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Focus on climate continues with BCBS principles and EBA discussion paper on environmental risks

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Climate continues to be a priority for banking regulators. In May, the European Banking Authority published a discussion paper on the Role of environmental risks in the prudential framework.

And in June the Basel Committee for Banking Supervision (BCBS) published its Principles for the effective management and supervision of climate-related financial risks. We’ll look at the Basel paper first, and then discuss the EBA consultation.

What's recommended by the BCBS?

The BCBS climate-related principles don’t replace existing risk management principles from the committee. But they are designed to ensure alignment amongst supervisors and banks in terms of expectations for managing these risks. 

Climate to be managed within existing risk categories

Climate-related risk drivers can impact a bank’s risk profile across the firm’s operations. Rather than viewing climate risk as a distinct event type, banks should therefore manage climate risk using their existing risk categories. 

These BCBS principles therefore align with the ORX working paper Climate & Operational Risk: the ORX approach, published in April and available to read on the members-only website. The paper supports our members in categorising and managing climate-related risks.   

Broadly speaking, the BCBS principles cover the following areas: 

  • Corporate governance – banks should understand, assess and manage the potential impacts of climate-related risk drivers on their businesses and the environments in which they operate. Climate risks should also be incorporated into capital and liquidity adequacy assessments.
  • Internal control framework – banks should incorporate climate-related financial risks into internal control frameworks across the three lines of defence. 
  • Risk management – banks should understand the impact of climate-related risk drivers on credit, market, liquidity, operational and other risks. 
  • Scenario analysis – where appropriate, banks should make use of scenarios to assess their resilience to a range of plausible climate-related pathways. Scenarios should consider physical and transition risks as drivers of risks including operational risks.  

What's proposed in the EBA paper?

Moving to the EBA discussion paper, this again sees environmental risks (which cover climate-related risks as well as ‘broader environmental issues’) as a driver or causal factor which must be incorporated into a firm’s existing risk management framework.  

For example, firms are asked to consider the potential integration of a forward-looking perspective into the operational risk framework to take into account the increasing frequency and severity of physical environmental events, such as flooding. 

ORX providing feedback on proposals

The EBA is seeking feedback on its proposals in early August, and ORX is aiming to provide a consolidated view based on responses from its members to a short survey conducted in June. This exercise will also enable ORX to understand its members’ priorities in managing climate-related risks. 

More on this topic from ORX

The latest episode of the ORX Operational Risk Podcast includes a discussion of the ORX approach to climate risk, plus examples of relevant publicly-reported events from ORX News. You can listen to the podcast on Apple PodcastsSpotify or anywhere else you get your podcasts from. You can also listen online.