Basel Committee Provides Details on Climate-Related Financial Risk Management

In a recent newsletter the Basel Committee provided additional information regarding the status of implementation of the Principles for the effective management and supervision of climate-related financial risks (Principles) and current gaps.

The Committee’s Principles are seeking to improve the banks’ climate-related financial risk management and lower risks to the global banking system.

After reviewing the status of implementation and meeting with supervisors and stakeholders, the Committee identified key areas of focus for the future. Enhancing data availability and quality is a top priority as data limitations were identified as the main impediment for banks and supervisors to implement the Principles. The Committee believes financial institutions will need to invest in better tools and greater automation to capture climate data and minimize operational risks.

Building capabilities and expertise was also identified as a significant challenge and area of focus. The lack of professional experience and human capital continues to challenge the speed of implementation. The Committee is recommending financial institutions continue to build in-house expertise to support integrating and mitigating climate-related risks into their management practices.

Finally, applying climate scenario analysis will be a focus moving forward. Financial institutions reported running a range of different scenarios for different purposes, such as for strategic planning and risk management frameworks. However, the uses and methodologies vary across jurisdictions.

The Committee will continue to monitor implementation progress but it is clear that financial institutions will need to devote further resources to fully implement the Principles.