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BFSI Chronicle, 11 Edition September 2022
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The Basel Committee on Banking Supervision re-
cently released 18 Principles that banks and their
supervisors should consider when addressing the

financial risks stemming from climate change. In
recognition of climate risks threatening banking
institutions and the broader financial sector, the

Committee issued 12 principles for bank man-
agement and six principles for banking super-
visors.

In particular, the principles cover themes relating support of outside experts.
to corporate governance, internal controls, risk
management, monitoring and reporting, and capital Banks should incorporate policies and procedures
and liquidity. that address climate-related risks throughout their
organizations. In addition, a bank’s board and senior
As the global standard-setting body for internationally management should ensure that climate-related risks
active banks, the Committee does not itself issue rules are clearly defined and addressed in the bank’s risk
or regulations but instead works with central banks appetite framework. Banks should also “regularly”
and bodies to design common approaches relating undertake a “comprehensive assessment” of climate-
to supervision. These climate-related principles, related risks and set clear definitions and thresholds
which the Committee expects member jurisdictions for materiality.
to implement “as soon as possible”, are the latest
and broadest articulation of what global banking Notably, banks should incorporate climate-related
regulators should consider when seeking to address risks into their internal control frameworks across
climate-related risks in an effective and coordinated the three lines of defense.
manner.
Under the first line of defense, staff should assess
Management Principles: climate-related risks during client onboarding, credit
The Committee issued 12 principles that banks application processes, and ongoing monitoring and
should adopt to manage climate-related risks. These engagement with clients as well as in new product
principles cover topics from corporate governance to or business approval processes.
scenario analysis.
In the second line of defense, the initial assessment
The Committee recommends that banks adopt a should be reviewed and challenged by an independent
process for assessing the impact of climate-related risk group within the bank, while the compliance function
drivers on the bank, which includes understanding should ensure adherence to applicable rules and
short and long-term risks. Banks should consider regulations.
how climate-related risk drivers might change the
environments in which the banks operate. To ensure The third line of defense requires an internal audit to
climate risks are not overlooked, a bank’s board and assure the quality of the overall framework.
senior management should assign climate-related
responsibilities to specific members or committees. The Committee also directs banks to maintain
Directors and senior management should be trained, sufficient capital given their climate-related risks.
including through internal workshops or with the Among other things, banks should quantify their

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