Stocktake on Financial Institutions’ Transition Plans and their Relevance to Micro-prudential Authorities

The Network for Greening the Financial System (NGFS) published a report taking stock of emerging practices relating to climate transition plans and assessing the role of central banks and supervisors in relation to transition plans. 

The NGFS took stock of the recent development of transition plans by corporates and financial institutions transition plans. The Network also examined the relevance and extent to which financial institutions’ transition plans (i) relate to micro-prudential authorities’ roles and mandates, and (ii) could be considered and used most effectively within their supervisory toolkit and in the overall prudential framework.

The NGFS has identified six key findings as well as steps to advance the work on the relevance of transition plans and planning to micro-prudential authorities.

1. While the potential of transition plans is widely recognised, there are multiple definitions of transition plans, reflecting their use for different purposes;
2. There is merit in distinguishing transition planning (understood as a process to design a transition strategy) from a transition plan (transparency to a specific audience);
3. Existing frameworks speak to a mix of objectives, audiences and concerns for transition plans but predominantly relate to climate-related corporate disclosures;
4. Transition plans could be a useful source of information for micro-prudential authorities to develop a forward-looking view of whether the risks resulting from an institution’s transition strategy are commensurate with its risk management framework;
5. There are some common elements to all transition plans which are relevant to assessing safety and soundness;
6. The role that micro-prudential authorities play needs to be situated in the context of the actions of other financial and non-financial regulators rather than acting in isolation.

The NGFS recognises that transition plans have the potential to provide much needed forward-looking visibility on the real economy’s pathway to a net-zero future. Financial institutions will prepare their own transition plans as well as engage entities that they finance on their respective transition plans. The forward-looking information contained in transition plans will be key to enable the financial sector to mobilise private finance in support of the transition.