending out surveys to regulated firms.27 Such a survey
process can prompt firms to consider the risks more fully
and then feed into an analysis of the approaches to address
climate-related risks across the industry.28

27 See Appendix A of The impact of climate change on the UK insurance sector A Climate Change Adaptation Report by the Bank of England Prudential
Regulation Authority (PRA), September 2015 and Section 4 of Transition in thinking: The impact of climate change on the UK banking sector, PRA, September 2018.
28 See e.g. Bank of England PRA, Transition in thinking: The impact of climate change on the UK banking sector, September 2018 and Finansinspektionen,
Integration of Sustainability into Corporate Governance, A survey of financial firms’ public sustainability information, 7 November 2018.

NGFS CALL FOR ACTION REPORT

23

Developing tools and methods to identify
and assess climate-related financial risks
Climate Risk Assessment
Climate Risk Assessment (CRA) refers to the methods andpractices used to size the financial impact of climaterelated risks to micro-prudential objectives, including:• Qualitative CRA explores the longer-term impacts ofdifferent scenarios and provides a descriptive assessment,
for example of risk transmission channels to the financial
sector. Most member supervisors have undertaken someform of qualitative analysis.
• Quantitative CRA represents a numerical approach tosizing the financial risks. It is most effective at assessing theshorter-term financial exposures to physical and transition
risks. Fewer authorities have performed quantitative analysis
and in general, these studies have been partial, focusing on
narrow channels of impact although wider methodologies
are being developed.
Over the last few years, there has been significant progresson attempts to size the financial risks from both physicaland transition risks. When combined, qualitative andquantitative assessments can provide a fuller picture of
the risks the financial sector faces. The list below provides
some examples of quantitative CRA.
On the transition risk side:• Assessing financial institutions’ exposures to high-carbon
sectors.29• Estimating the impact of a bank’s exposure at risk toenergy inefficient homes against the background oftightening energy efficiency regulation.
• Incorporating climate-related stresses into sector – oreven market – wide stress tests.30,31
On the physical risk side:• Developing climate scenarios based on specifictemperature rises and estimating the climate-related claims
burden for insurers (see the case studies in Box 3).
• Analysing the consequences of flood scenarios by linking
estimated damage to residential and commercial buildings
to financial institutions’ exposures.
• Calculating a vulnerability index for firms’ assets basedon their geographical distribution.32

29 Regelink, Reinders, Vleeschhouwer, van de Wiel (DNB), Waterproof? An exploration of climate-related risks for the Dutch financial sector, 2017.
30 According to a stress test conducted by DNB, transition risk could lead to substantial losses for banks, leading to a reduction in the banks’ CET-1 capital ratios of
up to 4.3 percentage points. Vermeulen, Schets, Lohuis, Kölbl, Jansen, Heeringa, An energy transition risk stress test for the financial system of the Netherlands, 2018.
31 Bank of England PRA, General Insurance Stress Test 2017, Scenario Specification, Guidelines and Instructions, 11 April 2017.
32 Regelink, Reinders, Vleeschhouwer, van de Wiel (DNB), Waterproof? An exploration of climate-related risks for the Dutch financial sector, 2017.

BOX 3

Case study of quantitative analysis – DNB physical risk CRA tool
Dutch non-life insurers cover most of the economic
damage caused by storms, hail and rain. Therefore,changing weather patterns are an important consideration
for the insurance sector. In the Netherlands, more than
95% of all non-life insurance policies cover objects withindomestic borders. Hence, insurers’ claims are heavily
related to regional climate change.
The 2017 Waterproof report explored the potential ofa changing climate on climate-related claims. Based on
scenarios from the Intergovernmental Panel on Climate

24

NGFS CALL FOR ACTION REPORT

Change (IPCC), the Dutch Meteorological Institute (KNMI)
developed climate scenarios for the Netherlands for a 1.5°C
and 3.5°C temperature rise in 2085. These scenarios include
more frequent and severe hail and thunder, an increase in
the intensity of rainfall and sea level rise. Based on thesescenarios, the De Nederlandsche Bank (DNB) calculated theclimate-related claims burden in 2085. Lower and higher
estimates reflect the substantial uncertainty about the
impact of changes in frequency and intensity of weather.
.../...

All scenarios showed an increase in climate-related claims
as a result of climate change.
Since products of non-life insurance companies are
typically on a one-year horizon, the sector might be able
to adapt to the new circumstances on a relatively short
notice. However, this would lead to additional pressure on
premiums. Supervisors can use these scenario analyses tochallenge insurance firms’ risk model and climate strategies.

Other institutions have performed CRA exercises as well.
According to an internal study by the Deutsche Bundesbank,in early 2018, German banks’ credit exposure to a limited
set of carbon intensive industries was relatively small(with an aggregated exposure of around EUR 157 billion
or 4.7% of total loans to domestic households andnon-financial corporations). According to a study by the
ACPR, in France, 13% of banks’ total net credit was
exposed to sectors vulnerable to transition risks in 2016.1

Increase in climate-related claims in 1.5°C and 3.5°C scenarios
C1 Estimated climate-related claims burden
as a proportion of premiums in 2016

C2 Estimated climate-related claims burdenin 2085

Homeowner’s insurance policies (in EUR millions)Homeowner’s insurance policies (in EUR millions)

3,096

1,238

3.50C

Climate-related claim burden in 2085
Lower estimate
Higher estimate
945
272

513
129
197
187
1,858

Increase from
2016

1,449

1.50C

409
114
108
187
Total
Other costs andpremiums profit margins

ClaimsNon climaterelated
claimsClimaterelated
claims

Source: DNB, 2017 Waterproof Report.

486
187

25%

131%

Climate-related claim burden in 2085
Lower estimate
Higher estimate
623
166
450
120
270
143

Increase from
2016

187

187

10%

52%

Rain

Hail

Storm

Source: DNB, 2017 Waterproof Report.

1 French Treasury, ACPR, Banque de France, Evaluating Climate Change Risks in the Banking Sector, April 2017.

Analysis of the potential risk differentials
between profiles of green, non-green,brown and non-brown assets
From a supervisory perspective, there is a need tounderstand the potential risk differentials between green,
non-green, brown and non-brown assets. If risk differentials
are detected, further analysis needs to be performed toassess if the differentials can be attributed to (non-) greenor (non-) brown characteristics, or if they are driven by otherfactors. Important prerequisites for this are clear definitionsof which assets can be considered green or brown. Owing
to the lack of taxonomies elsewhere, the default ratesof these types of assets have not been evaluated in any
jurisdiction, except for China.

NGFS CALL FOR ACTION REPORT

25

BOX 4The China Banking and Insurance Regulatory Commission analysis
of default rates of green loans compared to the overall loan portfolio1
Data from the China Banking and Insurance Regulatory
Commission (CBIRC, formerly the CBRC)2 showed that, forthe 21 largest banks in China as of June 2017, green
loans had a non-performing loan (NPL) ratio that is1.32 percentage points lower on average (at 0.37%)
than that of all loans. CBIRC data also showed that the NPL
ratios of green loans were consistently lower than thoseof all loans for each of the previous four years (2013‑16).
However, further work is needed to assess whether thedifferences in performance can be attributed purely to
the green/brown characteristics of the related loans.3
China was able to conduct this study following the
introduction of official definitions for green loans in 2012,and official definitions for green bonds in 2015.4 Other
than China, Brazil is the only other G20 country to haveadopted a green loan definition, but no data has beencollected in Brazil.

1 This simple statistical analysis does provide first insights about the relative performances of green and brown assets, but it does not allow inferring
broader conclusions about their relative intrinsic riskiness. The study does not indeed control for other factors which influence NPL ratios (different
states of the sectoral cycle, average characteristics of counterparties or the loan, etc.). Further data analysis is therefore warranted.
2 www.cbrc.gov.cn/
3 As an example, borrowers with high profitability and cash flow (i.e. low PD) may be the same borrowers who have the means to invest in modern,“green” production capacity.
4 In China, the definition of green loans could be traced back to July 2007 in the Opinions on Implementing Environmental Protection Policies andRegulations to Prevent Credit Risks (MEP Document No. 108 2007) issued by the Ministry of Environment Protection (MEP), CBRC (the banking
regulator) and the PBC, and has been further improved in the Guidelines on Green Loans (CBRC Document No. 4 2012) issued in February 2012.

Under prudential frameworks, risk weights are allocated todifferent asset classes or each individual exposure basedon the riskiness of the underlying asset(s), in accordancewith local supervisory requirements, usually based on
BCBS and IAIS standards.33 No jurisdiction, however, has
thus far explicitly taken into account the (non-) greenor (non-) brown nature of the underlying assets when
computing their perceived riskiness.
The NGFS has performed a preliminary stock-take ofstudies conducted by market participants on credit
risk differentials between green and non-green assets.
These studies used either international or local definitionsof “green”. The preliminary finding of the stock-take is that
it is currently impossible to draw general conclusions

on potential risk differentials. Some studies, based onnational and sectoral data found that green loans had lower
default and non-performing34 ratios than non-green loans
while others did not.
The studies have covered several types of assets:• Several studies point to a lower arrears frequency forresidential mortgages on energy-efficient properties,
although borrowers’ financial ability and thus repayment
capacity is only one of the factors controlled for.35,36• There are fewer studies on corporate loans. The China
Green Finance Committee (CGFC) found lower NPL ratios
for green corporate loans across most corporate industry
portfolios. Moody´s carried out a study in 2018 on
infrastructure transactions from 1983 to 2016 in both

33 The definition of “non-performing” in these studies is based only on arrears, which differs from other definitions such as in the EU, where the NPL
definition includes loans where the borrower has been assessed as “unlikely to pay” by the lender.
34 The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks. The International
Association of Insurance Supervisors (IAIS) is responsible for the regulatory cooperation regarding the supervision of the insurance sector.
35 “Home Energy Efficiency and Mortgage Risks” (2013), by the Institute for Market Transformation (IMT).
36 E.g. “Impact of energy use and price variations on default risk in commercial mortgages: Case studies” (2017) by Mathew et al., “Insulated from risk?
The relationship between energy efficiency of properties and mortgage defaults” (2018), by Guin and Korhonen and Transition in Thinking: The impact ofclimate change on the UK banking sector, case study 1: “Tightening energy efficiency standards and the UK buy-to-let market” (2018), by the Bank of England.

26

NGFS CALL FOR ACTION REPORT

advanced and developing economies.37 It found that green
use-of-proceeds projects exhibit lower cumulative default
risk (5.7%) than non-green use-of-proceeds projects (8.5%)
in advanced economies. However, Moody´s suggests thatthe difference is likely to be due to subsample characteristics
other than greenness.
• Some studies assess the default implications from theperspective of loan/bond pricing, on the basis thatcompanies with lower default probabilities tend to enjoy
lower funding costs. One study, based on data of 5,600 loans
from the Thomson Reuters DealScan Database, finds thatborrowers with better green management have more stable
income streams. This makes them less likely to default on
loans, violate covenants or file bankruptcy. As a result, theborrowing costs for “greener” companies tend to be lower
than those of other companies.38• Two studies found that a premium (ranging from 1 to
7 basis points) exists for green bonds. However, the study
that found a larger premium has not isolated the “green
factor”.39 Another study found no systematic evidence thatgreen bonds would be issued or traded at lower yields thancomparable non-green bonds. It highlighted the excess
of demand for green bonds as the main driver behind theperceived premium of 1-2 basis points, rather than the
explicit “greenness”.40
However, the number of these studies is small and they
typically have three types of limitations:• most do not fully take into account other variables
on borrower characteristics that may affect the default
probability;• country and sectoral coverage is limited;• the definitions of green/non-green and brown/non-brown
assets are not harmonised across the studies, therefore it is
not possible to draw a general conclusion on their risk profiles.
The stock-take points to the need for a more thoroughexamination of existing studies as well as further
fact-gathering and analyses. This should pay due regard to
non-climate variables that might affect the default rates andperformance of green assets. The NGFS intends to perform
an exploratory data collection from selected banks in 2019.
The objective is to analyse the collected data and assess if
there is a risk differential between green and non-green
assets (loans and bonds), taking into account the above
mentioned constraints. The NGFS is aware that historical
data is not always a good indicator of future performances, inparticular given the likelihood of unprecedented disruptions
to the economy caused by climate change. Therefore, asa possible next step after the collection and analysis ofhistorical data, it may be expedient to introduce a more
forward-looking perspective into the analysis, for example,
through scenario analysis and/or stress tests.

Setting supervisory expectations
Some central banks and supervisors have further
integrated climate-related risks into the supervisory
framework by adjusting and communicating theirsupervisory expectations.41 These expectations can set
out how financial institutions should monitor and manage
the financial risks associated with their climate exposures,
anchored in the qualitative aspects of Pillar 2. This includes
ensuring that consideration of these risks is integrated into
governance, strategy and risk management assessments.
The majority of authorities plan to assess climate-related
financial risks through established financial risk categories,
rather than to introduce new policy or frameworks.

Promoting transparency to enhance market discipline
In addition, authorities can set out their expectations
when it comes to financial firms’ transparency on
climate-related issues. Through the promotion of climaterelated disclosure via Pillar 3, for example in line with the
Task Force on Climate-related Financial Disclosures (TCFD)
recommendations (see recommendation n°5); authorities
can contribute to an improvement of the pricing
mechanisms for climate-related risks and a more efficient
allocation of capital.

37 ”Default and recovery rates for project finance bank loans, 1983-2016: Green projects demonstrate lower default risk” (2018).
38 Dawei Jin, Jun Ma, Liuling Liu, Haizhi Wang, Desheng Yin. “Are green companies less risky and getting lower cost bank loans? A stakeholder‑management
perspective.” Working Paper, 2018.
39 ”Is there a Green Bond Premium?” (2018), by O D Zerbib and “The Pricing and Ownership of U.S. Green Bonds” (2018), by Baker et al.
40 UBS Wealth Management Sustainable Investing – Green Bonds (2018).
41 See e.g. https://www.bankofengland.co.uk/

NGFS CALL FOR ACTION REPORT

27

Mitigating climate-related risks
through financial resources
Climate-related risks could be integrated further via
the quantitative aspects of the prudential framework.
In particular, the Pillar 2 framework could be enhanced

to assess the adequateness of firms’ governance andrisk management processes for dealing with climate
and environment-related risks, or with concentrated
exposures. If a risk differential and causation isestablished, it might be appropriate to include it in Pillar 1
capital requirements.

2.2 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, thisincludes integrating sustainability factors into the management of some of the portfolios at hand (own funds,
pension funds and reserves to the extent possible).

NGFS members may lead by example by integrating
sustainable investment criteria into their portfolio
management (pension funds, own accounts andforeign reserves), without prejudice to their mandates.42
This approach could have several benefits:• The assessment of sustainability factors, in addition
to traditional financial factors, can improve investors’
understanding of long-term risks and opportunities
and thereby enhance the risk-return profile of long-term
investments. To the extent that sustainability factors, suchas the exposure of a security to climate change, can pose
financial risks, it is natural for investors to seek to capture them.
• Central banks can reduce reputational risks byacknowledging financial risks related to the transition
towards a carbon-neutral economy and by addressing theserisks proactively in their own (risk) frameworks. Against
this backdrop, central banks could be scrutinised for not“walking the talk” if they fail to appropriately address
climate-related risks in their own (risk) frameworks.
Reputational risk could also arise when central banks invest
in companies that are exposed to these risks.

• Central banks may decide to employ part of theirinvestments to pursue non-financial sustainability goals inorder to generate positive (societal) impacts, in addition
to traditional financial return goals. In this way, central
banks can also actively support the development of themarket for green and sustainable assets.
Many NGFS members are, however, limited by theirmandates and/or investment objectives, such that, overall,sustainability criteria currently still play a minor role in mostcentral banks’ portfolio management. Nevertheless, anumber of central banks have established themselves asfrontrunners in this field and have adopted sustainability
strategies for all or at least part of their investments.
If other central banks were to follow, it seems expedientfor them to first establish their fundamental strategy
based on their motivation and rationale, then to establish
sustainability policies for their different given portfolios
and finally decide on the necessary implementation
measures and how to evaluate and report on their progress
towards achieving their set objectives. As central banks
are not a homogeneous group of investors with one
shared doctrine, it is up to each central bank to set theappropriate goals and scope for their respective sustainable
investment approach.

42 NGFS members’ efforts to work towards mainstreaming green finance also include various steps they take as corporates to green their corebusiness activities and to reduce their environmental impact. There is broad consensus among NGFS members that leadership also requires dedicatedenvironmental strategies, well-defined sustainability targets – such as reducing resource, water and energy use as well as waste production – andtransparency regarding the measures taken and the degree to which these targets have been met.

28

NGFS CALL FOR ACTION REPORTBOX 5

Sustainable investment at the Banque de France
In March 2018, the Banque de France (BdF) released its
responsible investment charter for its portfolios backed
to own funds and to the pension liability. This investment
charter is in line with the BdF’s corporate social responsibility(CSR) charter and its fiduciary duty as a long-term investor.
One year later, the BdF released its first responsible
investment report based on the provisions of Article 173of the French Law on the energy transition for green growth(LTECV) and recommendations from the Task Force on
Climate-related Financial Disclosures (TCFD).1 It describes
the extra-financial performance of its portfolios and sets

up the objectives of the BdF responsible investment
strategy. The BdF committed to harmonise its investmentswith France’s climate targets by getting aligned with a 2°C
trajectory and by financing the energy and ecologicaltransition through green bonds and dedicated funds.
Moreover, the BdF will include environmental, socialand governance (ESG) criteria in its asset management
and a best-in-class approach based on firms’ ESG score
and climate performance will be applied. Lastly, the BdF
will adopt a voting policy that includes provisions on
non-financial transparency and will increase its general
meeting attendance rate.

1 https://www.banque-france.fr/sites/

Notwithstanding that the focus of central banks
incorporating ESG aspects into their portfolio management
has been on own funds and pension liability portfolios,
some voices have called for an extension of thisapproach to monetary policy. Among NGFS members,
so far only one central bank, the People’s Bank of China,
has a dedicated policy to promote green finance via
monetary policy.

Going forward, the NGFS will consider exploring
the interaction between climate change and central
banks’ mandates (other than financial stability) andthe effects of climate-related risks on the monetary
policy frameworks, paying due respect to their respective
legal mandates.

2.3 Recommendation n°3
Bridging the data gaps
Building on the G20 GFSG/UNEP initiatives, 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
existing data gaps. The deliverable of this group would be a detailed list of data items that are currently lacking
but which are needed by authorities and financial institutions to enhance the assessment of climate-relatedrisks and opportunities – for example, physical asset level data, physical and transition risk data or financial
assets data.

NGFS CALL FOR ACTION REPORT29

In the course of its work, the NGFS observed, like otherinstitutions and academic papers before, that data
scarcity and inconsistency are substantial obstacles
to the development of analytical work on climate risk.
The associated challenges include:• Data availability: data covering the exposure toclimate-related risks, risk-return profiles of green financial
products as well as “brown” assets (loans, bonds and equity
instruments) are critical to undertaking risk assessment
and carrying out climate disclosure. Granular data is alsoneeded to conduct bottom-up, quantitative analysis of themacrofinancial impacts of climate-related risks. Finally, suchdata is also needed to assess and quantify the developmentof green asset markets, which is of particular interest in a
portfolio management context.

• Time horizon: the period covered by available data iscurrently too short. Risk-weighted assets, for example,
are calculated on a one-year forward-looking basis only.
• Lack of expertise: there is a need to bring together
the relevant expertise to gain a complete and integrated
understanding of data needs, covering climate,environmental and financial data.
In order to move from observation to action, the NGFS isready to initiate work with interested parties on settingout a detailed list of currently lacking data items, whichauthorities and financial institutions would need to enhance
the assessment of climate-related risks and opportunities
such as physical asset level data, physical and transition
risk data and financial assets data. The aim of this initiative
is to allow data providers to mine the relevant data andprogressively bridge the gaps.

2.4 Recommendation n°4
Building awareness and intellectual capacityand encouraging technical assistance and knowledge sharing
The NGFS encourages central banks, supervisors and financial institutions to build in-house capacity and tocollaborate within their institutions, with each other and with wider stakeholders to improve their understandingof how climate-related factors translate into financial risks and opportunities.
The NGFS therefore encourages central banks, supervisors and financial institutions to:• allocate sufficient internal resources to address climate-related risks and opportunities;• develop training to equip employees with the necessary skills and knowledge;• work closely together with academics and think-tanks to inform thinking;• raise awareness by sharing knowledge within the financial system.
The NGFS also encourages relevant parties to offer technical assistance to raise awareness and build capacityin emerging and developing economies when possible.

A key element to achieving effective consideration ofclimate risks across the financial system is to support
internal and external collaboration. Internally, the distinct
cross-cutting nature of climate-related risks has led toinnovative ways of working across supervisory institutions.
Central banks and supervisors have typically formed internal“hubs” or “networks” to bring together the relevant expertise
within their organisations.
Externally, there are examples of collaboration with academia,
think-tanks, NGOs, government departments, other local

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NGFS CALL FOR ACTION REPORT

supervisors, climate science experts, and financial industry
bodies. Examples of international collaboration include:• ESRB – European Systemic Risk Board and the Analysis
Working Group (AWG) Project Team on Sustainable Finance;• G20 – the G20 Sustainable Finance Study Group;• IOSCO – Sustainable Finance Network;• OECD – Centre on Green Finance and Investment, including
its annual Forum on Green Finance and Investment;• SBN – Sustainable Banking Network supported by the IFC;
• SIF – Sustainable Insurance Forum;• TCFD – Task Force on Climate-related Financial Disclosures.

NGFS members also promote market growth as facilitators
between the financial industry and legislators. Many are
involved in various national and/or international private
sector or public-private initiatives such as the Network of
Financial Centres for Sustainability, the Prudential Regulation
Authority (PRA)-Financial Conduct Authority (FCA) Climate
Financial Risk Forum, Finance for Tomorrow in Paris, the
DNB’s sustainable finance platform, and the Chinese Green
Finance Committee. Participating in such initiatives allows
for continuous dialogue with market participants andenables central banks and supervisors to contribute to theimprovement of existing green market infrastructure andthe development of new green financial instruments.
To foster international exchange on the topic, the NGFS
organised an industry dialogue in Singapore in June 2018
which was instrumental in understanding the expectationsof the private sector with regards to the role of the NGFS
and its members in scaling up green finance. Someparticipants called for policymakers to set minimumtransparency standards regarding the methodologies

of second opinion providers for green assets, to provide
guidelines (for example, for green bonds) or to simplify
approval processes (facilitating green issuances).
Furthermore, the NGFS hosted a conference at the Bankof England in January 2019 bringing together academia,
think-tanks, central banks and supervisors and financial
institutions to better understand how to size the risks.
Going forward, NGFS members will scale up theirefforts for capacity building and technical assistancein emerging economies. Emerging economies are often
disproportionately affected by the effects of climate change
and they often lack the resources to assess the associatedrisks. During its work, the NGFS has therefore initiated a
dialogue with authorities in developing and emerging
countries outside of its membership, and will continue todo so. The NGFS also encourages other relevant parties,
such as multilateral institutions, to offer technical assistanceto raise awareness and build capacity in emerging anddeveloping economies when possible.

2.5 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 TCFD recommendations provide a framework for consistent, comparable anddecision-useful disclosure of firms’ exposures to climate-related risks and opportunities. 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 adoptionof the TCFD recommendations and the development of an internationally consistent environment disclosure
framework. This includes authorities engaging with financial institutions on the topic of environment andclimate-related information disclosures, aligning expectations regarding the type of information to be disclosed
and sharing good disclosure practices.

NGFS CALL FOR ACTION REPORT31

As stated in the NGFS October 2018 progress report, robust
disclosure of climate-related information by financial
institutions has a number of important benefits:• It is integral to an efficient, well-functioning capital market,
as it can improve the pricing mechanisms for climate-relatedrisks. It also facilitates the surveillance of the financial system.
• Better disclosure can lead to better risk management.
The discipline of public disclosure requires financial
institutions to establish the necessary data collection andprocedures to better identify and manage their risks.
• It enables market players and policymakers to quickly
identify and capitalise on sustainable opportunities,
thereby contributing to the continued growth of the green
finance ecosystem.

Most jurisdictions with disclosure requirements set out
the type of information that entities must disclose, butallow flexibility on how to comply with the requirements.
While the scope and extent of information disclosed varies
across entities and jurisdictions, the reporting components
broadly include:• the firm’s policies and practices in relation to climate
matters;• climate targets, metrics and performance (including theimpact of their activities on the environment);• material climate risk exposures as well as measures taken
to mitigate such risks. In some entities and jurisdictions, thismay include the entity’s environmental impacts, and how
it seeks to identify, prevent and mitigate those impacts.

Climate-related disclosure practices differ acrossjurisdictions, both in terms of what and how to disclose.

The absence of a global standardised framework fordisclosures results in two main drawbacks:• the lack of comparability and consistency acrossjurisdictions, especially on the level of granularity andtransparency;• the lack of a level playing field across jurisdictions, which
may lead to increased and skewed compliance costs.

The majority of jurisdictions surveyed by the NGFS alreadyhave in place, or are planning to implement, some form ofclimate-related disclosure requirements for their entities. There
are various approaches to encourage disclosure, including:• Non-mandatory approaches: supporting industry-led or
non-binding disclosure guidelines, including cross‑bordercollaboration 43 and surveying disclosure practices.
This approach can help financial institutions comply withbroader disclosure requirements applied to listed entities
and/or entities considered to be of significant public
relevance within the jurisdiction.
• A “comply or explain” approach: a firm would beconsidered non-compliant if it does not disclose andfails to provide an adequate explanation.44 This approachprovides firms with clarity and guidance on disclosure
requirements but with greater flexibility and possibly
reduced compliance costs compared to a one-size-fits-all
disclosure rule. Additional non-binding recommendations
can support the standardisation of firms’ disclosure.45• A mandatory approach, specifying a catalogue of data
items detailing the quantitative and qualitative data thatneed to be disclosed.

This impedes the proper and globally consistent assessmentof climate risks at a firm level as well as the analysis offinancial stability risks.
A common international standard on climate information
disclosure would foster comparable high-quality disclosuresand provide greater clarity to the industry on how to aligntheir reporting internationally. The recommendations
provided by the TCFD with support from the Financial
Stability Board (FSB) are an obvious avenue of
convergence for a global standardised framework
on climate disclosures. Unlike existing disclosure
requirements, the TCFD proposal mainly focuses on climate
rather than more broadly on sustainability.
There is a significant level of awareness amongst central
banks, supervisors and regulated entities of the TCFD

43 Led by the China Green Finance Committee and the City of London Green Finance Initiative, and in collaboration with the Principles for Responsible
Investment, the China-UK Pilot TCFD group, comprising ten Chinese and UK financial institutions, launched a pilot TCFD reporting programme anddeveloped templates for disclosure by banks. The three-year action plan of this pilot exercise was published in November 2018.
44 An example of this is Article 173 of the French Energy Transition Law.
45 EU law requires large companies to disclose certain information on the way they operate and manage social and environmental challenges. While
Directive 2014/95/EU, as implemented into national law, is mandatory, the EU Commission issues non-binding guidelines on non-financial reportingwhich refine the disclosure obligation set out in the Directive.

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NGFS CALL FOR ACTION REPORT

recommendations, and support from the private sector
has grown rapidly, particularly considering that therecommendations were only released in mid-2017.
As of February 2019, the TCFD had the support of over
580 firms, with market capitalisations of over USD 7.9 trillion,
and including financial firms responsible for assets ofnearly USD 100 trillion. The most recent status report, from
September 2018, highlighted that many firms are alreadydisclosing in line with the recommendations, but there is
still a need for progress in key areas, including scenario
analysis and disclosing the financial impacts of climatechange on the firms’ operations. Increasing awarenessand sharing best practices can help encourage wider
implementation of the recommendations. For example,
the United Nations Environment Programme FinanceInitiative (UNEP FI)/TCFD pilot project involves 16 global
banks working to assess how they can best adopt key
elements of the recommendations.
Supervisors could support the development of
a disclosure framework by proposing additional
standardised metrics for the financial sector. This includes:• engaging with financial institutions on the topic ofenvironment and climate-related information disclosures
to align expectations regarding the type of information to
be disclosed and share good disclosure practices;• issuing additional guidance on materiality assessment
for their respective financial institutions and jurisdictions
in order to help firms’ comprehensively capture
the climate‑related risk factors to be considered
and disclosed.
In jurisdictions where prudential and market supervision
are conducted by different authorities, collaboration on
disclosure is also very important.
The NGFS considers that disclosure of climate-related
information and enhanced market discipline cannot
emerge rapidly enough without action by policymakers
or supervisory authorities. While acknowledging
the need to move forward on this issue, the NGFS isalso mindful of the remaining challenges, including
the current lack of data, the scope of reporting, andmethodological issues.

2.6 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 ataxonomy 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 (bothphysical 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.
Policymakers would thus need to:• ensure that the taxonomy is robust and detailed enough to (i) prevent green washing, (ii) allow for thecertification of green assets and investments projects and (iii) facilitate risk analysis;• leverage existing taxonomies available in other jurisdictions and in the market and ensure that the taxonomy
is dynamic and reviewed regularly to account for technological changes and international policy developments;• make the taxonomy publicly available and underline the commonalities with other available taxonomies. Eventually,it should strengthen global harmonisation to ensure a level playing field and prevent the dilution of green labelling.

NGFS CALL FOR ACTION REPORT

33

BOX 6

Green taxonomies and the cases of China and Europe
Green finance taxonomies provide the basis for defining
and classifying green financial assets (e.g., green loans,green bonds and green funds). In China, the definitionof green loans was introduced as early as 2013 by the
China Banking and Insurance Regulatory Commission(CBIRC, formerly CBRC) in the Guidance on Green Loans.
This green loan definition included 12 categories, such as
renewable energy, green transportation, green building,etc. Since then, the CBIRC has requested all major banks toreport on a semi-annual basis the balance of green loans
and the environmental benefits these loans delivered.
Green loan default data are also collected by the CBIRC.
As of end-2018, the outstanding amount of green loans
held by the 21 largest commercial banks in China reachedRMB 8.23 trillion, accounting for about 10% of their total
aggregate loan balance.
In 2015, China introduced the world’s first national‑levelgreen bond taxonomy, the Green Bond Endorsed
Project Catalogue (2015), which was published by theGreen Finance Committee of China Society for Finance andBanking, an institution under the People’s Bank of China(PBoC). The Catalogue defined six main categories and
31 sub-categories of projects as eligible for green bondfinancing. The six main categories included (i) energy
saving, (ii) pollution prevention and control, (iii) resource
conservation and recycling, (iv) clean transport, (v) clean
energy, and (vi) ecological protection and climate change
adaptation. The Catalogue was used by virtually all issuers,
investors and verifiers in China, even though it was notintended to be “mandatory”. Based on the green bondtaxonomy, Chinese regulators have also introduced rules
and guidelines on green bond verification, as well as
environmental information disclosure by green bondissuers. The Catalogue is now under revision and a
new version is expected to be released in 2019. Thanks
in part to the green taxonomies and the green bondeco-system developed on the basis of the taxonomy,
Chinese institutions have issued over USD 100 billion in

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NGFS CALL FOR ACTION REPORT

green bonds from 2016 to 2018, becoming one of thelargest green bond markets in the world.
In Europe, the European Commission has tableda legislative proposal to develop a unified EU
classification system – or taxonomy – to determine
which economic activities can be regarded asenvironmentally sustainable for investment purposes.
Such a list of environmentally sustainable economic
activities would be a useful tool to help financial market
participants identify sustainable companies and assets.
The proposal identifies six environmental objectives. For an
economic activity to be environmentally sustainable, itneeds to (i) substantially contribute to at least one of
the environmental objectives, (ii) do no significant harm
to any of these objectives, (iii) comply with minimum
safeguards, and (iv) comply with technical screening criteria.
These criteria are meant to determine when an activity canbe considered to “substantially contribute” to the objectives,
while doing “no significant harm”. The Commission has
set-up a Technical Expert Group on Sustainable Finance toadvise the Commission on the technical screening criteria.
The taxonomy will be instrumental to many other actions
that the Commission plans to take to move towards moresustainable growth. For example, the Technical Expert Groupis also working on a potential EU Green Bond Standard,
which will build on the EU Sustainability Taxonomy.
It is important to exploit potential synergies between
taxonomies in different jurisdictions. For example,
the China Green Finance Committee and the European
Investment Bank (EIB) have already made such an attempt
by publishing a White Paper called “The Need for a
Common Language in Green Finance” in November 2017,
followed by a second edition in December 2018. The White
Papers compared and mapped the differences andsimilarities between different green bond taxonomies
and highlighted the need for and a potential pathway
towards harmonisation of green taxonomies.

The NGFS identified a clear taxonomy around green,
non-green, brown and non-brown products as aprerequisite for deepening its analytical work.
• A taxonomy of “brown” assets based on clearly defined
criteria is important to identify which assets will be
impacted by the Paris Agreement and the low-carbon
and climate‑resilient transition. It is a preliminary step tobetter assess the risk profile of “brown” assets and ensurethat disclosures by financial institutions are consistentand comprehensive.
• A taxonomy of “green” assets enables policymakers
and supervisors to assess their risk profile. Like any otherinvestor, central banks will benefit from these taxonomies
when implementing sustainable investment strategies.
• A taxonomy of “green” assets is also of particular use
for scaling up green finance, as it provides financial markets
with more transparency, consistency and uniformity and,
therefore, confidence in green characteristics. It provides
the basis for labelling green financial assets and verifying
the “green” feature of the underlying activities, for collecting
statistics in green financial flows and stocks, such as green

loans or bonds extended or issued during a certain periodof time as well as the outstanding volume of green loans
and green bonds at any point in time.
The practical challenge is for all affected stakeholders tocome together and implement this taxonomy. This calls forpolicymakers to bring together the relevant stakeholders
and experts and to structure and facilitate the debate.
Until now, no regulatory taxonomy has been implemented
globally, except market-driven taxonomies which are, bydefinition, not binding. The NGFS acknowledges the trade-off
between, on the one hand, the fragmentation of regionalor national approaches, diversity of jurisdictions’ collective
preference and differing stages of development and, on theother hand, harmonisation in order to avoid level‑playingfield problems and to facilitate global assessment of risk
profiles. Although the space for a global taxonomy islimited, the NGFS is supportive of ensuring comparability
and consistency across different taxonomies.

NGFS CALL FOR ACTION REPORT

35

3

Looking forward: operationalising the workand strengthening the dialogue

The NGFS is an open-ended initiative and will continue
its work as long as its members deem it necessary anduseful. The lesson drawn from the first sixteen months of
NGFS activity is that climate change presents significant
financial risks that can only be mitigated through an early
and orderly transition.
To ensure such a smooth transition, there is still asignificant amount of analytical work to be done inorder to equip central banks and supervisors withappropriate tools and methodologies to identify,
quantify and mitigate climate risks in the financial
system. This calls for a close and specific dialogue withacademia and for further technical work to translate the
NGFS recommendations or observations into operational
policies and processes.
The NGFS will continue to leverage the best practices
identified within its membership to help central banks
and supervisors to better assess and mitigate climaterelated risks.
More precisely, in terms of concrete deliverables, the NGFS
is planning to develop:• A handbook on climate and environmental risk
management for supervisory authorities and financial
institutions: this document would set out some detailed
and concrete steps to be taken by supervisors andfinancial institutions to better understand, measure andmitigate exposures to climate and environmental risks.
The handbook will build on the recommendations of thisreport. It would also provide some detailed case studies ofclimate/environmental risk analyses carried out by financial
institutions and/or supervisory authorities. The focus will
be primarily on climate-related risks but will also coverenvironmental risks.
• Voluntary guidelines on scenario-based risk analysis:
scenario-based risk analysis is complex, requiring further

research and analytical input. The NGFS is working todevelop data-driven scenarios for use by central banks
and supervisors in assessing climate-related risks. The next
step will consist in providing practical advice and guidelines
for authorities willing to conduct their own analyses.
• Best practices for incorporating sustainability criteria
into central banks’ portfolio management (particularly
with regard to climate-friendly investments): building
on some concrete case studies, NGFS members will further
delve into the topic and develop a hands-on practical guidefor central banks to integrate sustainability principles into
their portfolio management.
The NGFS is also aware that addressing climate-relatedrisks calls for a collective response with the relevant
stakeholders, namely:• With non-NGFS central banks or supervisors, regional
and/or international supervisory authorities andstandard setting bodies and international organisations,
governments and policymakers in order to contribute todeveloping the appropriate policy framework. International
standard setting bodies could consider how the NGFS
recommendations could feed into their work and assess
their current set of standards/best practices with respect
to the relevance of climate-related risks. To this end, theNGFS will present this report to the BCBS in 2019. Specificregional outreach exercises, following the example of the
Mexico Green Finance Conference in January 2019, will
be arranged to strengthen the global reach of the NGFS.
• With academia in order to identify analytical blind spots
and gaps in our collective knowledge. In 2019, the NGFS
will set up a specific dialogue with academia and holdperiodic academic events to discuss the most pressing
research questions.
• With the financial industry and NGOs in order toensure a mutually beneficial exchange of experience andinformation. To that end, the NGFS has entered into a close
dialogue with a number of stakeholders relevant to its work.

NGFS CALL FOR ACTION REPORT

37

Conclusion
Over barely sixteen months of existence, the NGFS hasgrown from eight founding members to more than
thirty members from five continents including emerging
and developed countries alike. As time is runningout to ensure a smooth transition to a low-carbon
economy, and to mitigate climate change impacts
on the world’s economy and the global financial

38

NGFS CALL FOR ACTION REPORT

system, the momentum among the central bank andsupervisory community to respond to this challenge
is growing rapidly. This first comprehensive report lays
the foundations for the more technical deliverables the
NGFS is going to produce in the coming months. The
NGFS membership is collectively determined to develop
practical tools and methodologies for its membershipand beyond, while continuing to raise awareness and toreach out to the various stakeholders relevant to its work.

List of acronyms

BCBS	The Basel Committee on Banking Supervision is the primary global standard setter for the prudential
regulation of banks.
CRA	Climate Risk Assessment refers to the methods and practices used to size the financial impact ofclimate‑related risks to micro-prudential objectives, including qualitative and quantitative analysis.
CSR	Corporate social responsibility.
ESG	Environmental, social and governance criteria are used by responsible investors and can be financiallymaterial.
GFSG/SFSG	The G20 Green/Sustainable Finance Study Group was launched under China’s Presidency of the G20 in 2016.
The Study Group is co-chaired by China and the United Kingdom and has published three reports
in 2016, 2017 and 2018.
GHG	According to the IPCC1 the greenhouse gases are those gaseous constituents of the atmosphere, bothnatural and anthropogenic, that absorb and emit radiation at specific wavelengths within the spectrumof terrestrial radiation emitted by the Earth’s surface, the atmosphere itself and by clouds.
IAIS	The International Association of Insurance Supervisors is responsible for regulatory cooperation regarding
the supervision of the insurance sector.
IPCC	The Intergovernmental Panel on Climate Change is the United Nations body for assessing the science
related to climate change.
NGFS	Network for Greening the Financial System.
NPL	A non-performing loan is a loan for which the debtor has not met the scheduled payments for a defined period.
PD	The probability of default refers to the likelihood of default on a financial asset over a defined time horizon.
SFN	The Sustainable Finance Network is an initiative of the International Organization of Securities Commissions(IOSCO) bringing together securities and markets authorities. The Network is currently chaired by Erik Thedéen,
Director General, Finansinspektionen (Swedish Financial Supervisory Authority).
TCFD	The Task Force on Climate-related Financial Disclosures is a private-sector led task force, chaired by Michael
R. Bloomberg with support from the Financial Stability Board, which provides a global standardisedframework on climate disclosures.
UNEP FI	The United Nations Environment Programme – Finance Initiative is a partnership between UNEP and
the global financial sector created in the wake of the 1992 Earth Summit with a mission to promotesustainable finance.

1 IPCC, Special Report: Global Warming of 1.5°C, Glossary, 2018.

NGFS CALL FOR ACTION REPORT

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NGFS

Secretariat