To effectively manage climate-related financial risks, all financial institutions need to be transparent, accountable, responsible, coherent, systemic, sustainable, and long-term orientated. This is what it means to be a values-based bank.
The Global Alliance for Banking on Values (GABV) has responded to the Basel Committee on Banking Supervision public consultation on principles for the effective management and supervision of climate-related financial risks. These principles are part of the Basel Committee approach to improve both banks’ risk management and supervisors’ practices around climate-related financial risks.
The BCBS initiative takes greater urgency following the latest Intergovernmental Panel on Climate Change (IPCC) report, released on 28 February 2022, which points out that the lives of billions of people around the world are at risk. According to scientists, how climate change interacts with global trends, including an unsustainable use of natural resources, increasing urbanisation, growing social inequalities, rising losses and damages from extreme events, and a health pandemic, jeopardises future development. “Tackling all these different challenges involves everyone – governments, the private sector, civil society – working together to prioritize risk reduction, as well as equity and justice, in decision-making and investment”, says the IPCC.
The GABV considers the work of the central banks of the Basel Committee crucial to bring about fundamental changes in the financial sector. The BCBS principles focus on Pillar 2 measures only. This will not be enough to effectively address climate change. Considering the urgency, the scale of impact and the uncertainty around the repercussions of climate change on the economy and thus financial stability we call also call for Pillar 1 measures to disincentivize harmful behaviour and bolster financial system resilience against the impact of climate change. Additional disclosure requirements under Pillar 3 regarding the financing and investment activities will be a further incentive for banks to shift their activities in the right direction.
The BCBS can learn from the GABV members, all frontrunner financial institutions committed to banking to do good and promote positive change while doing as little harm as possible. By applying strict exclusion criteria, these banks, microfinance institutions and credit cooperatives practice a precautionary approach, one which the BCBS principles ought to advance.
The GABV considers it is not enough to define responsibilities at the Board and senior management levels or to require new models and data to improve risk profiles. For the future stability of the financial system, it is urgent that the BCBS changes the incentive structures that underpin financial institutions’ decisions. By considering not only the consequences of financed activities (single materiality) but also the adverse impact they cause (double materiality) the BCBS would be taking an affirmative step forward.
Transparency, accountability, responsibility, coherence, sustainability, and long-term orientation are the core values guiding the practice of GABV member banks. In our response to the Basel Committee public consultation, we ask that these become the norm for all financial institutions.