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Banks may be expected to disclose detailed data on their exposure to climate risks under new proposals by the banking standards-setter, despite its expressed concern over the suitability of current datasets.
The Bank of International Settlements’ Basel Committee has published its outline approach to protecting lenders and investors from the channelling of funds to potentially vulnerable companies and projects. Its proposals include the reporting of key new metrics to help lenders demonstrate to stakeholders where they are most vulnerable. But the BIS and observers note that the data may yet be difficult to obtain.
“The Basel Committee correctly identifies in this report that the accuracy, consistency, and quality of climate-related data is still evolving – which is absolutely true,” wrote Yann Bloch, head of product and pre-sales in the Americas for data company NeoXam. “The level of available and useful information in this area is certainly growing, which offers hope.”
The Basel Committee’s proposals, as part of its Pillar 3 disclosures framework, come as scrutiny intensifies on banks’ sustainability practices. Considered laggards among financial institutions in embedding ESG into their operations, lenders have come under fire for lacking transparency into their green credentials. A report by Bloomberg said banks are being questioned about the standards against which they gauge their sustainability investments, suggesting many in the industry are unhappy with the lack of comparability between different institutions’ claims.
Risks Abound
Like all financial institutions, banks must include the greenhouse gas (GHG) emissions, other ESG factors and climate risks of the loans they’ve made and bonds they hold.
The Basel Committee said it is concerned that institutions will be stricken with assets that have high exposures to physical and energy-transition risks that could weigh so heavily on them that they collapse. Consequently, the committee has proposed banks report a wide-ranging set of metrics.
“Physical and transition risks can have wide-ranging impacts across sectors and geographies that result in financial risks to banks via micro- and macroeconomic transmission channels, potentially affecting the safety and soundness of banks and the stability of the broader banking system,” the consultation report stated.
“Climate-related financial risks impact banks’ credit, market, liquidity, operational and other risks based on the physical locations of banks’ operations and through the counterparties and other stakeholders with whom they interact or invest in,” it added. “To the extent that banks transact with counterparties exposed to transition and physical climate-related financial risks, part of these risks will pass on to the bank.”
New Metrics
The report, written after consultation with the International Sustainability Standards Board, recommends the requirement of quantitative and qualitative data disclosures. Among the proposed new sets of quantitative disclosures is the detailing of the energy efficiency levels of property within mortgage portfolios. Citing United Nations data that shows real estate is responsible for as much as 36 per cent of GHG emissions in Europe, the report said this data could help investors encourage asset owners to reduce their buildings’ carbon intensity.
It also proposes the collection of data on financed emissions to help market participants assess how well banks are manging and monitoring risks presented by their assets. Similarly, under its list of qualitative disclosures, the committee is considering whether to ask banks to report on their financed emissions by sector to help prevent concentration of investments in vulnerable industries.
A separate set of bank-specific metrics has also been suggested, designed to enable the assessment of risks to their business posed by climate change and the energy transition. Specifically, this is hoped to offer a view of how the climate impact on the sectoral and the geographical location of exposures are affecting credit quality.
Market participants have been asked to offer their thoughts on the proposals and will be expected to submit those by the end of 2025.
Data Challenge
Banks’ ability to meet these expectations has been questioned by some in the industry. Many lenders have been slow to upgrade their technology systems to incorporate ESG and other data-led functions into their workflows, studies indicate.
A recent white paper published by A-Team Group for data management provider Snowflake indicated that banks have been slower than other financial institutions to adapt to the digital transformation that has swept through the finance sector. Another report, by Cornerstone Advisors, found that of the lenders that had undergone a transition, they were often so poorly planned that only half saw an improvement in their loan business.
On the specifics of ESG data, NeoXam’s Bloch argued that legacy tech stacks within banks would be a hindrance.
“The key for banks to successfully navigate the changing regulatory environment will be ensuring that they not only have the best possible data to hand when making disclosures and running test scenarios, but that they are able to use all of this information efficiently and accurately,” he said. “If they are relying on legacy systems or data scattered across the business in Excel spreadsheets, they are going to struggle as their requirements swell.”
