1、Network for Greening the Financial System Technical document A Status Report on Financial Institutions Experiences from working with green, non green and brown financial assets and a potential risk differential May 2020 NGFS Technical document MAY 2020 This report has been coordinated by the NGFS Se

2、cretariat/Banque de France. For more details, go to and to the NGFS Twitter account NGFS_ , or contact the NGFS Secretariat sec.ngfsbanque-france.fr NGFS Secretariat NGFS REPORT 2 Executive summary 3 Introduction: Why focus on potential risk differentials between green, non-green and brown? 6 1.Clas

3、sification principles 7 1.1. What is green and what is brown?7 1.2. Most respondents use a voluntary classification or principle8 1.3. Alternative views on the use of the taxonomies and classifications10 2.Respondents views on the risk aspect and risk assessments performed by the industry 10 2.1. Va

4、rious motives for engaging in climate- and environment-related issues10 2.2. The results of backward-looking approaches are not conclusive yet on a risk differential 12 2.3. Forward-looking approaches may be a better tool for capturing this emerging risk. 15 3.Integration of climate- and environment

5、-related risks into risk monitoring appears to be a challenge for the respondents 15 3.1. The path towards integration into risk assessment and monitoring15 3.2. Identified challenges and obstacles17 Tentative conclusions and high-level messages to financial institutions 19 Appendix I : Defining gre

6、en and brown sector, asset, activity and value-chain aspects 21 Appendix II : Case study: Practical application internal classification 25 Appendix III : A summary of the Chinese taxonomy 27 Appendix IV : The Brazilian classification framework 28 Acknowledgements 29 Table of Contents NGFS REPORT 3 E

7、xecutive summary A point-in-time survey of how financial institutions are tracking green, non-green and brown risk profiles It is important for financial institutions to consider all relevant risks in order to avoid suffering unexpected losses. Such losses could potentially have a negative impact on

8、 the stability of the financial system. Against the backdrop of the increasing impact from climate- and environment- related risks in the financial system1, financial supervisors need to understand how these risks are taken into account by supervised institutions. Therefore, with the help of a selec

9、t group of financial institutions, the NGFS has performed a survey to assess whether a risk differential could be detected between green, non-green and brown2 financial assets. This survey focuses on the work performed by financial institutions to track specific risk profiles of green, non-green and

10、 brown financial assets (loans and bonds), develop specific risk metrics and analyse potential risk differentials. It aims to present a point-in-time snapshot of current practices among financial institutions, based on the information these institutions have obtained up until now. Forty-nine banks f

11、rom the following jurisdictions have submitted their answers (anonymised in this report): Brazil, Belgium, China, Denmark, Finland, France, Germany, Greece, Japan, Malaysia, Morocco, the Netherlands, Portugal, Spain, Sweden, Switzerland, Thailand, the UK, and one supranational. We have also received

12、 answers from five insurance companies in Malaysia. shows that the institutions have not established any strong conclusions on a risk differential between green and brown The striking result from the study was the diversity of methods, results and motivations for whether to undertake a climate- and

13、environment-related risk assessment. Most of the institutions have undertaken an operational commitment towards greening their balance sheets, with 57% of the respondents undertaking commitments that affect their daily operations either by limiting their exposure to brown assets or by setting green

14、or positive-impact targets. However, the survey responses highlight that the underlying justification is not based on an attested financial risk differential between green and brown assets but rather on a more diffuse perception of risks. Most banks tend to consider their actions to be part of their

15、 corporate social responsibility or mitigation measures for reputational, business model or legal risks. Backward-looking studies on a potential risk differential have only been performed by five respondents. Another three respondents (banks) indicated that they conducted backward-looking analysis w

16、ith ESG or energy rating of housing loans, but not strictly using green or brown criteria. In both cases, they failed to reach strong conclusions on a risk differential between green and brown assets. These studies have been limited to sub-sectors and performed on a project-basis rather than at coun

17、terparty level. Overall, it appears that it is only possible to track the risk profile of green, non-green and brown assets in very few jurisdictions. An important reason for this is that the prerequisites, e.g. a clear taxonomy and available granular data, are not yet in place in most jurisdictions

18、. These results illustrate the challenges for banks and insurance companies to assess their exposure in the absence of common classifications and the inherent limits of backward-looking analysis in a rapidly developing area. 1 See NGFS first comprehensive report “A call for action: Climate change as

19、 a source of financial risk”, April 2019 2 As of yet, there are no clear, uniform definitions of the commonly used terms “green”, “non-green” and “brown” are being used . We abstain from adhering to any particular definition. Please see section III. NGFS REPORT 4 Using national or international taxo

20、nomies and/or principles is the most common approach for classifying green and brown assets In its first comprehensive report, the NGFS established the need for a clear taxonomy3 as a prerequisite for a better understanding of possible risk differentials between different types of assets4. Given the

21、 the lack of an official taxonomy in the majority of jurisdictions, the most common approach among the respondents has been to implement and use an international or national classification in the form of a voluntary classification or principle. The second most frequent approach is to use an internal

22、ly developed classification. There is a wide variety of approaches to classify assets, the most common being to classify the assets by the use-of-proceeds method. The survey shows a growing use of climate- related taxonomies among the respondents: only 15% of the respondents did not use any taxonomy

23、 or voluntary principle, and the majority of them are considering implementing an international/national taxonomy in the future. but there are some challenges to overcome when classifying financial assets The majority of the institutions only apply their internal classification to a part of their as

24、sets within each asset category (bonds or loans). Several respondents highlight that they encounter different challenges when trying to classify different types of assets (e.g. loans, bonds, investments). For loans in particular, whilst the classification of single purpose loans (e.g. within project

25、 finance) may seem quite obvious, loans for general corporate purposes have a weaker direct link to a physical asset or a project and seem more difficult to classify. Lack of harmonised client data and a lack of internal resources are other main challenges Many respondents stressed the lack of harmo

26、nised client data as the main obstacle for defining the greenness of an asset. One root cause identified by some respondents is the lack of legal disclosure requirements for companies to report verified data on a sector-specific basis, but respondents also highlighted some limitations of internation

27、al or internal taxonomies and classifications. The respondents stressed the internal challenges posed to their organisations. The integration of climate- and environment-related risk assessment into their usual risk analysis requires the build-up of internal knowledge as well as investment to adapt

28、existing IT systems to track this emerging risk. Different views on methodologies for assessing the effective riskiness of green and brown assets The respondents provided a number of comments on what methodology characteristics are important for assessing the effective riskiness of green or brown as

29、sets. In particular, diverging views were expressed with regard to the question of compatibility with existing methods or models. Some respondents take the position that climate-related risks can be considered in existing internal rating-based approach (IRB) standards, while others feel that the dif

30、ferent timeframes do not allow for this5. Some respondents highlighted the need to consider long horizons in a forward-looking approach through scenario analysis and forward-looking assessment of relative riskiness. In terms of the development of methodologies for the assessment of the vulnerability

31、 of counterparties to climate- or environment-related risks, respondents broadly agreed that the methodologies should consider key environmental issues that could impact the repayment ability of clients or the value of an asset. For economic sectors, the sensitivity to key parameters could be assess

32、ed. However, according to some institutions, it may be necessary to go deeper than the sectoral level and perform risk assessment at an individual or corporate level. Some institutions are currently working on integrating counterparty ESG factors into their credit processes and, subsequently, their

33、risk management frameworks. 3 A taxonomy can be defined as a system for organising objects into groups that share similar qualities. 4 See NGFSs first comprehensive report, “A call for action: Climate change as a source of financial risk”, April 2019, Recommendation No 6. 5 The IRB model uses a time

34、 horizon of one year, but climate risks are expected to fully materialise over a longer time frame. NGFS REPORT 5 Respondents mentioned a variety of environmental risk monitoring measures including ESG scoring, Risk Appetite Statement (RAS) limit setting, an internal capital allocation model, and en

35、vironmental veto systems. and some respondents have entirely different views A few of the respondents consider monitoring of the specific risk profiles of green or brown assets is not and should not be a priority in their on-going work on climate-related challenges. Some institutions also raised dou

36、bts on the relevance of monitoring risk profiles based on green and brown classifications and insisted on other more decisive risk factors. Forward-looking studies still at an early stage Forward-looking studies to assess how different climate scenarios can affect different kinds of activities and a

37、ssets were performed at the portfolio level by twelve respondents (22%). Of these forward-looking studies, scenario analyses and stress tests are the most common. These types of analyses are typically at an early stage and often stem from international initiatives such as the TCFD and the UNEP FI pi

38、lot, in which some respondents participated. Tentative conclusions and high-level messages to financial institutions The survey does not allow us to conclude on a risk differential between green and brown assets. Overall, it appears that in all but a few jurisdictions the prerequisites for tracking

39、the risk profile of green or brown assets are not yet in place. The vast majority of institutions cannot yet conclude on the relationship between greenness and credit risk, pending further analyses, which require a better tagging of exposures and meaningful performance data. With those prerequisites

40、 in place, it should be possible to expand the risk management tools already in use for more traditional risk categories to comprise climate-related and environmental risks. Given the increasing magnitude of climate change and its impact on the financial system, forward-looking methodologies are nec

41、essary to assess the impact on individual financial institutions. NGFS REPORT 6 Why focus on potential risk differentials between green, non-green and brown? Most local and regional prudential frameworks are based on BCBS and IAIS1 standards for banks and insurance companies. The BCBS guidelines Pri

42、nciples for the Management of Credit Risk2 state inter alia, that banks should identify and analyse existing and potential risks inherent in any product or activity3. Against the backdrop of the increasing impact from climate and environmental risks on the financial system4, supervisors need to bett

43、er understand how and to what extent such risks translate to financial risks. An important part of this work is to analyse the potential risk differentials between green, non-green, and brown financial assets and how financial institutions take these risks into account in their credit assessments. I

44、f, for example, a consistent link between brown financial assets (such as loans or bonds) and higher default rates could be established, financial institutions holding such assets would need to safeguard themselves against this increased default risk. This would mean for example, closer risk monitor

45、ing and setting aside more economic capital.5 Regulators would probably also need to consider increasing regulatory capital requirements6 held against these assets in order to safeguard financial stability. In 2018, the NGFS performed a preliminary stock-take of studies conducted by market participa

46、nts on credit risk differentials between green, non-green and brown financial assets. The findings showed that it was not possible to draw any general conclusions on potential risk differentials based on the studies conducted so far. These studies also pointed to differing results depending on the f

47、inancial assets that had been surveyed, the geography and the underlying factors the study had been able to control for. Based on this, the NGFS pointed to the need for further fact-gathering and analyses. The NGFS therefore decided to perform an exploratory data collection from selected institution

48、s. The original intention was to analyse the collected data, and assess whether a risk differential could be detected between green, non-green, brown and non-brown financial assets. However, due to the lack of relevant and comparable data, the scope and methodology were slightly altered. In the end,

49、 this survey does not allow a conclusion on a risk differential between green and brown assets. However, it provides a useful and encouraging snapshot of the current practices among a sample of financial institutions around the globe to monitor climate-related financial risks and the challenges these institutions are facing. Scope and methodology of the exercise The scope has been to collect information from financial institutions7 on how they have responded to the need to take the emerging climate-related risks into account in their risk assessment. Given that a