Global banking regulators issued a set of principles of managing climate-related financial risks, including using executive compensation to ensure these risks are being addressed.
The Basel Committee on Banking Supervision published a paper that sets out 18 principles for the management and supervision of banks’ climate risks, which aim to improve the performance of both banks and regulators in this area.
The list of principles cover a range of areas, including corporate governance, internal controls, risk management and reporting.
The committee indicated that the principles are intended both to set minimum expectations for global banks, while also remaining principles-based and flexible “given the degree of heterogeneity and evolving practices in this area.”
Among other things, the principles say both banks and regulators should consider climate-related financial risks in their assessments of capital and liquidity adequacy.
“Banks should develop processes to evaluate the solvency impact of climate-related financial risks that may materialize within their capital planning horizons,” the paper said.
And, as part of corporate governance, the paper said bank boards and senior management should consider whether their compensation policies should be revised to ensure material climate risks are factored into their overall business strategy and risk management frameworks.
The Basel Committee said it expects the principles to be implemented “as soon as possible” and pledged to monitor progress, with a view to promoting harmonization among global banks and banking systems.
The committee also promised an update on potential supervisory, regulatory and disclosure-related measures for the banking sector “in due course,” and said it would continue to cooperate with international financial standard setters and other bodies “to address climate-related financial risks in an effective and coordinated manner.”