Lucia Graham-Wood
Corporate Senior Engagement Specialist, Banks
We responded to the Basel Committee on Banking Supervision (BCBS) public consultation paper on a framework to address Pillar 3 for climate-related financial risks, part of its wider approach to address these risks in the banking system globally.
Currently, Pillar 3 of the Basel Framework provides a set of public disclosure requirements that “seek to provide market participants with sufficient information to assess an internationally active bank’s material risks and capital adequacy.” This latest consultation explores how best to incorporate climate-related financial risks into those disclosures.
The influential BCBS membership consists of 45 institutions from 28 jurisdictions, mostly central banks, and its Basel Framework is the primary global standard setter for the prudential regulation of banks. Voluntary commitments made by its members can in turn influence the monetary policy of the jurisdictions under their remit.
Climate change presents financial risks to banks and their investors. Deeper integration of climate-related financial risk into Pillar 3 would support better evaluation of bank risk profiles, and standardised disclosures would enable investors to compare relative cross-sector risk exposures. These disclosures would also assist local banking supervisors and the BCBS as they assess and address climate-related systemic risks.
The discussion on climate-related financial risks for banks is therefore a welcome one. Our response includes support for the recommendations, which cover qualitative and quantitative disclosure for banks, as well as some additional considerations. This included learnings from our Net Zero Standard for Banks which could help.
Qualitative disclosures
Interoperability has long been a priority for the BCBS and its preliminary proposals build on the Taskforce for Climate-related Financial Disclosures recommendations already widely adopted by banks. BCBS is now coordinating with the International Sustainability Standards Board (ISSB) and we encourage it to build on this baseline with more detailed reporting requirements which can better support investor needs.
We also shared our suggestions on how best to enhance disclosures for governance, strategy and risk management. This includes more clarity on the role of the audit committee and auditor on ensuring consistency between Pillar 3 disclosures and banks financial statements, as well as suggested disclosure requests around client engagement and review of client transition plans. We suggested that an explicit disclosure on whether and how a bank has considered severe but plausible climate scenarios would also be beneficial.
Crucially, proposed Pillar 3 disclosures should reinforce connectivity between the climate-related financial risks highlighted in narrative reports and those made in financial statements, in line with the approach taken by the ISSB. We therefore also encourage the BCBS to work with global accounting and audit standard setters to ensure that all reporting to the market reflects material climate risks.
Quantitative disclosures
On the quantitative side, in our response we encouraged disclosures on exposure, and financed, and facilitated emissions related to high-impact sectors. Where client scope 3 emissions are requested, banks should disclose the extent to which they have considered which categories are included in any counterparty scope 3 emissions, while offsets should be reported separately.
On the subject of stress testing, banks should disclose key conclusions for both climate and physical risk exposure.
Disclosures should also seek to clarify that material climate risks are being properly considered in forward-looking accounting assumptions, such as Expected Credit Losses (ECL).
We recommend that BCBS considers clear disclosure on these assumptions, providing a key link back to the banks’ financial statements and reassuring investors that these material climate risks are being properly considered.
Physical climate risk disclosures are also welcome, but the recommendations could go further. Banks should also be able to demonstrate that they have an understanding of their vulnerability and how to manage it, supported by tools such as the Physical Climate Risk Assessment Methodology.
On the subject of stress testing, banks should disclose key conclusions for both climate and physical risk exposure, and its implications for capital adequacy in different scenarios.
Undoubtedly, deeper integration of climate-related financial risk would help create a level-playing field if implemented consistently across jurisdictions, and as a result, offer overall market stability.
Now, we seek more clarity on how the Basel Committee will work with global accounting standard setters, audit standard setters and accounting and audit regulators to ensure all reporting to the market is reflecting material climate risks.
This public consultation is a welcome and important step in that journey which, once implemented, will help to secure the BCBS’ primary objective of enhancing financial stability globally.
If you’d like to take part in our working groups and help shape the outputs of our resources, why not get in touch today to learn more about becoming a part of IIGCC?