Climate-related financial risks - Basel steers the banks response

The Basel Committee on Banking Supervision (BCBS) has recently finalised its Principles for the effective management and supervision of climate-related financial risks (the new Basel Principles) here.

To address climate-related financial risks within the banking sector, the BCBS established a Task Force on Climate-related Financial Risks in 2020 to contribute to the Committee’s mandate to strengthen the regulation, supervision and practices of banks worldwide. 

Principles 1 through 12 provide banks with guidance on effective management of climate-related financial risks. Some reference changes in corporate governance while others are free-standing and others specific to matters such as  risk management, operational resilience and stress testing. However, we have focussed specifically on 3 of the 4 relating to corporate governance.

Principle 1: Banks should develop and implement a sound process for understanding and assessing the potential impacts of climate-related risk drivers on their businesses and on the environments in which they operate. Banks should consider material climate-related financial risks that could materialise over various time horizons and incorporate these risks into their overall business strategies and risk management frameworks. 

Principle 2: The board and senior management should clearly assign climate-related responsibilities to members and/or committees and exercise effective oversight of climate-related financial risks. Further, the board and senior management should identify responsibilities for climate-related risk management throughout the organisational structure. 

Principle 4: Banks should incorporate climate-related financial risks into their internal control frameworks across the three lines of defence to ensure sound, comprehensive and effective identification, measurement and mitigation of material climate-related financial risks. 

The assigning of responsibility for climate-related risk to particular individuals or committees in Principle 2 personalises the obligations.  What is clear is that complying with the new Basel Principles will be no easy task and the big questions will be around what are the current arrangements in place concerning climate-change risks, and what changes need to be made to meet the new requirements coming from BCBS.

Authors: Lynn Dunne and David Capps