Basel Committee publishes analytical reports on climate-related financial risks

• The two reports discuss transmission channels of climate-related risks to the banking system, and the measurement methodologies of climate-related financial risks.
• Climate risk drivers can be captured in traditional financial risk categories, but additional progress is needed to better estimate these risks.
• The reports provide a conceptual foundation for the Basel Committee's next phase of work to identify potential gaps in the Basel Framework and consider measures to address them.

The Basel Committee on Banking Supervision today publishes two analytical reports: Climate-related risk drivers and their transmission channels and Climate-related financial risks – measurement methodologies.

These reports contribute to the Committee's sequential approach to working on climate-related financial risks and follow the Committee's 2020 stocktake on members' existing initiatives. Both reports leverage extensive reviews of existing literature, including publications by scientists, academics, central banks, supervisory authorities, discussions with large banks, and the work of other international forums such as the Network for Greening the Financial System and the Financial Stability Board.

The reports are intended to be read in tandem. Climate-related risk drivers and their transmission channels explores how climate-related financial risks arise and affect both banks and the banking system. Climate-related financial risks – measurement methodologies provides an overview of conceptual issues related to climate-related financial risk measurement, and describes banks' and supervisors' current and emerging practices in this area.

Taken together, the reports conclude that climate risk drivers can be captured in traditional financial risk categories. But additional work is needed to connect climate risk drivers to banks' exposures and to reliably estimate such risks. While a range of methodologies is currently in use or being developed, challenges remain in the estimation process, including data gaps and uncertainty associated with the long-term nature and unpredictability of climate change. As these challenges are addressed, the ability to estimate and effectively mitigate climate-related financial risks will improve.

Building on this analytical work, the Committee will investigate the extent to which climate-related financial risks can be addressed within the existing Basel Framework, identify potential gaps in the current framework and consider possible measures to address them. The Committee will undertake further work in three broad strands simultaneously spanning regulatory, supervisory and disclosure-related elements for the banking system.