Global banking supervisors explore draft Basel rules for climate disclosures

An ECB paper has separately criticised banks for joining net-zero initiatives without a clear decarbonisation strategy.

An influential supervisory body is considering adding climate disclosures to the global rulebook used by banks to determine how much capital needs to be set aside to absorb potential losses.

The Basel Committee on Banking Supervision, which is the main international standard setter for prudential enforcement, on Wednesday published a “preliminary proposal” to establish a common disclosure baseline for climate-related disclosure for banks.

The suggested changes will amend Basel’s Pillar 3 rules which sets out the prescribed public disclosures banks are required to make. The remaining pillars, Pillar 1 and 2, establish the minimum capital requirements for all banks in a jurisdiction and institution-specific requirements, respectively.

While the Basel rules do not have any force of law, they are widely considered best practice and essential to the functioning of a global banking system. Members of the IMF and World Bank are routinely assessed on the extent of their implementation of the rules.

The move by the Committee follows longstanding criticism of the rules for not sufficiently addressing the financial stability risks associated with climate change. The body issued guidance in 2022 to show how climate risks may be captured in the existing Basel framework although feedback from green finance NGO Finance Watch has suggested that it will have limited impact.

A key aim of Wednesday’s consultation is to figure out which reporting format will make it easier for regulators and market participants to assess “concentration risk”, or how exposed banks are to a particular group or groups of clients. Stakeholders are asked whether banks should be made to disclose their clients according to industry sectors, geographical areas, different types of physical risks or other dimensions.

It comes soon after an EU-commissioned report urged the European Central Bank to introduce exposure limits to carbon-intensive companies for EU banks to prevent large losses as a result of excessive concentration.

The Committee is also considering whether to encourage the disclosure of forward-looking information, which it said will allow market participants to assess the transitioning activities of bank debtors in key sectors. If adopted, such disclosures would “not be compulsory and would only be required in instances where banks have established such forecasts”.

In addition, it has proposed three additional disclosure areas which would be subject to regulatory discretion for enforcement and metric selection. These are: real estate exposures, financed emissions intensity and facilitated emissions.

The latter, which consists of emissions that are enabled by the bank through off-balance sheet activities such as underwriting, is currently the subject of heated discussions among members of the PCAF banking group, which is developing a global standard for measurement.

Basel has also proposed the disclosure of strategy and governance KPIs, largely in line with the TCFD recommendations, as part of the framework.

The rules have a suggested implementation date of 2026, one year after the effective deadline proposed by the ISSB for its global sustainability disclosure standards. The proposal would “complement the ISSB framework”, it said.

The development of the new Pillar 3 rules, described by Basel as an “iterative process”, will likely take stock of the EU’s own attempt to introduce its own Pillar 3 climate rules last year. Both the EU regime and today’s proposals share common metrics on financed emissions and strategy/governance, with the addition of a slew of taxonomy-related metrics for EU banks.

Separately, an analysis on bank climate target setting published by the ECB yesterday has criticised banks for “overplaying their net-zero commitment… despite lacking a clear view and strategy on the operationalisation of their net-zero strategy”.

The regulator has suggested that banks should only be allowed “to associate with market initiatives only upon publication of their first set of interim targets”.

It also called upon net-zero initiatives to develop guidance aimed at improving the comparability and standardisation of net-zero plans, push for more short-term targets which could “improve the perceived reliability of such commitments” and encourage “immediate and decisive” actions.