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Global Regulators Turn Attention to Climate Risk Supervision

Joe Sergienko and Christopher Goncalves

December 20, 2021

The potential impact of climate risk on financial institutions has intensified significantly over the last eighteen months.

Financial institutions have been struggling to prepare for an uncertain array of potential economic, financial, and regulatory impacts. While financial institutions may have started to realign portfolios or assess the impact of climate change on their lending and asset pools, there has been little impetus beyond some market drivers. Regulators have been quiet on what they expect to see from financial institutions—until now.

In November 2021, the Basel Committee on Banking Supervision (BCBS) issued a consultative document, Principles for the effective management and supervision of climate-related financial risks. This document provides a series of principles that global regulators are suggesting be used for banks to manage their exposure, and for supervisors to use to assess financial institutions’ programs.

The consultative document is open for comment until February 16, 2022.

According to the BCBS, all banks regardless of size and complexity are exposed to climate-related financial risks. Financial institutions should have processes to identify and assess their exposures to determine materiality of both direct and indirect exposures. The time horizon for climate-related financial risks is still fluid and may be out of standard planning-time horizons. Financial institutions will need to think beyond traditional timelines.

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Joe Sergienko

Managing Director

Boston

Christopher Goncalves

Managing Director

Washington, DC