Basel Committee publishes supervision principles on climate risks
The Basel Committee on Banking Supervision adds another piece to the global regulatory puzzle with its principles on management and supervision of climate risk, after global demands for a harmonized framework applicable to the international banking sector.
The Basel Committee on Banking Supervision (BCBS) has published its long-awaited principles on the effective management and supervision of climate-related financial risks, after confirmation that it had approved a final list of principles in May.
The news comes more than a year after the BCBS had announced the establishment of a high-level Task Force on Climate-related Financial Risks (TFCR) and aims to bring additional regulatory control over the banking sector’s understanding and assessment of climate change as a financial risk.
Assessment, management and supervision
Unofficially referred to as Basel V, the 18 principles cover corporate governance, internal controls, risk assessment, management and reporting.
There are 12 principles on climate risk management for banks; the other six provide guidance to prudential supervisors.
For the banking sector, the principles point to necessary assignment of climate-related responsibilities to board committee members, the definition of climate-related responsibilities across credit reviews, risk assessment and internal audit divisions, and the inclusion of climate-related material risks assessments within internal capital and liquidity adequacy processes.
Banks should continuously develop their capabilities and expertise on climate-related financial risks commensurate with the risks they face
On the supervisory side, Basel V suggests that supervisors should conduct regular and cross-border assessments, including stress testing, to verify the operational resilience of banks’ risk-management models.