On April 14, 2021, the Basel Committee on Banking Supervision published two reports on climate-related financial risks entitled, Climate-related risk drivers and their transmission channels and Climate-related financial risks – measurement methodologies. According to the Bank for International Settlements’ press release:
- The two reports discuss transmission channels of climate-related risks to the banking system, and the measurement methodologies of climate-related financial risks.
- Climate risk drivers can be captured in traditional financial risk categories, but additional progress is needed to better estimate these risks.
- The reports provide a conceptual foundation for the Basel Committee's next phase of work to identify potential gaps in the Basel Framework and consider measures to address them.
The report on Climate-related risk drivers and their transmission channels, discusses how climate-related risks come to fruition and how they affect banks and the banking system as a whole, while the report on Climate-related financial risks – measurement methodologies, covers “conceptual issues” surrounding climate-related financial risk measurements, as well as related bank and supervisory practices. There is still a way to go to identify and improve on risk mitigation and the Basel Committee is currently working on how to incorporate climate-related financial risk into their Basel Framework. “While a range of methodologies is currently in use or being developed, challenges remain in the estimation process, including data gaps and uncertainty associated with the long-term nature and unpredictability of climate change.”
More information on the Basel Committee’s climate-related financial risk reports can be viewed here.