10 December 2021

SSM's Elderson: Mapping connected dots: how climate-related and environmental risk management is becoming a reality

Thank you for inviting me to speak at this IMF workshop on addressing climate risks in prudential supervision and regulation. It is a great pleasure to join you today to speak about addressing climate risks in prudential supervision and regulation – both because of the importance of this topic and because it draws a common thread between many of my roles. First, as Chair of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). Second, as Co-chair of the Basel Committee on Banking Supervision’s Task Force on Climate-related Financial Risks. And third, as Vice-Chair of the ECB’s Supervisory Board.

I am not only Vice-Chair of the Supervisory Board, but also a member of the ECB’s Executive Board and Governing Council. We are now in our quiet period leading up to a monetary policy meeting, which means that I will not say anything today that has any bearing on the deliberations of the Governing Council next week.

That being said, the topic of this workshop leaves us plenty to discuss. Addressing climate-related – and I will consistently add environmental – risks in prudential supervision and regulation has many dimensions and perspectives. Still, considering the impressive agenda that the organisers have put together for this event, I had to think hard about the best angle to take in my remarks today to complement the contributions of other speakers. You will hear from the head of the NGFS Secretariat Jean Boissinot, who will present the NGFS’s Guide for Supervisors and its recently published progress report on that Guide. My colleague Patrick Amis will present the activities of ECB Banking Supervision in more detail. And there will be interesting presentations on the approaches and experiences of the South Asia region.

With so much progress being made in so many different places, we risk losing sight of the broader picture. Therefore, I thought it would be useful to share what can be described as the perspective of the travelling salesperson. In short, the travelling salesperson problem considers the following question: “given a list of cities and distances between each city, what is the shortest possible route that connects all cities?” In other words, the travelling salesperson sets out to complete a “connecting the dots” exercise as efficiently as possible to make her task – visiting all cities – a reality. This is what I will aim for in my contribution today: connecting the dots of different activities in the global policy community, which – once connected – reveal how the prudential supervision and management of climate-related and environmental risks is becoming a reality. In a way, I would like to be your “net zero travelling salesperson” for today.

The NGFS Guide for Supervisors

The NGFS’s journey started exactly four years ago this Sunday: the day the network was founded . Over these past four years, our network has quickly grown from eight founding members in 2017 to 102 central banks and supervisors and 16 observers today. The NGFS is a global and inclusive network – our members include central banks and supervisors across five continents, they come from developed, emerging and developing economies, and they cover 88% of the global economy and 85% of all global emissions.

Since launching the NGFS in 2017, we have developed and shared tools and knowledge to better equip central banks and supervisors to deal with climate-related and environmental risks in all their tasks and responsibilities. In our first comprehensive publication, the 2019 “Call for Action” report^[1], we acknowledged that the physical and transition risks from climate change are a source of financial risk and that, as a result, it falls squarely within the mandates of central banks and supervisors to ensure the financial system is resilient to these risks. One of the six recommendations included in this early NGFS publication was to integrate climate-related risks into financial stability monitoring and microprudential supervision – by mapping and monitoring the relevant risks and their transmission channels, by engaging with supervised entities and by establishing supervisory expectations. On supervision, we followed up with a further five concrete recommendations in our Guide for Supervisors published in May 2020.^[2]

Later in today’s workshop, Jean Boissinot will present the conclusions of a recently published report^[3] on the progress made in following up on these recommendations. For now, let me highlight one finding of particular relevance. We are seeing that more supervisors are clarifying how existing legal requirements will be applied in the context of climate-related and environmental risks. This clarification of what supervisors expect from supervised entities will guide the supervisory dialogue in the future. Both supervisors and financial institutions are in the early stages of the journey towards sound management of climate-related and environmental risks. It is therefore to be expected that the guidance will be refined and the bar will be raised over time as expertise and regulations are developed and capabilities are improved. But setting expectations is still an important step, given the urgent need for financial institutions to start integrating climate-related and environmental risks into their decision-making and risk management processes. This is also acknowledged by the banks themselves as evidenced by the recent GFANZ^[4] initiative that has banks voluntarily entering into commitments reach net zero, with intermediate targets and consistent transition planning....

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