Basel Committee Publishes Papers to Guide Work on Climate Risk

The Basel Committee today published two papers on climate-related risk that will serve as a “conceptual foundation” as the committee works to incorporate climate risk into the Basel regulatory framework. The first report addressed climate-related risk drivers and their transmission channels, noting that the effects of climate risk may vary risk based on geography, sector and economic financial system development. The paper also noted that several traditional risk categories used by banks—such as credit risk, market risk, liquidity risk and others—can be used to capture climate risk.

“To explore this further, a comprehensive analysis could usefully be undertaken on how climate-related financial risks can be incorporated into the existing Basel framework,” the paper noted. “Part of the Basel Committee’s near-term work would be to identify gaps in the current Basel framework, where climate-related financial risks may not be sufficiently addressed.”

The second paper provided an overview of conceptual issues related to climate-related financial risk measurement and methodologies, as well as practical implementation by banks and supervisors. The report noted that to date, most of the work to measure these risks has centered on “mapping near-term transition risk drivers into counterparty and portfolio and exposures,” and that most banks have focused on credit risk when attempting to assess climate-related financial risk. Looking ahead, “key areas for future analytical exploration relate to measurement gaps in data and risk classification methods, as well as methodologies suitable for assessing long-term climate phenomena not always of a standard nature,” the report said.