Prudential supervisors are increasingly using financial institutions’ strategic transition plans to assess resilience, governance, and financial stability. These plans help institutions evaluate exposures to climate-related risks and manage the financial implications of transitioning to a low-carbon economy. While prudential supervision continues to focus on safety and soundness, climate change and environmental degradation are now recognized as drivers of traditional financial risks, including credit, market, and operational risks. Supervisors are therefore exploring how transition plans can help identify, manage, and mitigate these risks, with some requiring that plans explicitly address climate-related financial risks within prudential frameworks.
Emerging supervisory approaches highlight the value of transition plans as forward-looking tools for risk assessment. The 2024 Network for Greening the Financial System (NGFS) Transition Plan Package emphasizes that these plans support risk management, microprudential supervision, decarbonization strategies, transition finance, and alignment with the Paris Agreement. Transition plans are increasingly seen as integral to evaluating banks’ governance, risk appetite, business model sustainability, and capital adequacy under the Basel Framework Pillar 2. Institutions are encouraged to develop integrated data systems, embed climate objectives across governance structures, and adopt scenario approaches to enhance both strategic planning and supervisory risk assessment.
As prudential approaches evolve, supervisors are also beginning to consider how climate physical risk management and adaptation measures can be integrated into transition plans. Incorporating adaptation alongside mitigation strengthens institutional resilience, supports financial stability, and can reveal investment opportunities linked to risk reduction and preparedness.
Different regions are advancing prudential transition planning in distinct ways. In the European Union, climate and environmental risks are being integrated through CRRIII and CRD VI, with banks required to produce prudential transition plans focused on risk management, supported by EBA guidance and ECB supervisory priorities. In the United Kingdom, the Prudential Regulation Authority emphasizes coherence between firms’ strategies, disclosures, and risk management but does not mandate the development of transition plans. In Brazil, the Central Bank is expanding mandatory climate reporting to align with BCBS guidance and IFRS Sustainability Disclosure Standards, strengthening quantitative disclosures and risk management requirements, with adoption expected in 2026.
Looking ahead, embedding climate strategy within risk management frameworks positions institutions to meet evolving supervisory expectations. Prudential requirements are raising the baseline quality of transition plans and supporting system-level resilience. However, differences in scope, assumptions, and assurance practices currently limit comparability, especially for internationally active banks. Greater consistency, interoperability, and integration of transition plans into risk management and supervisory oversight will be critical. Initiatives by UNEP FI, including guidance, regulatory support programs, and policy engagement, aim to help stakeholders navigate these developments and align practices globally.
