The Basel Committee on Banking Supervision, the primary global standard and policy setter for the banking industry, announced the release of a new, and long-awaited, framework for use by regulators for the disclosure of climate-related risks by banks.
Following pressure from the U.S., however, the committee decided to make the framework voluntary, rather than requiring its adoption by regulators, potentially weakening the initially stated intention of exploring a Pillar 3 disclosure framework for climate-related financial risks.
The publication follows an initial consultation on a proposed framework by the Basel Committee in 2023, as part of its “its holistic approach to address climate-related financial risks to the global banking system.” At the time, the committee stated that it would determine through the consultation process, “which elements would be mandatory and which subject to national discretion.”
In recent months, however, U.S. regulators have reportedly pushed back against the climate risk disclosures, as part of a significant shift by the Trump administration away from climate change focused regulation, including the Fed’s withdrawal earlier this year from the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), a global coalition of central banks aimed at working together on climate and green finance issues.
In its statement announcing the publication of the framework, the Basel Committee said:
“The Committee has agreed this framework will be voluntary in nature, with jurisdictions to consider whether to implement it domestically.
“The Committee acknowledges that the accuracy, consistency and quality of climate-related data are evolving, and therefore it is necessary to incorporate a reasonable level of flexibility into the final framework.”
Key reporting requirements for jurisdictions that choose to adopt the new framework include disclosures on qualitative factors describing banks’ governance processes, controls and procedures used to monitor, manage and oversee material climate-related financial risks, including how the risks affect banks’ business models, strategy and decision-making, as well as on methodologies used to determine which exposures are subject to material physical and transition risk.
The framework also includes requirements for qualitative disclosure on exposures and financed emissions by sector, although this section included several changes from the initial 2023 proposal. Most notably, a requirement to report on facilitated emissions, or those from capital markets and financial advisory activities, has been removed. Additionally, reporting under the framework on financed emissions has been changed from a requirement to disclose on all 18 TCFD sectors “regardless of materiality” to reporting on these sectors only “where material.”
Advocacy groups welcomed the release of the new framework, but pushed back on the voluntary nature of the new requirements, with Belgium-based finance reform NGO Finance Watch describing the move as “one step forward, two steps back.”
Julia Symon, Head of Research and Advocacy at Finance Watch, said:
“In the 2023 draft, banks would have been required to disclose greenhouse gas emissions no matter what. In the final version, they only need to do so if they consider those emissions financially material, and different banks will define materiality in different ways. On top of that, the final standard drops all disclosures related to banks’ capital markets and advisory activities.
“We’re seeing one step forward, two steps back. As climate risks intensify, the momentum for coordinated action is fading. But climate change affects banks everywhere, and those banks are deeply interconnected. When one jurisdiction treats climate risks as optional, it raises financial stability risks for everyone.”
