NGFS: Guide to Implementing Effective Climate-Related Disclosure Practices for Central Banks

The urgent need to address climate change has thrust central banks into a crucial role in the global financial system's transition towards sustainability. Recognizing this responsibility, the Network for Greening the Financial System (NGFS) has developed a comprehensive framework to guide central banks in navigating the complex landscape of climate-related disclosure. This in-depth blog post aims to explore the key aspects outlined in the second edition of the "Guide on climate-related disclosure for central banks."

Governance: Building a Strong Foundation for Effective Disclosure

Establishing a robust governance structure is the cornerstone of effective climate-related disclosure. Central banks must align their climate-related goals, targets, and processes with their legal mandates to achieve this. Transparency in governance structures demonstrates a central bank's unwavering commitment to addressing climate-related risks and opportunities.

Implementation steps:

1. Conduct a thorough review of the central bank's legal mandates and identify areas where climate-related objectives can be integrated.
2. Develop specific, measurable, and time-bound climate-related goals and targets that align with the identified mandate areas.
3. Establish clear processes for regularly informing and engaging the board and management on climate-related issues, such as quarterly briefings or dedicated agenda items in meetings.
4. Create dedicated committees or units responsible for monitoring and addressing climate-related issues, ensuring cross-functional collaboration and expertise.
5. Publicly disclose the central bank's climate-related governance structure, including roles, responsibilities, and accountability mechanisms.

Strategy: Charting a Course Towards a Climate-Resilient Future

A comprehensive strategy is vital for central banks to effectively identify, assess, and address climate-related risks and opportunities. A well-defined strategy should include a detailed description of material risks across various functions, a robust approach to risk assessment, and a clear plan for adapting core functions to integrate climate considerations.

Implementation steps:

1. Conduct a thorough materiality assessment to identify and prioritize climate-related risks and opportunities across the central bank's areas and functions.
2. Develop a standardized approach for assessing climate-related risks, incorporating both qualitative and quantitative methods, such as scenario analysis and stress testing.
3. Identify areas and functions where climate considerations can be integrated, such as monetary policy, financial stability, and supervision, and develop a phased implementation plan.
4. Establish a process for regularly reviewing and updating the climate strategy to ensure it remains relevant and effective in the face of evolving risks and opportunities.
5. Disclose the central bank's climate strategy, including the approach to risk assessment, prioritization of actions, and progress on implementation.

Risk Management: Navigating the Complexities of Climate Risk

Effective risk management is essential for central banks to identify, assess, and manage their exposure to climate-related risks. A robust risk management framework should incorporate both qualitative and quantitative approaches, and ensure that climate-related risks are integrated into the overall risk management processes.

Implementation steps:

1. Develop a comprehensive taxonomy of climate-related risks, including physical, transition, and liability risks, and their potential impact on the central bank's operations and the broader financial system.
2. Integrate climate risk assessment into existing risk management processes, such as credit, market, and operational risk assessments, to ensure a holistic approach.
3. Implement a combination of qualitative and quantitative risk assessment tools, such as expert judgment, scenario analysis, and stress testing, to capture the full spectrum of climate-related risks.
4. Establish clear guidelines for managing material climate-related risks, including risk mitigation strategies, risk transfer mechanisms, and risk acceptance criteria.
5. Regularly review and update the risk management framework to ensure it remains effective in identifying and managing evolving climate-related risks.
6. Disclose the central bank's approach to climate risk management, including the integration of climate risks into overall risk management processes, and the tools and methods used for risk assessment and management.

Metrics and Targets: Measuring Progress and Driving Change

Establishing meaningful metrics and targets is crucial for central banks to measure and manage climate-related risks and opportunities effectively. Disclosure should include relevant metrics and targets across various areas, such as monetary policy, financial stability, supervision, financial portfolios, and internal operations.

Implementation steps:

1. Identify key metrics and indicators relevant to the central bank's climate-related risks and opportunities, such as carbon intensity, green asset ratio, or exposure to high-risk sectors.
2. Develop a data collection and management system to ensure the availability, quality, and comparability of climate-related data across the central bank's operations and the broader financial system.
3. Set ambitious yet achievable targets for reducing the central bank's climate-related risks and increasing its positive impact, such as reducing the carbon footprint of financial portfolios or increasing green lending.
4. Regularly monitor and report on progress against established metrics and targets, using standardized methodologies and templates to ensure comparability and transparency.
5. Disclose the central bank's chosen metrics and targets, along with the rationale for their selection, the data sources and methodologies used, and the progress achieved against the targets.

Capacity Building and Communication: Driving Change from Within and Beyond

To effectively address climate-related risks and opportunities, central banks must invest in building internal capabilities and actively engage with external stakeholders. Disclosure should cover the central bank's approach to internal capacity building, as well as its external communication and outreach efforts to raise awareness and promote best practices.

Implementation steps:

1. Conduct a skills gap analysis to identify the knowledge and expertise needed to effectively address climate-related risks and opportunities within the central bank.
2. Develop and implement a comprehensive training and capacity-building program for central bank staff, covering topics such as climate risk assessment, scenario analysis, and sustainable finance.
3. Foster a culture of continuous learning and knowledge sharing within the central bank, encouraging staff to stay up-to-date with the latest developments in climate-related issues and best practices.
4. Engage with external stakeholders, such as financial institutions, academia, and civil society, to raise awareness about climate-related risks and opportunities and promote the adoption of best practices.
5. Develop and disseminate educational materials, such as research papers, guidelines, and case studies, to support the broader financial sector in addressing climate-related challenges.
6. Actively participate in international forums and initiatives, such as the NGFS, to share experiences, learn from peers, and contribute to the development of global standards and best practices.
7. Disclose the central bank's approach to capacity building and communication, including the training and development programs for staff, the engagement with external stakeholders, and the educational materials and resources provided.

So what's next?
Climate-related disclosure is not just a reporting exercise; it is a powerful tool for central banks to drive the transition towards a climate-resilient financial system. By following the comprehensive guidance provided by the NGFS central banks can enhance their disclosure practices, lead by example, and catalyze change across the financial sector.

As central banks embark on this critical journey, it is essential to remember that climate-related disclosure is an iterative process that requires continuous improvement and adaptation. By fostering a culture of transparency, collaboration, and shared learning, central banks can collectively rise to the challenge of addressing climate change and build a more sustainable and resilient financial future for all.

P.S. How is your central bank advancing its climate-related disclosure practices? Share your experiences, challenges, and successes in the comments below to foster a dialogue and learn from your peers in the central banking community.

Disclaimer: The views expressed in this blog are not necessarily those of the blog writer and his affiliations and are for informational purposes only.

If you found this blog post insightful, don’t forget to subscribe to our website for more updates. Your subscription will help us continue to bring you the latest insights. And if you think this post could benefit others, please feel free to share it. Let’s spread the knowledge together!

Reference:

Guide on climate-related disclosure for central banks (Second edition) by NGFS