This response consists of a written submission by CETEx to the Basel Committee on Banking Supervision (BCBS) consultation on a disclosure framework for climate-related financial risk (CRFR). The consultation was issued by the BCBS to inform the design of a Pillar 3 disclosure framework for CRFRs, with the aim of strengthening the regulation, supervision and practices of banks globally.

This submission greatly welcomes the proposal put forward by the BCBS, and provides a discussion of the prudential benefits and limitations, as well as suggesting adjustments to the BCBS’s proposals, guided by the consultation questions.

Key messages

  • It is fitting for the BCBS to work towards a coordinated approach that enables comparability across banking and supervisory activities. Addressing the cross-jurisdictional and international dimension of CRFRs is required, given the BCBS’s mandate to strengthen the regulation, supervision and practices of banks with the purpose of enhancing financial stability globally.
  • The inclusion of detailed qualitative and quantitative information on CRFRs, pertaining to both physical and transition risks, is crucial for the third pillar of the Basel framework to reflect the unique features of CRFRs.
  • Qualitative and quantitative information complement each other in critical ways. For example, transition plans with specific targets (‘forecasts’) enable the assessment of banks’ exposure to transition risk (Dikau et al., 2022; NGFS, 2023). Specifically, transition plans can: 1) support the use of existing risk-based prudential instruments; 2) provide insights into the material risk that the bank will be exposed to under its current strategic and operational orientation; and 3) provide information about the alignment of the financial sector as a whole with transition pathways.
  • The disclosure of quantitative transition risk, which covers Scope 1, 2 and 3 emissions per client sector, is valuable. While we recognise that banks currently face challenges in obtaining all the required information, data improvements in data and emergence of new methodologies will very soon enable banks to meet increased disclosure requirements, provided that an influential body like the BCBS provides regulatory certainty and leads in this direction.
  • By supporting the disclosure of financed and facilitated emissions, the BCBS can also encourage efforts to increase the robustness of the Partnership for Carbon Accounting Financials’ methodology or facilitate the emergence of new and rigorous alternatives that banks can use.
  • Assessing transition risk on a sectoral basis is essential, as banks have different business models, and some are particularly exposed to high-risk sectors. However, the sectoral approach needs to ensure that disclosed emissions are transparently attributed to real economy sectors, rather than under the blanket of financed emissions, subject to verification by appropriate third-party assurance.
  • For many banks, capital markets and financial advisory services are of strategic importance. Including the trading book and facilitated emissions as a mandatory disclosure will support the development of a consistent, bank-wide approach to decarbonisation. The disclosure of such emissions should therefore be informed by the bank’s business model and not be subject to jurisdictional discretion.
  • The scope of the BCBS’s approach to physical risks is so far mostly limited to climate change. However, risks to other ecosystem services can also be material from a prudential perspective. An increasing number of central banks have assessed the degree to which their banking or financial system is exposed to nature loss and environmental degradation, looking beyond just climate-related aspects.
  • In finalising and implementing the Pillar 3 disclosures, the BCBS should be mindful of possible unintended consequences in the Global South, where many regions are highly vulnerable to extreme weather events, with potential to increase costs of financing further, or even prevent access to finance. Physical risk disclosures should take into account ongoing, but still incomplete, national and international initiatives, which also enable emerging markets and developing economies to reduce their transition and physical risks. Furthermore, temporary proportionality clauses for reporting climate-related risks could be put in place for smaller and less sophisticated borrowers.
  • Improving quality and consistency of climate change-related disclosures will enable market participants to better exercise discipline with regard to banks’ management of related risks. It will further lay the groundwork for improved supervisory methodologies and practices, and enable broader stakeholder engagement.