On the 13 June, the Basel Committee of Banking Supervision published its final framework for the voluntary disclosure of climate-related risks. As a long-standing advocate for more transparent bank accounting and audit, Sarasin & Partners welcomes this framework as a foundation on which to build.
The Basel Committee initiated its consultation for enhanced climate disclosures in November 2023. The backdrop was rising concern over the potential for climate risks to build, hidden within banks’ balance sheets. Unchecked, this poses a potential risk to financial stability.
A banking sector that ignores anticipated damage to property and physical infrastructure from climate change, for instance, may fail to provision properly for likely losses. Likewise, banks that are not tracking decarbonisation, may not properly price default risks in high-carbon industries, leading to excessive exposure to losses.
The Basel Committee’s framework provides a globally consistent standard for banks to provide additional transparency on these potential risks within their regulatory Pillar 3 disclosures.
We are disappointed, however, to see facilitated emissions (i.e. emissions associated with investment banking activities) removed from the final recommended disclosures. Moreover, we would have liked to see a clearer emphasis on the importance of prudent, climate-aware, financial statements as a underpin to an effective Pillar 3 regime. Not only does the capital adequacy regime build from a presumption that the financial statements are prudent, but investors rely on financial statements to provide a reliable view of financial strength. In short, the financial statements need to include foreseeable losses and/or liabilities that come from the physical or transition impacts of expected climate change.
Notwithstanding these gaps, we will be pressing banks to implement this framework as a starting point and urge regulators to require enhanced Pillar 3 climate disclosures, while enforcing existing accounting standards.
Our submission to the Basel Committee’s consultation and associated engagement outreach can be downloaded here.
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