On April 14, 2021, the Basel Committee on Banking Supervision (BCBS) issued two climate-related reports—one on climate-related risk drivers and their transmission channels and a companion report on measurement methodologies for financial risks. Among the reports’ findings:
- Banks and the banking system are exposed to climate change through macro- and microeconomic transmission channels that arise from two distinct types of climate risk drivers: physical risks and transition risks;
- Evidence suggests that the impacts of these risk drivers on banks can be observed through traditional risk categories including credit, market, liquidity, operational and reputational risks;
- Climate-related financial risks have unique features, necessitating granular and forward-looking measurement methodologies; and
- While banks and supervisors remain at an early stage of translating climate-related risks into robustly quantifiable financial risk, work continues to gather pace.
We provide further detail on what the reports reveal regarding progress made in the assessment and quantification of climate-related financial risks by banks and their supervisors, and comments on the further work that remains, in our Legal Update on MayerBrown.com.