Integrating bank transition planning into prudential supervision

Climate transition plans are a versatile new tool for use by financial and non-financial firms, policymakers and prudential regulators. For banks, they are an important building block that supports their ability to respond adequately to short-, medium- and long-term risks arising from climate change. For central banks and prudential supervisors, assessing the transition plans and planning practices of banks can help overcome some of the limitations that existing prudential frameworks face when it comes to climate change risks, in particular by supporting the assessment of business models and the adequacy of banks internal governance and risk management.

This report’s analysis is designed to support prudential authorities across jurisdictions as they integrate transition plans into their supervisory review and evaluation processes. It articulates how the different aspects of the emerging transition plan governance ecosystem fit together, summarises their common elements, and explains the role that prudential supervision should play within this ecosystem. It develops a framework for identifying how specific elements of transition plans can be integrated into existing supervisory assessment procedures, with a primary focus on climate transition plans.

Recommendations

Supervisors need to clearly articulate their expectations for bank transition planning practices and coordinate with other regulatory authorities who are developing transition planning requirements with other policy use cases in mind (e.g. investor protection, financial market integrity). This is critical to ensure that as banks develop and implement transition plans, these meaningfully contribute to the safety and soundness of the institution, without adding to the overall regulatory burden.

Supervisors need to set out the criteria that they will apply when integrating transition planning information into supervisory assessments. As a starting point, the authors recommend that supervisors should expect banks to:

• Adopt a forward-looking approach, whereby the bank develops a robust assessment of the future business environment and potential uncertainties relating to key risk drivers such as policy, technology, and physical climate change over medium- and long-term time horizons.
• Include a robust materiality assessment conducted by the bank to assess climate change risk exposure with regard to both transition and physical risk over the medium-term time horizon.
• Include broad coverage and a broad scope of transition planning across geographies, sectors and activities to ensure that the banks’ risk identification and management practices are adequate and do not leave sizable blind spots and vulnerabilities.
• Provide clarity around key assumptions and dependencies, and that the bank is taking adequate action to mitigate and address risks arising from critical dependencies.
• Provide internal consistency across business lines and functions (e.g. between disclosed transition plans, financial statements and supervisory reporting information).
• Include high-quality supporting evidence, with pledges and commitments accompanied by specific and detailed examples, especially when they have a bearing on risk identification and mitigation at the client or portfolio level.
• Rely on science-based targets, particularly with regard to physical risks and long-term impacts.