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New Basel III climate disclosures proposed for global banks

Running until February 29, 2024, the consultation will help the Basel Committee determine which elements should be mandatory and which should be subject to national discretion.
Melodie Michel
Basel III climate disclosures
Photo by Alicja Ziajowska on Unsplash

New disclosure rules could require global banks to report on their climate strategies and financed emissions as early as January 2026.

The Basel Committee, a watchdog formed by 63 central banks to increase global financial stability, has launched a consultation on the potential to add climate-related risk disclosures to its Basel III framework. 

The proposed disclosures would remedy identified data gaps and harmonise the way banks report on sustainability globally. Currently, climate disclosure regulations apply to banks differently in different jurisdictions, creating a patchwork of data and formats that make climate-related risks difficult to assess and compare.

Even in the EU, where climate regulations are particularly extensive, “quality information remains too low”, according to the European Central Bank.

Quantitative disclosures would include detailed financed emissions

Among quantitative disclosures, the Basel Committee suggests including exposures to climate-related physical and transition risks by sector and by geography, as well as financed emissions – the bulk of banks’ carbon footprint by far.

Most large banks like SEB and Deutsche Bank have already started to calculate and tackle emissions indirectly caused by their loans and investments by setting carbon reduction targets for their clients. But the new disclosures would require them to provide a detailed breakdown of Scopes 1, 2 and 3 emissions by obligor, and disclose the methodology used to calculate them.

The Committee believes such disclosures could provide market participants with “an indication of banks’ exposure to climate-related transition risks and the related impact on their risk profiles”, and assist them in assessing “whether a bank adequately identifies, manages and monitors risks that may result from its financed emissions, and how it could be calculated”.

Additionally, the watchdog is considering adding details around credit quality and maturity to banks’ financed emissions disclosures to get a clearer picture of climate exposures by credit quality, though it notes that “this is not intended to signal that higher credit risk can be solely attributed to climate risk factors, nor it is intended to influence banks’ strategies or decisions to lend to certain sectors”.

Qualitative disclosures and forecasts

Banks would also be required to provide qualitative information regarding their climate-related risk governance, strategy and management, to ensure their disclosures are “sufficiently comprehensive and meaningful”.

Those that have established climate risk forecasting systems would also be asked to disclose their forward-looking forecasts around financed emissions by sector and facilitated emissions related to capital markets and financial advisory activities, as well as expected changes in strategy and risk management as a result of changing risk profiles.

Basel III climate disclosures aligned with ISSB standards

The Basel III framework, created in response to the 2008 financial crisis, is composed of three pillars, including minimum capital and liquidity requirements (Pillar 1), supervisory monitoring and review standards (Pillar 2), and mandatory public disclosures (Pillar 3, where the proposed disclosures would be added).

The Committee says it has been coordinating with other standard setters, including the International Sustainability Standards Board (ISSB), whose recently published IFRS S1 and S2 standards are widely seen as a game changer when it comes to investor-focused sustainability disclosures.

Its proposed disclosures would aim to complement the ISSB’s work and “provide a common disclosure baseline for internationally active banks” – though it is worth noting that IFRS S2 on climate-related disclosures doesn’t require quite as much detail on financed emissions.

Running until February 29, 2024, the consultation will help the Committee determine the feasibility and usefulness of its proposal, as well as which elements should be mandatory and which should be subject to national discretion.

“The Committee recognises that the accuracy, consistency and quality of climate-related data is still evolving, but at the same time, disclosure requirements will accelerate the availability of such information and facilitate forward-looking risk assessments by banks,” it says.