Roundup: Basel committee pushes for greater global alignment on climate scenario analysis

June 5, 2024|Written by |Basel Committee on Banking Supervision, International Sustainability Standards Board, Central Bank of Ireland, Bank of Japan, European Central Bank

The Basel committee opens consultation on climate scenarios, critics say Japan’s impact investing framework is watered down, Korea considers mandatory scope 3 reporting plus more in Green Central Banking’s latest roundup.

Basel committee consults on climate scenario analysis

The Basel Committee on Banking Supervision (BCBS) is undertaking “targeted work” to strengthen banks’ use of climate scenario analysis (CSA) and promote greater global convergence in these critical risk management exercises.

In a consultation paper, the committee outlines recommendations on key features of CSA, including scenario design, risk capture and exercise parameters. The BCBS says it is seeking to advance common understanding and foster dialogue to channel industry and supervisory efforts towards collective progress on these exercises.

Differences in CSA scope and methodologies have so far limited harmonisation of supervisory expectations and comparability of results, according to BCBS analysis.

The current consultation paper recommends tailoring key features, such as time horizons and balance sheet assumptions, for different scenarios as these will “likely vary depending on the objective of the exercise”.

However, greater standardisation regarding specific data elements, data outputs, modelling techniques and scenario variables would lead to more consistent global practices, according to the document. Therefore, the scenario objectives “should inform the degree of customisation employed within the exercise, and trade-offs made in making this decision should be discussed and communicated”. The paper is open for comment until 15 July.

Korea to considers scope 3 emissions reporting

South Korea has joined the ranks of countries drafting new climate disclosure standards to align with increasingly stringent global sustainability reporting norms. The move aims to enhance the nation’s sustainability competitiveness in global capital markets, while ensuring higher standards do not impose excessive burdens on companies, according to the Korean Sustainability Standards Board (KSSB).

The proposed rules from the KSSB will require reporting in line with the International Sustainability Standards Board’s (ISSB) IFRS S1 and S2 baseline requirements, including mandatory scope 3 emissions disclosures.

However, the KSSB has proposed making scope 3 disclosures optional at first to ease the transition. The timeline for mandatory disclosures will be determined after a public consultation on the draft rules closing on 31 August.

The move underscores Korea’s ambition to remain competitive as other jurisdictions such as the EU and Japan ramp up sustainability reporting. Achieving consistency with international standards is “essential” for Korean companies to compete in global capital markets and to respond effectively to sustainability-related regulations, according to the KSSB.

Central bank of Ireland builds sustainable finance capacity

The Central Bank of Ireland (CBI) is stepping up efforts to enhance the finance sector’s capacity to address such risks, having identified climate risk as one of its six overarching supervisory priorities earlier this year.

A report released by the Climate Risk and Sustainable Finance Forum, which includes the CBI as a member, said it is critical that Ireland rapidly upskill its finance sector to meet the increasingly complex range of international sustainable finance obligations it faces. The document outlines a comprehensive strategy to “fast track sustainable finance training and capacity building”.

In a recent speech, the CBI’s governor Gabriel Makhlouf said climate is already disrupting the real economy, and that the finance sector itself must adapt to climate change or risk jeopardising financial stability. Makhlouf stressed that climate risk should be embedded into the bank’s modelling and risk management frameworks. He even suggested a potential “wholesale recalibration” of the capital framework may be possible as data improves.

Japan’s impact investing framework faces criticism

Japan’s impact investing framework has been criticised by some commentators for inconsistencies with global guidelines.

The governing framework of the Financial Services Agency (FSA) sets out standardised definitions and best practices for impact investing in the domestic market. The guidance is structured around four overarching principles – defining impact, demonstrating contribution, measurement and engagement – that it says “are in principle compatible” with global guidance.

However, the FSA guidelines have been challenged for being inconsistent with the Global Impact Investing Network (GIIN) operating principles. Unlike the GIIN framework, the FSA’s does not set any eligibility criteria, thresholds or KPIs for impact-focused investments and lacks requirements for public disclosures. Critics have also noted a watering-down of guidance around demonstrating “additionality” – the requirement that positive impacts would not have been realised without the investment – when compared to the draft version.

The regulator said its intention was to establish common norms in Japan’s relatively young impact investment sector not to “indicate the practical conditions that shall be satisfied to be qualified for impact investments”.

Separately, Japan has introduced draft ISSB-aligned disclosure standards which are open to consultation until 31 July, while the Bank of Japan has announced plans for a second climate scenario analysis of the country’s largest banks.

New webcasts explain how to apply ISSB standards

The IFRS Foundation has released two new webcasts aimed at helping companies understand and apply the ISSB’s IFRS S1 and S2 disclosure requirements. Specifically, the webcasts provide guidance related to disclosing current and anticipated effects of sustainability-related risks and opportunities on a company’s financial position, performance and cash flows.

In the webcasts, ISSB vice-chair Sue Lloyd and technical staff member Gabriel Benedict explain how companies can provide useful information to investors about the effects of sustainability-related risks and opportunities, including their strategies for managing them in a proportionate manner.

Given the importance of providing holistic and comprehensive sustainability information within general purpose financial reports, ISSB staff collaborated with the International Accounting Standards Board to develop these webcasts.

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This page was last updated June 5, 2024

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