Principles for the effective management and supervision of climate-related financial risks

In June 2022 the BCBS published Principles for the effective management and supervision of climate-related financial risk. This addresses the BCBS’s concern that “Climate change may result in physical and transition risks that could affect the safety and soundness of individual banking institutions and have broader financial stability implications for the banking system.”

These principles have been produced on the back of the work undertaken by the high-level Task Force on Climate-related Financial Risks that was established in 2020. This task force undertook a survey of current initiatives and then published analytical reports on Climate-related risk drivers and their transmission channels and Climate-related financial risks – measurement methodologies in April 2021.

Following on from this work the BCBS reviewed the extent to which requirements in the Basel Framework addressed climate-related risks. The conclusion was that that there was a need to provide more guidance to bank institutions on the effective management of climate-related financial risks and to supervisors to ensure more consistency in their oversight activities. To this end the BCBS has now issued a set of 18 principles. Principles 1-12 address bank management and 13-18 supervisors are formulated along similar lines to other sets of principles, such as the Principles for Sound Liquidity Risk Management and Supervision. For example principles 1-12 cover topics such as the need for clear roles and responsibilities to be assigned by the board and appropriate policies, procedures and controls. With regards principles 13-18 coverage includes the need for supervisors to ensure that banks regularly identify and assess climate-related risks and that appropriate tools and techniques are used when doing so.

These principles are primarily aimed at internationally active banks in BCBS jurisdictions though they comment that “... smaller banks and authorities in all jurisdictions can benefit from a structured consideration of the potential impact of climate-related financial risks.” In all cases they are expected to be adopted on a proportionate basis.

See section 2.4 regarding ongoing developments, covering the Principles for Sound Liquidity Risk Management and Supervisions and 27.7.2.5 covering stress testing the impacts of climate change. See also the previous blog post Results of the 2021 Climate Biennial Exploratory Scenario (CBES).