Published: 28 March 2021
The Paris Agreement’s goal to mitigate climate change requires a restructuring of global energy use. Access to information is a prerequisite for market participants to be able to assess and price risk correctly, and for capital markets to function effectively. For financial institutions and investors, it is important to gain good insight into companies' exposure to climate risk.
Again in 2020, Finanstilsynet placed great emphasis on sustainability and climate risk in its inspections and when refining its supervisory tools and models. EBA, EIOPA and ESMA engage in a number of activities related to sustainability in general and climate risk in particular, and Finanstilsynet has taken part in this work.
Finanstilsynet expects supervised institutions to address risks arising from the impact of climate change and the transition to a low-emission society in its risk management and capital planning. Sustainability and climate risk have been on the agenda at inspections in a number of institutions. Finanstilsynet has carried out a survey of banks' handling of sustainability risks, with particular emphasis on climate risk. The purpose of the survey has been to get an impression of the extent to which banks have taken such risks into account in their operations. Several of the banks have included general reflections on sustainability and climate risk in their governing documents. However, the banks have not come very far in assessing climate risk in their loan portfolios. Finanstilsynet will further refine its supervisory follow-up in this area.
Finanstilsynet has conducted a survey of listed companies' sustainability reporting. The main purpose of the survey was to gain an overview of how listed companies work with such reporting, what information the companies report and how the information is presented. Finanstilsynet’s survey shows major shortcomings in current reporting practices and that Norwegian companies provide little information about the risk of changes in future profit levels as a result of the transition to a low emission society. Finanstilsynet will follow up companies’ future sustainability reporting.
Exposure analyses, sensitivity analyses and stress tests of climate scenarios are tools that can provide increased insight into the climate risk to which financial institutions and the financial system are exposed. Finanstilsynet started working on an exposure analysis in the spring of 2019, and the results were published in the Risk Outlook 2019. This work was continued in 2020 through testing of whether the PACTA model can be used to analyse financial institutions' climate risk. PACTA is short for ‘Paris Agreement Capital Transition Assessment’ and is a tool for testing whether financial institutions’ investment portfolios are in line with the goals of the Paris Agreement. The PACTA tool has been developed by the ‘2 Degrees Investing Initiative (2DII)’, an international, non-profit think tank aiming to help to ensure that the financial industry and the regulation thereof are in line with the goals of the Paris Agreement.
The Network for Greening the Financial System (NGFS) published a set of climate scenarios in June 2020 that will be revised and expanded in the spring of 2021. Finanstilsynet is a member of the NGFS and assesses how stress tests of the Norwegian economy and Norwegian financial institutions can be carried out based on these scenarios.
There has been a significant increase in the offering of sustainable investment products, so-called ESG products, in recent years. Green investment products are most actively marketed, and the recent strong price growth on many green investment products may also have helped to increase demand for such products. The sharp rise in investments in green financial products has heightened the risk of overpricing and financial bubbles in this segment.
Greater interest in green investment products also heightens the risk that companies and securities will be marketed as sustainable without actually being so, so-called greenwashing. Thus, it is important to develop standards for which financial products can be classified as green or sustainable.
During 2020, the EU adopted two regulations in this area
- Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector
- Regulation (EU) 2020/852, which defines sustainable economic activities and investment products (Taxonomy Regulation).
The EU regulations are EEA relevant and are scheduled to be implemented in Norwegian laws and regulations.
The regulation on sustainability-related disclosures lays down requirements for the disclosure of information on how the institutions' investments and activities contribute to sustainable development, and requirements for the information to be provided when selling financial products. The main objectives are to strengthen protection for end investors and improve disclosures to them.
The Taxonomy Regulation lays the basis for the further development of a system for the classification of sustainable economic activities and investment products. The classification system will, among other things, form the basis for a European standard for green bonds and a pan-European labelling scheme for green financial products aimed at consumers. In order to be defined as sustainable, an economic activity must meet at least one of six defined environmental objectives, and at the same time not do any significant harm to the other environmental objectives.
The Ministry of Finance asked Finanstilsynet to examine the need for changes in Norwegian legislation to enable implementation of the expected EEA obligations arising from the two regulations. Finanstilsynet submitted draft rules and a consultation document on 27 October 2020. The consultation document proposes to include the new rules in a new Act on sustainability disclosures to ensure a better overview and harmonisation of rules in this area. A new Act on sustainability disclosures would reflect the increased importance of such disclosures to society and clarify the connection between the different disclosure requirements and reporting obligations relating to sustainability.
The European Supervisory Authorities EBA, ESMA and EIOPA are preparing supplementary EU rules on climate risk management. The rules are EEA relevant and will therefore also apply in Norway.
Guidance and communication
Finanstilsynet has presented relevant regulations and other work on climate risk to the financial industry at several seminars. In addition, Finanstilsynet has published relevant information, also from international organisations, on a separate topic page on climate risk on its website.
Finanstilsynet's regulatory sandbox for fintechs
In Finanstilsynet’s regulatory sandbox, fintech firms are given the opportunity to launch new, innovative products, technologies and services while being followed up by Finanstilsynet. Among other things, the firms will learn which permissions are required. The purpose of the sandbox is to enable technological innovation and open up for new players. Participation in the sandbox can help innovative firms to gain better knowledge of relevant regulations and increase Finanstilsynet’s understanding of new technological solutions in the financial market. The regulatory sandbox for fintechs was opened for applications on 12 December 2019, with an application deadline of 12 February 2020. Finanstilsynet received a total of twelve applications. In April 2020, Finanstilsynet admitted two projects from Quesnay AS and Sparebank 1 SR-Bank, respectively, to the sandbox.
Quesnay is a provider of services to the banking and financial sector and develops solutions for use in obliged entities’ anti-money laundering work. The sandbox project aimed to identify relevant issues related to the Anti-Money Laundering Act to clarify what information can be shared between obliged entities as part of their anti-money laundering efforts. The Norwegian Data Protection Authority participated as an observer in the project.
Sparebank 1 SR-Bank wants to develop a solution for an authorised digital customer adviser where the technology behind the advisory services includes artificial intelligence. The purpose of the sandbox project was to build expertise in Sparebank 1 SR-Bank and in Finanstilsynet within the development, management and control of a solution that provides fully automated pension advice in accordance with the Insurance Mediation Directive.
The projects were completed in the autumn of 2020. Final reports describing the activities undertaken in the regulatory sandbox and the results achieved will be published in early 2021. The projects have been of great use and were carried out in line with the objectives set for the regulatory sandbox.
At the end of November 2020, Finanstilsynet opened up for new applications for participation in the regulatory sandbox, with an application deadline of 22 January 2021. There has been good dialogue between Finanstilsynet and relevant players to obtain input to and assessments of the work related to the sandbox.
In addition to the regulatory sandbox, Finanstilsynet has an information and guidance service targeting fintech firms. Through this initiative, Finanstilsynet responded to 32 inquiries in 2020, which was slightly higher than in 2019.
The Covid-19 pandemic – consequences for the financial industry
Just like the rest of the world, Norway experienced an abrupt and sharp economic downturn when the Covid-19 pandemic triggered strict containment measures and extensive lockdowns in the spring of 2020. Strong government measures helped to reduce financial market turmoil, curb the fall in demand and sustain household income.
Lower contagion rates provided the basis for a gradual reopening of society through the summer and expectations of a faster normalisation of the economy than feared when the measures were introduced in March. Towards the end of the year, several countries once again experienced a surge in the number of infected people. This resulted in new lockdowns and other strict measures to slow the spread of the virus. Further developments in both the Norwegian and international economy are uncertain and will largely depend on the path of the contagion. Access to vaccines will gradually provide a basis for lifting the comprehensive containment measures. Nevertheless, it may be long before economic activity returns to pre-pandemic levels.
Supervision, monitoring and control
Through 2020, Finanstilsynet cooperated closely with the European Supervisory Authorities and other national financial supervisory authorities to make sound risk assessments and coordinate relevant measures. 2020 saw closer monitoring of institutions’ risks, more frequent reporting and the need for certain regulatory adjustments. Several joint measures were introduced at EEA level in addition to other measures at national level. The specific assessments made and initiatives carried out in 2020 are described in more detail in the reports from the various supervised sectors.
Finanstilsynet has provided guidance to the institutions on an ongoing basis and has also published relevant information on its website. All information that is of relevance to markets and supervised institutions and concerns assessments and measures related to the Covid-19 pandemic is easily available in one and the same place.
In order to better enable financial institutions to handle potential losses, the European Supervisory Authorities placed great emphasis on preserving the institutions’ financial soundness. They thus encouraged national authorities to ask banks and insurers to refrain from distributing dividends and repurchasing own shares. These measures were intended to promote financial stability.
Finanstilsynet also initiated extraordinary reporting from the largest mutual fund management companies, partly to monitor developments in liquidity risk.
In the spring of 2020, Finanstilsynet closely monitored institutions of importance to the financial infrastructure. As a consequence of containment measures during most of 2020, few people were physically present at work, which could make it more challenging to ensure continuous operations and adequate emergency preparedness at the institutions. Experience from the crisis shows that the key players in Norway’s financial infrastructure have good emergency response plans and can quickly implement measures.
Based on a decision made by ESMA, intensified monitoring of short sale positions was initiated by reducing the reporting thresholds. Some countries also introduced a ban on short sales, but this was not deemed necessary in the Norwegian market.
Critical social functions
On 13 March 2020, Finanstilsynet was designated as a coordinating government body and had to quickly identify institutions in the financial sector that are critical to society in order to ensure that personnel with critical functions were enabled to fulfil their duties during the pandemic.
Cooperation with other authorities and institutions during the pandemic
National financial supervisory authorities cooperated closely throughout 2020. Finanstilsynet was represented in all meetings of the Boards of Supervisors of the European Supervisory Authorities and also held separate meetings with the Nordic financial supervisory authorities.
Throughout 2020, Finanstilsynet was in ongoing contact with the Ministry of Finance, Norges Bank and other national authorities to share information and coordinate measures. During the year, Finanstilsynet sent frequent reports to the Ministry of Finance about the market situation and Finanstilsynet’s assessments and measures.
The Financial Infrastructure Crisis Preparedness Committee (BFI) is chaired by Finanstilsynet and has representatives from national authorities and key financial market players. The committee coordinates measures for preventing and resolving crisis situations and other situations that may result in major disruptions to the financial infrastructure. BFI had frequent meetings in the spring of 2020 to share information and assess the situation.