Global Banking Standards Body Releases Principles to Mitigate Climate Risk
The global banking standards setting agency has issued a series of principles for the effective management and supervision of climate-related financial risks. The principles released by the Basel Committee on Banking Supervision (BCBS) this week come as the G20 discussed the issue in Glasgow and aim to improve both banks’ risk management and bank supervisors’ practices related to climate-related financial.
The principles, which the BCBS has released for consultation until 16 February 2022, follow the publication of a series of analytical reports earlier this year on the issue. The BCBS not only recommends that banks change their internal assessment and management of climate-related risks, but that banking supervisors also play a role by supervising the way banks incorporate material climate-related financial risks into their business strategies, corporate governance and internal control frameworks. They should also make sure that banks adequately identify, monitor and manage all material climate-related financial risks.
The principles are set to further push the global banking industry to manage and mitigate their climate-related risks and thereby play a role in placing even greater pressure on multinationals and all companies to avoid business activity that is environmentally harmful.
The BCBS stopped short of taking a more proscriptive approach, saying that it aimed to strike a balance between providing a common baseline for international banks and global banking supervisors and allowing for flexibility given the evolving standards and approaches around managing environmental risk.
However, other global bodies are working towards more precise guidelines for banks, including the Network for Greening the Financial System (NGFS), a network of 100 central banks and supervisors and 16 observer bodies, and the Task Force on Climate-related Financial Disclosures (TCFD), formed by the Financial Stability Board in 2015 to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders.
The committee has asked for consultation on its proposals via its website.
In summary, its principles are that:
* The board and senior management should clearly assign climate-related responsibilities to members and committees and exercise effective oversight of climate-related financial risks.
* Banks should adopt appropriate policies, procedures and controls to be implemented across the entire organisation to ensure effective management of climate-related financial risks
* Banks should incorporate climate-related financial risks into their internal control frameworks
* Banks should identify and quantify climate-related financial risks and incorporate those assessed as material over relevant time horizons
* Banks should identify, monitor and manage all climate-related financial risks that could materially impair their financial condition, including their capital resources and liquidity positions.
* Risk data aggregation capabilities and internal risk reporting practices should account for climate-related financial risks. Banks should seek to ensure that their internal reporting systems are capable of monitoring material climate-related financial risks
* Banks should understand the impact of climate-related risk drivers on their credit risk profiles
* Banks should understand the impact of climate-related risk drivers on their market risk positions
* Banks should understand the impact of climate-related risk drivers on their operational risk
* Where appropriate, banks should make use of scenario analysis, including stress testing, to assess the resilience of their business models and strategies to a range of plausible climate-related pathways
* Supervisors should determine that banks’ incorporation of material climate-related financial risks into their business strategies, corporate governance and internal control frameworks is sound and comprehensive.
* Supervisors should determine that banks can adequately identify, monitor and manage all material climate-related financial risks
* Supervisors should determine that banks comprehensively identify and assess the impact of climate-related risk drivers on their risk profile
* In conducting supervisory assessments of supervised banks’ management of climate-related financial risks, supervisors should utilise an appropriate range of techniques and tools and adopt adequate follow-up measures in case of material misalignment with supervisory expectations.
The Committee welcomes comments on the principles, which should be submitted here by 16 February 2022.
The full consultation report is here.