The Financial Stability Board (FSB) has recently put forth a report on The Relevance of Transition Plans for Financial Stability, which looks at the role that firms’ climate transition planning and the resulting outputs – transition plans – can play for financial stability. Transition plans provide forward-looking information on how non-financial companies and financial institutions may adjust their activities in response to climate risks, which can be useful for authorities to measure and monitor climate-related financial risks.
Transition planning and plans can help address climate-related risks to financial stability through three channels. First, they facilitate firms’ strategy setting, which informs better climate-related risk management. Second, they help inform investment decisions by addressing information gaps and reducing market failures. Third, they can support authorities’ macro-monitoring of transition and physical risks both in the financial system and the real economy.
The use of transition plans for financial stability and macroprudential purposes remains in the early stages. Transition plans are not inherently designed for the purpose of financial stability assessments; their primary purpose is business strategy and target setting. Moreover, they are only available for a restricted number of firms and differ widely in terms of scope, coverage, methodologies and quality of key metrics.
Satoshi Ikeda, Deputy Commissioner for International Affairs and Chief Sustainable Finance Officer at Japan’s Financial Services Agency, who chaired the FSB group that prepared the report said: “Because of their forward-looking perspective, transition plans could help improve the monitoring of climate-related financial risks by financial authorities, but more work is needed to enhance their coverage, transparency, reliability and comparability.”
Broader adoption of transition plans and continued efforts towards standardisation, including by international organisations and standard-setters, are key to making transition plans usable by financial authorities.
