Basel Committee proposes principles for managing climate risk

The Basel Committee on Banking Supervision (BCBS) has opened a public consultation on the effective management and supervision of climate-related risks to global banking and financial stability. The consultation paper proposes 18 principles to improve climate-related financial risk management by banks and supervisors, including that banks should incorporate climate risks into their capital and liquidity adequacy assessments.Z

Developed as part of an examination of how climate-related financial risks can be addressed within the Basel Framework of global banking regulation, the BCBS principles cover corporate governance, internal controls, risk management, monitoring and reporting, and scenario analysis The principles are largely aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures.

The paper also proposes that banks include climate risks in their internal capital and liquidity adequacy assessments over the relevant time horizons. It proposes that they begin by identifying climate-related risk drivers, developing key risk indicators, and assessing the impact of climate change on credit, liquidity and other traditional risks.

“The principles seek to achieve a balance in providing a common baseline for internationally active banks and supervisors, while retaining sufficient flexibility given the evolving practices in this area,” the BCBS said in a statement accompanying the publication. “The committee intends to monitor implementation across member jurisdictions to promote a common understanding of expectations, support the development of harmonised practices and facilitate implementation of the principles as soon as possible.”

While the consultation paper and exercise is the first climate guidance to be issued by the BCBS, it falls far short of the expectations and demands of climate campaigners. The proposal focuses exclusively on assessing the materiality of climate-related financial risks to banks, but does not address the double materiality of the banks’ effects on the climate and environment. There is also no application of the core precautionary principle that the vast scale and non-linear uncertainty of climate change requires urgent mitigation.

Civil society groups have called for Basel Accord capital requirements to be adapted to incorporate financial risks caused by fossil fuel exposures, and for the expansion of Basel Framework systemic risk buffers to include climate-related risks.

Campaigners have also demanded that a 1250% risk weight be applied to the financing of new fossil fuel expansion and exploration, similar to that recently proposed by the BCBS for cryptocurrency exposures. This would restrict banks to financing such assets only from their own funds.

A recent letter to the BCBS from 111 climate organisations called for such a ‘one-for-one’ rule to be immediately applied. “Capital regulations for banks and insurers already mandate higher capital charges for high risk exposures,” the letter said. “All we need to do is to make sure that fossil fuel exposures are recognised as high-risk within the existing rules.”

Comments on the suggested principles outlined in the BCBS consultation paper must be submitted by 16 February 2022.