NGFS pushes for international guidance to mobilise transition capital

April 23, 2024|Written by Ingrid Walker|Network for Greening the Financial System

The Network for Greening the Financial System (NGFS) has published a transition plan package, outlining its vision for how transition plans can be used to boost sustainable finance and climate-proof the financial system.

The package consists of three reports, each offering “thematic deep-dives” on the “broader context in which financial institution transition planning takes place”, asking how transition plans can be used to mobilise transition capital and manage climate-related financial risks.

The first report focuses on tailoring plans for emerging market and developing economies (EMDE) perspectives and priorities, while the second examines the connections between financial and non-financial firms’ transition planning processes. The remaining report considers what makes for credible plans from a microprudential supervisory perspective.

The NGFS assessment of what constitutes a credible transition plan could provide a useful frame of reference for the EU as regulators start to supervise financial institutions’ transition plans as part of their capital requirements framework.

The European Banking Authority, which will determine rules on prudential transition plans, closed its consultation on the matter last Thursday.

Overall, the NGFS reports stress the need for converging existing standards and practices into an overarching international framework to boost plans’ credibility and consistency. They highlight governance, strategy, risk management and metrics as key common elements for assessing the safety and soundness of all transition plans.

However, guidelines must be proportionate and adaptable to local country contexts to avoid hampering their ability to mobilise relevant transition capital, particularly for EMDEs. For instance, guidance should be able to accommodate the greater centrality of adaptation and nature-related risk in many EMDE transition pathways relative to economies in the global north.

“Transition plans are the roadmaps to steer the risks and opportunities that come with the transformation to a net zero future,” said Sabine Mauderer, chair of the NGFS. “Transition plans allow corporates to explain how they plan to manage the transition and strengthen their resilience. This will support financial institutions in making informed investment decisions.”

The reports noted that transition plans have “become a key topic of interest” and other global standard-setting bodies have also been advancing their regulatory efforts in this context.

Separately, the UK’s Transition Pathways Taskforce (TPT) has provided the final advisory output on integrating nature into its disclosure framework and associated sectoral guidance.

The paper from the TPT’s nature-related working group echoed suggestions from the NGFS by proposing that transition plans be designed to address interlinked nature and climate risks. The paper also examined how to create an enabling environment for businesses to implement this more integrated approach.

The TPT report highlights that 55% of global GDP – roughly US$58tn – is dependent on healthy ecosystems and, alongside planning for the low-carbon transition, ”it is critical we halt and reverse nature loss [as] our fundamental dependency on nature also represents huge risks to our economy”.

This page was last updated April 23, 2024

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