IIF responds to BCBS Consultation on Principles for the Effective Management and Supervision of Climate-related Financial Risks

On February 14, the IIF submitted a comment letter to the Basel Committee on Banking Supervision (BCBS) on its Consultative Document on “Principles for the effective management and supervision of climate-related financial risks.”

In the letter, the IIF welcomes efforts by the BCBS to establish a global principles-based approach to climate-related financial risk management to strengthen coordination and harmonization of supervisory efforts globally, and to support existing efforts within the banking sector to develop a more systematic understanding of, and response to, climate-related risks and opportunities.

The letter asks the BCBS to provide more guidance and clarity on how the final principles can be implemented in a phased-in manner, recognizing the current limitations for banks and prudential authorities in terms of the necessary data, tools and conceptual understanding. It also makes a number of specific suggestions to further clarify and refine the proposed principles, including: 

• Encouraging a stronger emphasis on supervisory cooperation and collaboration; 
• Emphasizing that the final BCBS principles should recognize that a variety of practices can be appropriate for managing risks and that banks’ current risk management frameworks, which vary, can be leveraged to do so;
• Asking for greater delineation between climate scenario analysis and/or climate stress testing and traditional macro-financial stress testing; 
• Requesting that the BCBS clarifies that it would not be appropriate at this stage for climate scenario analysis exercises or climate stress tests to influence banks’ internal capital or liquidity adequacy assessment processes or capital/liquidity requirements given the risk of generating unintended consequences;
• Asking the BCBS to proceed, as it is doing with respect to climate-related risks, in a careful and considered way with respect to broader environmental risks and not just apply the current consultation principles on climate-related risks to broader environment-related risks in the future.