Banks must put climate risk at core under proposed global rules

Banks around the world should put controls over financial risks from climate change at the heart of their boards and assess if their capital buffers could cope with floods, fires, and sudden asset price falls, banking regulators said.

Pressure is building on banks to play a more active role in helping global economies transition to a net-zero economy by 2050 and to buttress their own defenses against potentially sharp falls in the value of company loans and other assets.

The Basel Committee of regulators from the G20 economies and other countries on Tuesday, November 16, proposed its first set of principles for dealing with climate-related risks as debate continues over how far and fast regulators should move.

Central banks have already begun rolling out climate-related stress tests, with separate work by Basel on potential capital buffers to cover climate risks continuing.

But so far calls from climate activists to introduce capital charges on banks which fund fossil fuel projects have been rejected by regulators, who say their job is to keep lenders stable in the face of climate fallout.

‘Holistic approach’

Basel’s proposed principles focus on requiring banks to quantify climate risks and have controls to mitigate them.

“The committee is taking a holistic approach to addressing climate-related financial risks to the global banking system,” Basel said. “This includes the assessment and consideration of disclosure, supervisory, and regulatory measures.”

The principles would require banks to develop and implement processes to understand and assess the potential impact of climate change on their business and strategy.

“The board and senior management should clearly assign climate-related responsibilities to members and committees and exercise effective oversight of climate-related financial risks,” Basel said.

“Banks should include climate-related financial risks assessed as material over relevant time horizons that may negatively affect their capital position,” it added.

The consultation paper is out for public consultation until February 2022. – Rappler.com