Disclosure of Climate-Related Financial Risks: Basel Committee Consultative Document

The Basel Committee on Banking Supervision is pursuing a comprehensive approach to address climate-related financial risks in the global banking system, focusing on regulation, supervision, and disclosure. Following analytical reports in 2021 that identified climate risk drivers as traditional financial risks, the Committee published 'Principles for the effective management and supervision of climate-related financial risks' in June 2022. This consultative document proposes a Pillar 3 disclosure framework to complement international standards like those from the ISSB, aiming to provide a common baseline for climate-related financial risk disclosures among internationally active banks. The Committee recognizes that climate-related data is still evolving and aims for flexibility in the framework, considering mandatory and national discretion elements.

The Basel Committee's analytical work underlined how climate-related risk drivers, including physical and transition risks, can impact banks and the broader banking system. Transition risks stem from changes associated with moving to a low-carbon economy (policies, technology, market sentiment), while physical risks result from acute and chronic climatic events. These risks can manifest as credit, market, liquidity, and operational risks but are characterized by unique drivers, complex interlinkages, longer time horizons, uncertainty, and non-linear effects. Traditional Pillar 3 disclosures lack specific information on climate risk impacts, leading the Committee to explore a new framework to improve comparability and market transparency regarding banks' climate-related financial risk exposures.

The Committee proposes qualitative disclosure requirements for banks to provide comprehensive and meaningful information on their climate-related financial risks. These include information on: (i) Governance structures for climate risk oversight; (ii) Strategy for reducing or mitigating climate risks, including forward-looking metrics and transition plans; (iii) Risk management processes, procedures, and organization for identifying, assessing, and managing climate risks; and (iv) Concentration risk management concerning material exposures to transition and physical risks. Feedback is sought on the usefulness and content of these qualitative disclosures.

In addition to qualitative disclosures, the Committee is exploring quantitative requirements, inviting feedback on their meaningfulness and feasibility. These include: disclosures on Exposure by sector, specifically non-financial corporates classified by Global Industry Classification Standard (GICS) to assess sensitivity to a low-carbon economy transition; Financed emissions (Scope 1, 2, and 3 GHG emissions associated with loans and investments) as an indicator of transition risk; and Exposures subject to physical risk by geographical area, to understand a bank's risk profile based on locations prone to climate change physical impacts. The Committee is considering mandatory sectoral breakdown for exposures and welcomes views on other useful metrics.

The Committee proposes bank-specific risk metrics to assess the impact of climate risks on banks' safety and soundness. This includes disclosing exposures by credit quality (non-performing loans and allowances) and the maturity profile of exposures subject to climate-related risks. The document also suggests that banks disclose forward-looking information, such as forecasts, where available, to allow market participants to assess exposure to transitioning activities of counterparties. This would apply to financed emissions by sector, qualitative strategy and risk management disclosures, emission intensity per physical output, and facilitated emissions related to capital markets activities.

Recognizing the evolving nature of climate risk analysis, the Committee proposes three additional quantitative metrics that would be subject to jurisdictional discretion: (i) Real estate exposures in the mortgage portfolio by energy efficiency level, to assess transition risk impact on collateral value; (ii) Emission intensity per physical output, as a proxy for transition risk transmitted to banks by counterparties; and (iii) Facilitated emissions related to capital markets and financial advisory activities, considering off-balance sheet activities generate significant revenue. Feedback is requested on the feasibility, meaningfulness, and practicality of these metrics.

The consultative document includes illustrative tables for qualitative disclosures (governance, strategy, risk management, transition, physical, and concentration risks) and templates for quantitative disclosures (exposures and financed emissions by sector, physical risk exposures). Additional templates are provided for discretionary items like mortgage portfolio energy efficiency, emission intensity per physical output, and facilitated emissions. The Committee seeks views on a potential implementation date of 1 January 2026, considering other global frameworks and required preparation time for jurisdictions and banks. Feedback on necessary transitional arrangements is also requested.

The document concludes with a series of consultation questions across general, qualitative, quantitative, and jurisdictional discretion requirements, as well as the effective date and liquidity risk. These questions aim to gather comprehensive feedback on the benefits, risks, interoperability, challenges, methodology, and practicality of the proposed Pillar 3 framework. The Committee also specifically invites views on exploring disclosure requirements for the impacts of climate-related financial risks on deposits/funding and liabilities. The received responses will inform the Committee's development of a revised or final proposal in H2 2024, with continuous monitoring of other standard-setting bodies' developments.