BCBS Proposals Could See More Detailed Disclosure by Banks Around the World
The Basel Committee on Banking Supervision (BCBS), the global body that sets the basis for banking prudential rules globally, has proposed a new set of metrics which could require banks and financial institutions globally to make more detailed climate-related financial risk exposures to market participants. The proposed changes could consider qualitative and quantitative disclosures as to how banks are managing these risks in various sectors and could be mandatory to facilitate comparability across banks.
Any further climate-related financial disclosures would form part of the BCBS’ Pillar 3 rules, which aim to promote market discipline through disclosure requirements for banks. They require banks to disclose certain qualitative and quantitative information publicly on a regular basis, either as part of their financial reports or in separate Pillar 3 reports. The rules have been incorporated into domestic banking legislation throughout the world, with banking supervisors developing implementing technical standards (ITS) to accompany them. However, the existing Pillar 3 framework does not provide distinct or comparable information as to how climate risk drivers can impact a bank or the banking sector.
Most banks make climate-related disclosures already and are required to do so by various legislation, but the BCBS work would establish bank-specific Pillar 3 disclosure requirements that would complement the recently developed ISSB framework and provide a common disclosure baseline for internationally active banks around the world.
The Pillar 1 rules deal with minimum capital requirements for banks and the Pillar 2 rules deal with banking supervisory review.
The BCBS, which operates under the auspices of the Bank for International Settlements, says the scope and nature of the various risks, both physical and transition risks (transitioning to a low carbon economy) can have wide-ranging impacts across sectors and various regions of the world that result in varying financial risks that can affect the safety and soundness of banks and the stability of the broader banking system. These risks can be credit, market, liquidity or operational related. As a result, climate-related financial risks need to be assessed and considered in a forward-looking manner, it says.
More specifically, it notes that climate-related financial risk analysis is an evolving discipline with globally disparate levels of technical expertise, data and a lack of internationally agreed terms and methodologies. It is considering adding three additional quantitative metrics in such analysis (i) real estate exposures in mortgage portfolios by energy efficiency level; (ii) emission intensity per physical output; and (iii) facilitated emissions related to capital markets and financial advisory activities. This is important because, for example, real estate property represents a significant proportion of global greenhouse gas emissions (close to 20% of global GHG emissions and up to 36% of these emissions in Europe, according to the United Nations Environment Programme Finance Initiative).
Requiring banks to disclose energy efficiency levels of the underlying collateral in their real estate portfolios could provide market participants with information on risk arising from high emission and carbon-intensive assets for example.
The BCBS consultation coincides with a rising awareness in the banking system that greater action needs to be taken to mitigate all risk. In early December the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) said in a statement that while good progress had been achieved in incorporating sustainability in the financial system, nature-related risks could have significant macroeconomic implications, with a failure to account for, mitigate, and adapt to these implications a source of risks for financial stability.
The latest consultation follows the publication of principles in June 2022 for the effective management and supervision of climate-related financial risks to improve banks’ risk management practices as well as supervisory practices related to climate-related financial risks.
The BCBS consultation has proposed draft disclosure tables and templates for illustrative purposes. It is inviting feedback on its proposals until 29 February 2024.