Integrating sustainability concerns in financial supervision – exploring complementarities across institutional contexts

The Paris Agreement committed the signatory jurisdictions to make financial flows consistent with a net zero future. A variety of new international networks and standard setting bodies are emerging to ensure the development of adequate approaches and methodologies to ‘green finance’ across asset classes (banking, insurance, capital markets). These include the Financial Stability Board’s Task Force for Climate-Related Disclosures (TCFD), the Network for Greening the Financial System (NGFS) and the International Sustainability Standards Board (ISSB). In addition, established bodies such as the International Association of Insurance Supervisors (IAIS) and the Basel Committee for Banking Supervision (BCBS) are also developing frameworks to address risks related to sustainability transition in insurance and banking respectively. Within such globally developing ‘green finance’ frameworks, individual supervisors adopt different approaches, for example regarding the scope of sustainability concerns and regulatory tools used. 

In this context, what remains still understudied are the institutional factors that shape banking supervisors’ individual approaches. The project analyses comparatively how public authorities are using the prudential frameworks to address environmental and social risks across countries and asset classes. The different legal routes (legislative, regulatory, supervisory guidance) to introducing prudential treatment of environmental and social risks are identified for both banking and insurance at national level and juxtaposed with the emerging global standards. Factors considered in the comparative analysis include the scope of mandate, the institutional set-up (e.g. whether the supervisor is a central bank or another authority), independence and accountability mechanisms. Case studies are drawn from the supervisory practices of the ‘leaders’ of sustainable finance trend in the European Union (Banking Union, Hungary, Sweden) and beyond (Brazil, United Kingdom and China). 

The project contributes to filling three gaps in sustainable finance and related regulation and governance literatures. First, it explores the institutional design aspect of ‘greening’ prudential supervision that for now has been neglected in the scholarship on sustainable financial supervision. The ‘institutional fit’ between supervisory architectures and specific regulatory and supervisory solutions in relation to environmental and social risks (‘institutional complementarity’) is identified. Second, the project identifies the ‘balancing acts’ of supervisors in developed and developing jurisdictions with regard to risk- and non-risk aim, showing the different approaches to addressing possible policy objective trade-offs. Third, the project explores the policy layering process that takes place with regard to national practices and international standards in the field of sustainability risk integration.