The Role of Banks in Tackling Climate Change

The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks. It has introduced Basel III, a global voluntary framework for regulating the financial sector. Basel III has three pillars: minimum capital requirements, supervisor review and market discipline.

- Ujjwal Kant

Climate change refers to long-term shifts in temperatures and weather patterns. While such shifts can be natural, the overwhelming scientific consensus is that the climate changes observed since the mid-20th century are primarily driven by human activities. Climate risk encompasses the potential for negative consequences on societies and ecosystems due to the impacts of climate change. It involves analysing the likelihood and severity of these impacts and the ability to respond to them. These risks are becoming increasingly apparent worldwide, manifesting in a growing number of climate-driven disasters. Banks have a multifaceted and crucial role to play in tackling climate change. As primary providers of capital and key players in the financial system, they can significantly influence the transition towards a low-carbon and climate-resilient economy.

Introduction to Climate Related Financial Risk

1. Physical Risks: Physical risks concern the physical damage to firms and assets from climate-related shocks and stresses, such as rising temperatures, heavier rainfall or rising sea levels. The costs of these damages may be transmitted to a financial institution when they have an interest in a project - for example, if a bank provided a mortgage to a home on a floodplain or a pension fund financed infrastructure that was damaged by a storm. The costs may also be transmitted indirectly through damages to firms and households in which the financial institution has an interest - for example, if a sovereign wealth fund purchased municipal bonds from a city that has been struck by drought or cyclones