NGFS – Network of Central Banks and Supervisors for Greening the Financial System

The Central Banks and Supervisors Network for Greening the Financial System (NGFS) is a group of Central Banks and prudential supervisory authorities willing, on a voluntary basis, to exchange experiences, share best practices, contribute to the development of environment and climate risk management in the financial sector, and to mobilize mainstream finance to support the transition toward a sustainable economy. Its purpose is to define, promote and contribute to the development of best practices to be implemented within and outside of the Membership of the NGFS and to conduct or commission analytical work on green finance.

In order to achieve its work program, the Network has structured its work into five dedicated Workstreams:

1. Workstream on “Micro prudential/Supervision”, dealing with keeping track of supervisory developments and update the mapping of supervisory practices for integrating climate-related and environmental risks into micro-prudential supervision; considering the extent to which a financial risk differential exists between ‘green’ and other assets, as well as reviewing and assessing existing methodologies to measure climate-related and environmental financial risks at micro level;
2. Workstream on “Macro financial”, responsible for developing climate scenarios for central banks and supervisors, providing guidance to central banks and supervisors on integrating climate risk analysis into macroeconomic and financial stability surveillance and sizing the macro-financial impact of climate-related risks;
3. Workstream on “Scaling up green finance”, aimed at promoting the adoption of sustainable and responsible principles in central banks’ investment approaches, understanding and monitoring the market dynamics of green finance and providing a joint central banks’ view on the various challenges climate change raises for the conduct of monetary policy;
4. Workstream on “Bridging the data gaps”, structured around the topics of identifying a list of data items needed for the purpose of other NGFS workstreams, determining the availability, the sources and limitations for accessing the relevant data, producing a public list of missing data items and calling for external stakeholders to bridge it;
5. Workstream on “Research”, mandated at updating the list of NGFS research questions on a regular basis, in relation with the other NGFS workstreams, ensuring a smooth coordination of research efforts within the NGFS working structures and developing the relationship with the NGFS research stakeholders;

Research activities of the NGFS (those relevant to Armenia) has been so far aimed to include the below.

Designing climate scenarios for Central banks and Supervisors

The NGFS Climate Scenarios (the scenarios) have been developed to provide a common starting point for analysing climate risks to the economy and financial system. While developed primarily for use by central banks and supervisors they may also be useful to the broader financial, academic and corporate communities.

The first iteration explores a set of eight scenarios which are consistent with the Framework published in the First NGFS Comprehensive Report. The set includes three representative scenarios, which each cover one of the following dimensions:

• Orderly: Early, ambitious action to a net zero CO2 emissions economy;
• Disorderly: Action that is late, disruptive, sudden and / or unanticipated;
• Hot house world: Limited action leads to a hot house world with significant global warming and, as a result, strongly increased exposure to physical risks.

These scenarios were chosen to show a range of lower and higher risk outcomes. A 'too little, too late' scenario with both high transition and physical risks was not included in the first iteration.

A key guiding principle of the exercise has been embracing the uncertainty inherent in scenario modelling. This has been captured in two ways. Firstly, five alternate scenarios have been published to help users explore how specifying different key assumptions would change the results. Secondly, for each scenario, multiple models have been used to provide a range of estimates.

Climate Change and Monetary Policy

Climate change is one of the most significant structural forces shaping the global economy. Its impact will be substantial and diverse, affecting all economic agents and sectors across the globe. Respective methodological guidance compiled by the NGFS group of experts on monetary policy and climate change investigates the possible effects of climate change on the conduct of monetary policy. Based on a comprehensive review of existing literature, studies and expert analyses, it provides some early answers to the following questions:

1. How does climate change affect key macroeconomic variables?
2. What are the effects on the monetary transmission channels and central banks’ assessment of their policy space?
3. Do central banks’ prevalent analytical toolkits adequately reflect climate change?
4. How might climate-related risks affect different monetary policy regimes?

Sustainable and responsible investment guide for Central Banks’ portfolio management

The NGFS encourages central banks and supervisors across the globe to lead by example and include sustainability considerations in their portfolio management, without prejudice to their primary mandates. The NGFS believes that the adoption of Sustainable and Responsible Investment (SRI) practices by central banks is important and can help to demonstrate this approach to other investors and mitigate material ESG risks as well as reputational risks. As public institutions, central banks are subject to public scrutiny if they fail to address stakeholders’ concerns related to climate change. This is especially true if a central bank calls upon the financial sector to take account of climate‑related risks, but fails to appropriately address these risks in its own operations.

Central banks manage a large number of assets in different portfolios. However, they are not comparable to other institutional investors as their investment practices are (to a large extent) dictated by the respective policy objectives. Consequently, central banks face specific challenges in the pursuit of SRI:

• Sticking to the legal policy mandate. The vast majority of holdings are dictated by a policy objective. It is up to each central bank to determine whether an SRI objective could be adopted without prejudice to its mandate.
• Investing responsibly while preserving liquidity. Central banks’ balance sheets largely consist of supranational and high‑grade sovereign debt with short duration. The adoption of SRI is less straightforward for these asset classes.
• Safeguarding independence and preventing conflicts of interest. Since central banks act as independent agents, any conflicts of interest arising from their investment practices should be prevented.
• Striking a balance between transparency and confidentiality. Transparency is key to any SRI approach. Nevertheless, central banks may not be able to disclose everything about all of their investment practices as this could undermine the primary policy objective.