The Basel Committee, an international banking supervisory body, announced on 29 November a proposal to require banks to disclose their exposure to climate risks.

The move comes as COP28 begins, with many major banks attending to promote their green credentials.

The proposal is supported by a 38-page consultative document that details the Committee’s current thinking on the matter. If it were to be implemented in its current form, it would be a comprehensive update to current banking disclosure practices which currently exclude climate change and transition risks.

It includes proposals for banks to disclose quantitative and qualitative data related to climate change, including governance, forward-looking strategy and a breakdown of sectoral exposure to climate risk. In practice, this would mean that banks would have to account for their financed emissions using the global standard of metric tons of CO2 equivalent (MtCO2e) subdivided by sector and geography. Banks would also have to report the likelihood of their non-financial partners being impacted by transition programmes, such as carbon taxes or enforced divestments from fossil fuels.

The report is likely to be a welcome acknowledgement for groups in the sector that have been pushing for more recognition of climactic impact in banking. It makes explicit the view that “climate risk drivers could increase banks’ credit risk,” and it argues that market participants should be able to understand how banks expose themselves to these forces in order to make informed decisions.

It also notes the need for qualitative data because “in assessing the impact of the magnitude and timing of climate risk drivers on banks’ exposures to climate-related financial risks, little reliance can be placed upon historical events, giving rise to a high level of uncertainty.”

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Will it work?

The key caveat to this proposal is that its implementation in its current form is by no means guaranteed. It is open for consultation until February 2024, and banks may well baulk at the level of disclosure suggested. Financial institutions have been particularly hesitant on the issue, continuing to invest in fossil fuel companies despite the worsening climate risks they pose.

There are also questions about how much investors will care about this exposure, particularly in the US. Earlier this year, behavioural economist David Lewis explained that politicised backlash against ESG investments has led the industry to keep any involvement under wraps. It is possible that irrational actors will choose to ignore risk assessments to comply with their political viewpoints.

Reuters also reported yesterday that four major banks including Standard Chartered and HSBC have pulled out of the UN’s Science Based Targets Initiative, which assesses progress towards climate targets. Given that the Basel Committee’s proposal would impose more stringent and sector-specific reporting requirements, it is likely to be watered down before implementation.

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