Two new reports from the BCBS outline banking system exposure to climate-related risks and recommend methodologies be adapted accordingly.
Banks and financial institutions need to expand and adjust their existing risk management frameworks to better account for climate-related financial risks, according to two reports published today by the Basel Committee on Banking Supervision (BCBS).
The findings emphasised that traditional risk categories used by financial institutions can be used to successfully identify climate-related financial risks, but methodologies need to be more granular and forward-looking to effectively measure and mitigate the extent of risk exposures.
The first report – ‘Climate-related Risk Drivers and their Transmission Channels’ – identifies the main climate-related financial risks faced by banks and financial institutions within six traditional risk categories.
The risk categories consist of: Economic (losses due to increased severity of physical climate risk drivers); credit (climate risk reducing borrowers’ ability to repay and service debt); market (reducing financial asset values where climate risk isn’t incorporated into prices); liquidity (climate change reducing access to stable sources of funding); operational (regulatory compliance risks); and reputational (changing consumer sentiment towards climate change).
The report further identifies … [continues]
Read the full article on Regulation Asia’s sister publication, ESG Investor.