Working Group on Financial Modernization and Regulatory Reform Annual Meeting (Virtual Session II)

Held on September 29, 2020

Meeting Overview

The Office of the Auditor General of Canada (OAG-Canada) hosted the second of three planned virtual meetings to replace the in-person annual INTOSAI Working Group on Financial Modernization and Regulatory Reform meeting. Sixteen SAI members joined the meeting. The SAIs learned about the Network for Greening the Financial System (NGFS) from Morgan Després, NGFS’ Head of Secretariat. SAIs also exchanged ideas to finalize the 2021-2023 Work Plan.

Meeting Attendees

The following SAIs attended the meeting: Brazil, Canada, China, Cyprus, Estonia, European Court of Auditors, France, Germany, Korea, Mexico, Pakistan, Poland, Qatar, Saudi Arabia, Sweden, and United States.

Network for Greening Financial System

Morgan Després shared the following information about NGFS. The slides he shared will be added to the Working Group website.

• NGFS was established in December 2017 by 8 central banks and supervisors and currently has 72 members and 13 observers covering 5 continents. NGFS is not a standard setting body. Rather, it consists of a coalition of those willing to share best practices and contribute to the development of environment and climate risk management in the financial sector.
• NGFS monitors and analyzes significant microeconomic effects of the changing climate.
• The impetus behind NGFS stems from central banks’ mandates for financial stability and climate change as a source of financial risk. NGFS argues that if central banks do not observe or quantify climate risk exposure for financial institutions, then central banks will not be able to properly execute or meet their mandate.
• In April 2019, NGFS issued its first set of recommendations, 4 for central banks and 2 for policymakers.
• For central banks and supervisors, NGFS issued the following recommendations.
  • Integrating climate-related risks into financial stability monitoring and micro-supervision.
  • Integrating suitability factors into own-portfolio management.
  • Bridging the data gaps.
  • Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing.
• For policymakers, NGFS issued the following recommendations.
  • Achieving robust and internally consistent climate and environment-related disclosure.
  • Supporting the development of a taxonomy of economic activities.
• Regarding the recommendation to bridge data gaps, NGFS members realized that there is a lack of consistent financial and nonfinancial data to be able to make comparisons and asses risk.
• Regarding the recommendation to support development of a taxonomy of economy activities, currently the definitions for activities that are green or nongreen are not well-defined so the activities are difficult to measure.
• NGFS has been working on practical guides to better equip the community of central banks and supervisor, including guide for central banks’ portfolio management and risk scenarios. Such guides share best practices and experiences.

In response to a few members’ questions, Mr. Després said the following.

• As a club of the willing, NGFS does not recruit. Central banks that are not members can act as observers, and nonmembers have contributed to NGFS’ work, such as on the guides NGFS has produced.
• NGFS does not issue standards, but standard-setting bodies, such as the Basel Committee, participate as part of the secretariat and contribute to NGFS’ work. NGFS’ guides may help contribute to standards when standard-setting bodies are ready to issue them. However, NGFS’ risk scenarios have been used in France and the United Kingdom to develop stress testing exercises.
• Much progress has been made on the supervisory front. Members have issued supervisory expectations and conducted scenario analyses, for example. Work related to monetary policy is the least developed and more research is needed. Central banks have started work on this topic, but incorporating climate risks into a monetary policy framework is a big task. The European Central Bank has made this a key priority.
• With 72 different central banks as part of its membership, NGFS’ members are starting from different points and operating within different financial systems. NGFS’ guides aim to be reasonably high-level and leave decisions to central banks and supervisors to adapt them for their countries.

2021-2023 Work Plan

• Based on member feedback, US GAO raised the question whether to consider having subgroup chairs for key Work Plan activities rather that for each group goal. OAG-Canada proposed organizing the group by topic and have members assigned by group topics, such as climate change, COVID-19, etc. This would help make it more clear which SAIs are participating in each subgroup.
• OAG-Canada also said that much of the Work Plan revolves around sharing of information and best practices, much of which could be done via the Working Group website.
• SAI-Sweden said that some Working Group goals are ambitious for the size and commitment of the group, such as parallel audit work. SAI-Sweden supports streamlining group activities and sharing of best practices and interactions with IMF and standard-setting bodies.

Next Steps

• US GAO will incorporate the comments on the work plan and send a finalized version to members.
• In the coming weeks and months, US GAO will also send members a draft of the annual Governing Board Report and coordinate with China-CNAO on organizing the next virtual meeting.