In recent weeks, we have reported on how ESG commitments are pushing ahead in spite of COVID-19, underlining how banks are still developing new ESG targets despite the current market conditions.

Now, the Basel Committee on Banking Supervision has published a stocktake report on its members’ existing regulatory and supervisory initiatives on climate-related financial risks. The work on the Basel Committee’s stocktake was conducted before the COVID-19 pandemic - but it still provides some good insights as the pandemic has further highlighted the importance of mitigating the risks of events with severe global impacts.  

The report was prepared by the Committee’s high-level Task Force on Climate-related Financial Risks (TFCR). The TFCR is co-chaired by Frank Elderson (executive director of Supervision at the Netherlands Bank) and Kevin Stiroh (executive vice president of the Federal Reserve Bank of New York and head of the Supervision Group).

Climate-related financial risks refer to the set of potential risks that may result from climate change and that could potentially impact the safety and soundness of individual financial institutions and have broader financial stability implications for the banking system. These risks are typically classified as physical and transition risks. Physical impacts include the potential economic costs and financial losses resulting from the increasing severity and frequency of extreme climate change-related events. Transition impacts relate to the process of adjusting to a low-carbon economy.

Regulatory and supervisory initiatives

The stocktake report suggests that the majority of Committee members are undertaking a number of regulatory and supervisory initiatives on climate-related financial risks. While the specific types of initiatives and level of advancement in this field varies across member institutions, most Committee members are undertaking work on the measurement of climate-related financial risks, raising awareness of such risks with banks and external stakeholders, requiring or encouraging banks to disclose information on to climate-related financial risks, stress-testing of such risks and/or promoting the growth of sustainable finance.

The TFCR is charged with contributing to the Committee’s mandate of enhancing global financial stability by undertaking some lead-off initiatives on climate-related financial risks. These include a set of analytical reports on climate-related financial risks, including reports on the transmission channels of such risks to the banking system as well as on measurement methodologies. The development of effective supervisory practices in order to mitigate climate-related financial risks is another initiative.

The Committee says it will coordinate its work with similar initiatives underway in other international forums and standard setting bodies. It says it is also an observer of the Network for Greening the Financial System.