February 16, 2022
Secretariat of the Basel Committee on Banking Supervision
Bank for International Settlements
CH-4002 Basel, Switzerland
Japanese Bankers Association

JBA comments on the BCBS Consultative Document: “Principles for the effective
management and supervision of climate-related financial risks”
Dear Basel Committee members:
The Japanese Bankers Association1 (JBA) appreciates the opportunity to provide our comments on the BaselCommittee on Banking Supervision’s (BCBS) Consultative Document: “Principles for the effective
management and supervision of climate-related financial risks” 2 (hereafter “the Principles”) released on
November 16, 2021. We hope the following will contribute to further consideration in the BCBS.
We welcome the BCBS to consider the principles for the effective management and supervision of climaterelated financial risk, which aim to provide a common baseline for internationally active banks and supervisors
across jurisdictions. We support the overall concept of the Principles, which focus on climate-related financial
risks within the banking sector and maintain sufficient flexibility and proportionality given the degree ofheterogeneity and evolving practices in this area. We believe that the BCBS’s role, as the global standard setterfor the prudential regulation of banks, should be primarily focused on the financial risks and financial stability
implications for the banking system associated with climate change in line with its mandate, not the promotionof actions taken by banks to tackle climate change.
The Principles provide a comprehensive set of approaches for effective management and supervision regarding
Pillar 2 (supervision/internal control). It should, however, be noted that there remain a number of challenges forfully implementing them at this stage, such as, but not limited to, the lack of available data, uncertainty of
government policies (e.g. carbon pricing) that affect clients and the economy as a whole, and a lack of globally
established methodologies and tools. Some of these challenges are also interdependent with clients’ cooperationand climate-related disclosures. While our member banks iterate trial and error for the effective management ofclimate-related risks and engagement with their clients, these are iterative and progressive processes in nature,and require banks to prioritize the areas where they focus their efforts. Therefore, the Principles should be “endpoint” expectations and we would like the BCBS and respective supervisory authorities to accept that the overall
response of banks to climate-related risks is handled step by step from the perspective of risk, urgency, andfeasibility levels (e.g., data collection from clients and information disclosure to stakeholders, as well as internalrisk measurement, risk management, and senior management involvement).
We are also of the view that the quantification of climate-related financial risks should not be directly linked toincorporation into the internal capital and liquidity assessment processes immediately at this moment, given thestate and uncertainty of data and risk quantification methodologies, and the numerous assumptions needed tocarry out the quantification. Considering the potential adverse impact on clients and the economy more widely
by getting the assessments wrong, the high degree of uncertainty should be interpreted as a need to sufficiently
and carefully consider the margin of error in those assessments at least at this stage. Furthermore, we recognizethat there are arguments by some policymakers or regulators on whether capital requirements (Pillar 1) need tobe adjusted to climate-related financial risks. However, such adjustment should first require a thorough review
and analysis as well as full impact assessments, and we believe there is no clear and sufficient evidence to justify
1

The Japanese Bankers Association is the leading trade association for banks, bank holding companies, and bankers associations inJapan. As of February 16, 2022, JBA has 114 Full Members (banks), 3 Bank Holding Company Members (bank holding companies),
77 Associate Members (banks & bank holding companies), 58 Special Members (regionally-based bankers associations), and one SubAssociate Member for a total of 253 members.
2 https://www.bis.org/bcbs/publ/d530.pdf

1

the necessity or rationality of that at this moment. The hasty introduction of a Pillar 1 approach might eventhreaten the level playing field on a global basis, given the situation where common data definitions and common
methodologies have not been fully developed.

Our responses to the questions
Q1. Has the Committee appropriately captured the necessary requirements for the effective
management of climate-related financial risks and the related supervision? Are there any
aspects that the Committee could consider further or that would benefit from additional
guidance from the Committee?
We support the BCBS's approach of taking a principles-based approach that seeks to achieve balance between
improving practices related to the management of climate-related financial risks and providing a common
baseline for internationally active banks and supervisors, while maintaining sufficient flexibility given the
degree of heterogeneity and evolving practices in this area.
However, several jurisdictions are already in the process of implementing or drafting supervisory guidelines 3.
If a financial institution operating globally is required to comply with all the different guidelines in eachjurisdiction, it would cause an undue burden and ineffectiveness and might even give rise to conflicts between
jurisdictions. We expect the BCBS to take a leading role in harmonizing the supervisory and regulatory
approaches across jurisdictions. Having greater consistency among the guidelines across jurisdictions will allowbanks to concentrate their efforts and resources on effectively managing climate-related financial risks. A mutual
equivalent mechanism between supervisors should also be encouraged and formally provided in the Principles.
Furthermore, we believe that the importance of cooperation and collaboration between financial authorities andnon-financial authorities should be emphasized. Key policies by non-financial authorities, such as carbon tax,
energy policies, and mandatory climate-related disclosure requirements for corporates will significantly affectthe economic activities of each bank’s clients. Financial authorities should endeavour to ensure that nonfinancial authorities understand and effectively coordinate the efforts by the financial sector in order to avoid
unintended consequences for the economy as a whole.
Q2. Do you have any comments on the individual principles and supporting commentary?
The Principles cover comprehensive principles for addressing climate-related financial risks in order to ensure
the enhancement of financial stability. On the other hand, the practice in this area is highly heterogeneous andis in a stage of continuous evolution, and we would like the BCBS to consider the following comments to makethese principles more effective.
#

Prin.

Para.

1

-

6

-

2

-

10

-

JBA Comments
Physical risk largely depends on the geographical characteristics of each country.
In addition, transition risk largely depends on the industrial structure of eachcountry and public policies by the government. Given the uncertainties andconstraints in measuring climate-related financial risk, as well as the cost of
making mistakes, at least at this stage, frameworks leading to undue capitalcharge without clear evidence should be avoided.
Although it is necessary to measure long-term risks, it is very difficult to predict
how society as a whole will transition to a low-carbon economy or how eachcorporate will change its business in the long-term. In addition, it should be notedthat when and how much risk appears depend on the assumptions andpresumptions by each bank, and therefore the variation in measurement might

3

Japan Financial Services Agency (JFSA) plans to release a draft guidance regarding its supervisory expectation to encourage
financial institutions’ concrete actions this year. (https://www.fsa.go.jp/en/news/2021/20210618/04.pdf)

2

#

Prin.

Para.

3

-

10

18

61

4

4

5

JBA Comments
be large. We would like the BCBS to clarify the concept of the time horizon formeasurement as much as possible, recognizing the need to balance these
expectations with each bank's discretion to make its own risk-based
determinations, in order to ensure a common understanding of the intention of
the principles among banks.
-

We need a consistent and common understanding (measurement or
methodology) for a transmission channel from the risk driver of climate-related
financial risks, although we understand that the BCBS report published in April
20214 mentions the transmission relationship. A common approach would bringabout enormous benefits, such as accelerating the risk assessment process infinancial institutions and allowing comparison and benchmarking across theglobal financial system.

18-

When incorporating climate-related financial risks into existing risk
management, such as credit ratings and credit costs, there are a number ofchallenges, including different time horizons (an extremely long term forclimate-related financial risks, which contrasts with current horizons used forexisting risk management), and a lack of data availability and credible data (suchas data on the relationship between climate-related risk and credit losses).
Therefore, we recognize that it will require a considerable amount of time toestablish quantitative financial risk management practices at the client level. We
would like the BCBS to consider an appropriate timeline for rulemaking,reflecting the progress of international discussions.

4

19

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We would like the BCBS and respective supervisory authorities to accept thateach bank’s response is handled step by step, because it takes time to secure
human resources and establish an evaluation method.

6

5

Prin.

-

We would like to propose adding the words “in line with the evolution of data,capabilities, and methodologies” at the end of this sentence to bring it in linewith the supporting commentary in Paragraphs 21-23, and to avoid any
misunderstanding by those who read only the principles and take the meaningout of context.

7

5

21-23

-

7

28

Regarding the data, since it is necessary to carry out accurate calculations basedon a forward-looking scenario for climate-related financial risks, data on future
management plans for each corporate client based on climate change is required.
Also, global disaster data on climate change will be needed. Regarding the
calculation method, it is necessary to introduce a common model on a global
basis, especially for models that convert NGFS scenarios into risk factors for
traditional financial risk. (Currently, we recognize that there are multiple
Integrated Assessment Models such as REMIND or MESSAGE.)-

At present, given the lack of data availability and sufficiently matured common
methodologies in the field of climate-related financial risk management
mentioned above, the BCBS should have sufficient flexibility for further
development before incorporating climate-related financial risks into internal
capital and liquidity adequacy assessments, including stress testing.

-

In Japan, the current ICAAP is conducted under the three-year capital planninghorizons scenario, which differs from the extremely long-term time horizon of
30 to 50 years under the climate change scenario. The time horizons of the above

8

5

21

4

Basel Committee on Banking Supervision, Climate-related risk drivers and their transmission channels
https://www.bis.org/bcbs/publ/d517.pdf

3

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9

Prin.

5

Para.

23

JBA Comments
scenarios are not compatible.
-

At this time, since common quantification methodologies have not been
established, it should be left to the efforts of individual banks, subject toappropriate dialogue with respective supervisory authorities, until a common
time horizon is established.

-

We would like to propose adding the word “capable” in front of the word
“methodologies” in the second line of this paragraph to make the sentence
consistent with the following sentence.

-

We understand that ICAAP will mature over time as methodologies and data
availability become more advanced, as described in the Principles: “climaterelated financial risks will probably be incorporated into ICAAPs and ILAAPs
iteratively and progressively”. From the viewpoint of improving comparability
among banks, the establishment of a global standard for methodology should befocused upon as the first step, and then incorporating it into ICAAP should beconsidered later. At present, we understand that there is no establishedmethodology for quantifying climate-related financial risks, such as a VaR
measure.

10

6

26

-

Given that it will take considerable time to develop key risk indicators, werequest that quantitative risk mitigation measures using internal limits beallowed in a phased manner, along with the principle of materiality, on multiple
axes, such as by risk category, by business line, and by region.

11

6

27

-

According to Paragraph 27 of Principle 6, “banks should monitor future
developments and seek to understand, and, where possible, manage the impact
of climate-related risk drivers on other material risks that may not yet beapparent.” Since this is also important for supervisors, a principle consistent withit should be added to the section of “Principles for the supervision of climaterelated financial risks.” We are still learning by doing for managing climaterelated financial risks, and it would be beneficial and reasonable for both banks
and supervisors to share their efforts and knowledge to better understand theserisks.

12

7

Prin.

-

Challenges include internal reporting and data constraints under decision making
by the board and senior management. Data aggregation and analysis take a longtime, and there are many issues that are difficult to solve through the efforts of asingle bank and it might require the development of systems. Therefore,
regulators and supervisors should have a long-term perspective and promoteinternational and inter-firm initiatives related to data aggregation.

13

7

28

-

Although system investment for data collection is necessary, it should be allowed
to be considered after industrial entities and third-party vendors havestandardized and clarified the definition of data to be disclosed.

14

7

29

-

Since globally harmonized definitions of data aggregation have not been
established and disclosure by corporate clients is not sufficiently advanced at thismoment, each bank iterates trial and error in data aggregation. In such a situation,accurate risk measurement is difficult, so we would like to ensure carefulconsideration and sufficient time.

-

Although the BCBS allows the use of reasonable proxies and assumptions asalternatives, a globally harmonized definition of data or classification code isnecessary to avoid the undue burdens and ineffectiveness of risk calculation ineach jurisdiction. Duplicate work is more problematic where head office and
4

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Prin.

Para.

JBA Comments
branches, or parent companies and subsidiaries, are located in different
jurisdictions.
-

In order to obtain detailed output through scenario analysis, etc., elaborate
management plans (for example, how to deal with climate-related risks) ofcorporate clients are required from the perspective of understanding long-termtransition risks. Since the collection of these plans is likely to be very
burdensome and time-consuming, we would like to ask for flexibility on thescope of risk measurement (for example, which industries or sectors should betargeted for risk measurement, etc.).

15

7

31

-

As for the quantitative metrics of assessment, monitoring, and reporting, there
are no common industry practices for quantitative indicators. It is more efficientfor the BCBS or respective supervisory authorities to develop examples ofharmonized methods and concepts, instead of each bank developing them
individually.

16

8

32-33

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We would like the BCBS to allow banks to take a step-by-step approach, startingwith sectors that are considered to have higher climate-related risk.

17

9-11

-

-

Currently, although the impact analysis of climate-related risks on credit risk isongoing, the same analysis on market/liquidity/operational risk is in its initialstage. So, we would like the BCBS and respective supervisory authorities tosecure enough time to consider the measurement of climate-related risks onmarket/liquidity/operational risk. In particular, we should achieve a consistentand common understanding (measurement or methodology) of the transmission
channel from the risk driver of climate-related financial risks on each risk.

18

9

35-36

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We understand that measuring market risk and other risks will mature over time
as methodologies and data availability become more advanced. From theviewpoint of improving comparability among banks, the establishment of a
global standard for methodology should be focused upon as the first step, andthen evaluating the potential risk and establishing effective processes to control
should be considered later. At present, we understand that there is no establishedmethodology for quantifying climate-related financial risks, such as a VaR
measure.

19

11

Prin.

-

Supervisors and banks should work together to study specific risk scenarios ofclimate-related financial risks (particularly in the development of BCPs) in termsof operational risk and other risks, as well as methods of assessing the impact ofclimate-related risk drivers on these risks, methods of determining tolerance
limits, avoidance methods, and mitigation methods. Regarding operational risk
and other risks, there is no common understanding of specific risk scenarios forclimate-related financial risks compared to the credit risk area. Therefore, it isnecessary to clarify what mitigation measures should be considered for risk
events.

20

12

Prin.

-

We would like to propose adding the words “start building risk analysis
capabilities and” after “should” in the first sentence, and also adding the words“, as the methodologies and data used to analyse risks continue to mature overtime” at the end of the first sentence. It should be clarified that scenario analysis,
like ICAAP or ILAAP, will mature as the methodologies and data availability
become more advanced.

-

For quantifying climate-related risks, the scenario analysis is still a pilot exercise
and undergoing improvement. It would be improved in an iterative manner, so
we would like to request the BCBS and respective supervisory authorities not to
5

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Prin.

Para.

JBA Comments
stick to one single result of the scenario analysis to determine the adequacy of
capital and liquidity. An appropriate level of capital should be assessed by anappropriate risk measurement, so we should prioritize the enhancement of a risk
management toolkit before incorporating it into capital imposition. We should
focus on the enhancement of risk management first, for several years at least.

21

12

42

-

More guidance could be provided in the selection of scenarios that “cover a rangeof plausible pathways” (e.g., 1 or 2 pathways selected from Representative
Concentration Pathways (RCP) 2.6, RCP 4.5, RCP 6 or RCP 8.5) and employing
the prevailing Nationally Determined Contributions (NDCs) of all countries at a
specific point in time. This would allow banks to save resources and focus onassessing the impact from the most likely pathways. Furthermore, this would
allow the results to be easily aggregated at the national, regional, or even global
level.

22

16

56

-

We support the BCBS's approach to promote collaboration between supervisors.
To achieve this, we should take advantage of an existing framework, such as
Supervisory College, rather than establishing a new framework.

-

The BCBS principle could go further to link Paragraph 56 with Paragraph 54, inthat host supervisors should primarily use the home supervisor’s approach toscenario analysis and/or stress testing in meeting their supervisory expectations.
This would help to avoid the situation where host supervisors impose different
scenarios or approaches to scenario analysis for individual entities within thesame banking group, which might damage the effective and efficientmanagement of such a banking group and its affiliated entities’ vulnerabilities toclimate scenarios.

Q3. How could the transmission of environmental risks to banks’ risk profiles be taken into
account when considering the potential application of these principles to broader
environmental risks in the future? Which key aspects should be considered?
With regard to broader environmental risks, various risks such as biodiversity risk and water pollution risk, etc.
can be included, and there seems to be no consensus on the scope. Before considering the impact on financial
systems and individual financial institutions, it is important to discuss the scope of these risks, the impact onsociety and the economy, and what kind of risk scenarios can be envisioned.
In addition, many works are in the very early stage, such as identifying the transmission channel from broader
environmental risks to financial risk, and assessing whether the impact and time horizon of that risk transmission
can be calculated in the traditional risk category framework.
Furthermore, in terms of data availability and methodologies, those related to broader environmental risks areeven much more premature than those of climate-related risks. Therefore, it is necessary to identify and conduct
an adequate assessment/analysis before expanding the scope. For the same reasons discussed above in the caseof climate-related risks, the imposition of Rough-and-ready quantification for broader environmental risks
without reliable evidence, which could even impede the economy and the environment, should be avoided.
In conclusion, we would like to propose focusing on climate-related risks first, rather than immediately
expanding the scope to broader environmental risks. Many issues remain regarding climate-related risks, andtherefore the examination of new fields should not proceed prematurely. Environmental topics contain broader
aspects, and analysis/assessment of risks related to such issues is in the initial stage. The world should gain
experience by discussing climate-related issues first, and lessons learnt should be leveraged to discuss
environmental issues. We also believe that it is necessary to enhance collaboration with relevant stakeholders,6such as NGFS, FSB, or TNFD, and focus on a global consensus on these issues.

(End)7