Financial Risk Management

CHAPTER 6Climate‐Related Financial Risks

In November 2021, the Basel Committee on Banking Supervision (BCBS) published a consultative document in the form of BCBS guidelines titled Principles for the effective management and supervision of climate‐related financial risks. This document was issued for comments by 16 February 2022. The Committee expected comments from all stakeholders on the proposed principles and requested feedback on three questions. Of the three, the third one is the most comprehensive because it reflects the big picture of climate‐related financial risk management: “How could the transmission of environmental risks to banks' risk profiles be taken into account when considering the potential application of these principles to broader environmental risks in the future? Which key aspects should be considered?” (BCBS, 2021, p. 10).

Through the publication of this consultative document, the Committee aims to provide banks with guidance on effective management of climate‐related financial risks. Interestingly, this document also includes guidance for prudential supervisors. This is the first initiative from the Basel Committee to tackle the challenges—both present and future—arising from climate change.

As observed by the Basel Committee, there is no question that “banks are potentially exposed to climate‐related financial risks regardless of their size, complexity or business model” (BCBS, 2021, p. 2). Moreover, the potential impacts of climate‐related risk drivers ...