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Basel Committee Issues Principles for Managing Climate Risks

Principles for banks and financial supervisors aim to strike balance between improving practices and providing common baseline.

The Basel Committee of Banking Supervision (BCBS) has issued its final set of 18 high-level principles to provide a common global baseline for the effective management and supervision of climate-related financial risks.

The principles, proposed last November and finalised last month, form part of a broader BCBS assessment of disclosure, supervisory and regulatory measures that could be used to address climate-related financial risks.

“Through this publication, the Committee aims to promote a principles-based approach to improving both banks’ risk management and supervisors’ practices related to climate-related financial risks,” the BCBS said on 15 June, announcing the finalised set of principles.

“[The principles] seek to achieve a balance in improving practices and providing a common baseline for internationally active banks and supervisors, while retaining sufficient flexibility given the degree of heterogeneity and evolving practices in this area.”

The first 12 principles are aimed at banks and cover corporate governance, internal controls, risk assessment, management and reporting, capital and liquidity adequacy and other elements of risk management, including scenario analysis.

Banks are expected to incorporate material climate-related financial risks into their internal capital and liquidity adequacy assessments, and to understand the impact of climate-related risk drivers on their liquidity risk profiles. They should also consider adjusting their compensation policies to align with new strategies and capital planning needed to cope with climate change risks.

Bank boards and senior managers should ensure their internal strategies and risk appetite statements are consistent with any publicly communicated climate-related strategies and commitments.

A further set of six principles focus on financial supervisors and regulators, to help them ensure banks can adequately “identify, monitor and manage all material climate-related financial risks”.

Supervisors are expected to know the extent to which banks identify and assess their climate-related risks and, if needed, be prepared to act to address material misalignment with their expectations. For multinational banking groups, supervisors should collaborate and share information related to climate risk resilience of banks and banking groups.

The BCBS expects implementation of the principles “as soon as possible”, saying it will monitor progress across member jurisdictions to promote a common understanding of supervisory expectations and support the development and harmonisation of strong practices across jurisdictions.

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