BCBS Issues Climate Risk Principles while HKMA Expresses Its Support
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks. HKMA issued a circular in support of these principles, also indicating that it will assess the need for aligning the existing supervisory framework with these principles. HKMA further advised all authorized institutions to take into account the guidance in the Principles when strengthening their management of climate-related financial risks and implementing the HKMA Supervisory Policy Manual module GS-1 on climate risk management.
The principles-based approach builds on the review of the current Basel framework—particularly the Basel core principles for effective banking supervision (BCPs) and the supervisory review process (SRP)—and draws from existing supervisory initiatives undertaken by individual prudential authorities and other international bodies. The document includes 18 high-level principles: principles 1 to 12 provide banks with guidance on effective management of climate-related financial risks, while principles 13 to 18 provide guidance to prudential supervisors. BCBS expects these principles to be implemented as soon as possible and will monitor progress across member jurisdictions to promote a common understanding of supervisory expectations and support the development and harmonization of strong practices across jurisdictions. These 18 principles cover areas related to corporate governance, internal controls, risk assessment, management, and reporting, providing the following key guidance to banks:
- Consider climate-related financial risks that could materialize over various time horizons and incorporate these risks into their overall business strategies and risk management frameworks
- Clearly assign climate-related responsibilities to members and/or committees and exercise effective oversight of climate-related financial risks
- Adopt appropriate policies, procedures, and controls that are implemented across the entire organization to ensure effective management of climate-related financial risks
- Incorporate climate risks into their internal control frameworks across the three lines of defense to ensure sound, comprehensive and effective identification, measurement and mitigation of material climate-related financial risks
- Identify and quantify climate-related financial risks and incorporate those assessed as material over relevant time horizons into their internal capital and liquidity adequacy assessment processes, including their stress testing programs
- Identify, monitor, and manage all climate-related financial risks that could materially impair their financial condition, including their capital resources and liquidity positions
- Ensure that the internal reporting systems are capable of monitoring material climate-related financial risks and producing timely information to ensure effective board and senior management decision-making
- Understand the impact of climate-related risk drivers on their credit risk, market risk, liquidity risk and operational risk profiles and ensure that the risk management systems and processes consider material climate-related financial risks
- Use scenario analysis to assess the resilience of their business models and strategies to a range of plausible climate-related pathways and determine the impact of climate-related risk drivers on their overall risk profile
Related Links
Keywords: International, Banking, ESG, Climate Change Risk, Basel, Supervisory Review Process, Reporting, Disclosures, Credit Risk, Market Risk, Liquidity Risk, Operational Risk, Scenario Analysis, Stress Testing, Climate Risk Principles, BCBS
Featured Experts
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Related Articles
OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks
The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.