It has been six years since the Network for Greening the Financial System (NGFS) was formed, and today it represents the views of 129 regulators and central banks. The work of NGFS has been fundamental in driving the development and implementation of climate risk and green finance related regulations. Furthermore, with over 50 publications, NGFS has played a pivotal role for financial institutions, offering guidance and assistance in shaping the industry best practices and providing a window into possible futures through its creation of climate scenarios.
Over the years, regulatory developments have materialized on multiple fronts and in different regions, largely influenced by this work of NGFS, encompassing risk, disclosure and green finance. Also noteworthy is the arrival of the Corporate Sustainability Due Diligence Directive (CSDDD) in Europe, signaling a shift towards firms bearing increasing liability for their climate inaction. While the financial sector is temporarily excluded from its scope, this is still subject to review and change.
Another ongoing major regulatory debate focuses around climate risk and capital requirement: whether climate risk should be a separate pillar 1 risk with its own risk-weighted asset and capital requirement, or should it be rather included in the current risk categories, and/or should there be a capital relief for greener assets. Once resolved, these issues can lead to significant impact on how financial institutions respond to climate change.
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