March 2024

Basel Committee Consultative Document on the Disclosure of
Climate-Related Financial Risks (published 29. November 2023):
Response by the TPI Centre at the London School of Economics
and Political Science
Authors: Nelson Diaz, Ákos Hajagos-Tóth, Valentin Jahn
Introduction
1. About the TPI Centre
The Transition Pathway Initiative Centre (TPI Centre) is an independent, authoritative source of
research and data on the progress of corporate, financial and sovereign entities in transitioning to a
low-carbon economy.
The TPI Centre is part of the Grantham Research Institute on Climate Change and the Environment,
which is based at the London School of Economics and Political Science (LSE). It is the academic
partner of the Transition Pathway Initiative (TPI), a global initiative led by asset owners and supported
by asset managers. As of March 2024, 151 investors globally, representing around US$60 trillion
combined Assets Under Management and Advisement, have pledged their support for TPI.
2. The TPI Centre’s Net Zero Banking Assessment Framework and the BIS Consultation
The Net Zero Banking Assessment Framework (NZBAF)1 is the result of nearly four years of ongoinginvestor consultation with the Institutional Investor Group on Climate Change (IIGCC) and CERES.
The project started in 2021 and will deliver its third assessment cycle in September 2024. The NZBAF
is a comprehensive, open-source set of indicators and data that can be used to assess banks' progressin managing the low-carbon transition and mitigating the impacts of climate change. The NZBAF
uniquely integrates and aligns with leading standards in the field, notably the IIGCC Net Zero
Investment Framework2, the IIGCC Net Zero Standard for Banks3 and CERES’ Net Zero Standard forNorth American Banks4. This alignment is not merely coincidental but a design principle to ensure
coherence, complementarity, and efficiency within the sector's transition efforts and between
different stakeholders, most notably between investors and the banks they invest in.

1 https://www.transitionpathwayinitiative.org/banks

2 https://www.iigcc.org/resources/tag/net-zero-investment-framework
3 https://www.iigcc.org/resources/net-zero-standard-for-banks
4

https://www.ceres.org/resources/reports/net-zero-standard-north-american-banks

1The NZBAF builds on the TPI Centre's established expertise in assessing the climate actions ofcompanies in the real economy and follows the Centre's design principles of disclosure-based data,
accessible and easy-to-use information, alignment with existing initiatives and disclosure frameworks,
objectively assessable indicators, and aggregation to the company level.
3. The TPI Centre’s Feedback on the Consultation:
General Comment
The TPI Centre recognises the efforts of the Basel Committee on Banking Supervision (BCBS) to steer
disclosure requirements towards a positive direction. Bank transparency is key to effective climate
management of climate risk and coordination between different stakeholders in the financial system.
Overall, the proposed disclosures support this goal.
As most of the members of the BCBS are central banks and authorities from countries that havesigned the Paris Agreement, the TPI Centre suggests that the BCBS reflects on how banks' climate
risk management should be aligned with the Paris Agreement, including the goal of limiting global
warming to 1.5°C.
Question-specific Comments
Q6. What are your views on potentially extending a Pillar 3 framework for climate-related
financial risks to the trading book?
Climate change is not just a concern for the loan book; it poses a significant risk to banks' entire
portfolio, including capital markets activities. The same climate risks that could affect credit defaults
can also affect securities traded in financial markets.
Excluding the trading book from the Pillar 3 framework disclosure provides an incomplete picture ofbanks' exposure to climate risks. Recent estimates5 confirm that capital markets revenues account for
22-70% of the total revenues of several of the largest European and US banks. Not including the
trading book will allow stakeholders to assess only a part of banks' exposure to climate risks, andtherefore could result in underestimating the potential losses and systemic risks to the banking
system.
The current partial and selective disclosure of climate risks by banks makes it difficult for investors tointegrate climate change into their investment process. Therefore, as one of the overarching principlesof the NZBAF, banks' climate change disclosures should cover all on- and off-balance sheet activities
in all high-emitting sectors6.

5 S&P Global: Banks' Capital Markets Revenue May Feel The Strain Of Economic And Industry Uncertainty In 2023

6 The TPI Centre defines high-emission sectors as oil and gas; power; coal mining; airlines; shipping; autos; steel, aluminium, diversified

mining, paper, cement, chemicals; food; and real estate. Our methodologies for the different sectors can be found at:
www.transitionpathwayinitiative.org/.

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Q8. What are your views on which elements should be made subject to national discretion andwhich should be mandatory? Why?
Q18. Should the proposed quantitative Pillar 3 climate-related financial risk disclosure
requirements be on a mandatory basis to facilitate comparability across banks?
One of the main challenges facing the financial community in assessing climate-related risks is thelack of standardised information and incomplete data that would enable investors to compare andcontrast banks’ performance on climate-related issues and associated risk management. To
overcome this challenge, the TPI Centre stresses that all elements of the consultation should be
mandatory to ensure comparability and to enable constructive engagement with banks on theimplementation of their climate-change commitments.
Through the assessment of banks using the NZBAF, the TPI Centre has found that the lack of external
standardised methodologies and insufficient data from clients are hampering banks' progress.
However, these challenges should not prevent banks from generating estimates or proxy data to
support their net-zero strategies. In several cases, the TPI Centre has identified banks that are alreadydeveloping their own methodologies and proxy data to assess their climate risk exposure7.
Moreover, whilst acknowledging the challenges associated with estimating financed and facilitatedemissions, we also want to stress the importance and feasibility of such disclosures going forward.
Reporting on emissions intensities and facilitated emissions no longer faces major methodologicalbarriers – especially for G-SIBs – considering the recent publication of PCAF methodologies for
estimating and reporting on facilitated emissions. Additionally, data availability and quality are
improving rapidly. Recognising that banks' emissions disclosures are the basis for risk assessments aswell as supervisory policies and highlighting recent improvements and efforts to lower the obstacles
for banks to estimate these emissions, we recommend that banks should be required to disclose these
metrics. This will also ensure the requirements under consultation are future-proof. Banks should
disclose these quantitative metrics based on their materiality assessments (e.g. whether capital
market facilitation is a material business activity) and not on where the bank is domiciled.
Q14.What additional qualitative Pillar 3 climate-related financial risk disclosure requirements
should the Committee consider8?
Based on the TPI Centre's experience with the NZBAF and engagement with various stakeholders in
the financial system, primarily investors who are interested in understanding banks' climate risk
profiles, the TPI Centre suggests the following additional qualitative disclosures:
Table

SectionCRFRA

Governance

Suggestion
Item (1e): Banks should disclose whether they have established aremuneration scheme at the C-suite level that takes account ofclimate change performance. Supplementary information isrecommended to explain how climate-related objectives areincorporated specifically into executive remuneration policies, e.g.
which performance metrics/objectives are included, their weights andwhich roles the policy applies to.

PriorityHigh

7 ING, Citibank, Goldman Sachs, and Barclays developed their own methodologies to estimate facilitated emissions. Barclays, ING, Credit

Agricole and Citi developed their own methodologies to estimate financed emissions in the real state sector, and ING, HSBC and JP
Morgan did so for airlines.
8Additional proposals can be found in the appendix.

3

Strategy

RiskManagement

CRFRB

Fossil Fuel
SectorStrategy

CRFRA

Risk
Management

This is to avoid generic disclosures that either do not quantify theclimate performance-related remuneration at all or that leave theactual KPIs vague. We have found several banks who do not provide
these details although they do state that their executive remuneration
is tied to climate-related performance.
The TPI Centre further recommends emphasising that banks should
provide disclosure specifically on climate-related objectives. General
ESG or sustainability initiatives should not be considered sufficient if
they do not specifically mention climate.
Item 2(d): The impact of climate-related financial risks on the bank's
financial position, financial performance and cash flows for thereporting period should also be reflected in its financial statements.
This is intended to enable non-climate-focused investor groups toassess banks' exposure to potential climate-related financial risks.
Currently, banks’ financial statements do not usually refer to climaterelated financial risks in their financial statements and it is therefore
unclear as to whether or to what extent these risk drivers have been
incorporated into expected credit loss (ECL) assumptions andcalculations. The lack of internalisation of these potential cost items
might expose banks to potentially underestimating the impacts ofclimate change in their financial statements.
Item 3(a): Along with the input parameters used by the bank, clear
policies and guidelines should be disclosed regarding the bank's climate
risk appetite and how it is integrated with the bank's traditional
financial risk drivers (i.e. credit, market, operational and liquidity risks).
Item 1(a): Banks should disclose their approach to financing the fossil
fuel sector, specifically, if the bank has implemented financing
conditions that support clients’ transition in these sectors.
Item 2(e): For scenario analyses to be useful in assessing potential
exposure and to ensure comparability across banks, these should be
conducted based on "minimum standards", such as a 1.5°C scenario
when assessing transition risks and a high emissions scenario (i.e. RCP
8.5) for physical risks.
Just Transition (additional item): Policymakers and investors are
increasingly recognising that just transition considerations are
essential to achieving net zero and climate resilience. Recognising the
emergence and importance of Just Transition, the TPI Centre would
like to emphasise that banks should report and explain whether andhow they take into account Just Transition objectives and the steps
they have taken to ensure integration of such considerations.
Item 3(a-b): Although the proposed framework increases
transparency across jurisdictions with regard to methodologicalreporting, that is only one aspect. Qualitative and quantitative
elements of materiality test results (such as expected credit losses,
loan provisioning and risk weighting), that inform banks’ climate risk
management are equally important for stakeholders and should
therefore be reported on. Here, the TPI Centre emphasises thatnarrative disclosures/commentary alone are not sufficient, as investors
and other stakeholders should be transparently informed about banks’
climate risk integration strategies and the effects of climate-related
scenario analyses.

High

High

High

MediumMediumMedium4

Climate
Solutions

Item 1(a): An effective way for banks to strengthen their climate
resilience is to invest in climate solutions. Accordingly, banks should be
required to provide context to their climate financing goals, financing
frameworks and how they intend to capitalise on these to mitigate
climate transition risks. In addition, banks should disclose the externaltaxonomy used to define climate solutions or if they have developed
an internal taxonomy.

Medium

Q20. What additional quantitative Pillar 3 climate-related financial risk disclosure
requirements should the Committee consider?
Table

Section

CRFR1

GHG
Emissions(Columns
K-N)

CRFR4

9

Emissions
Intensity
MetricMethodology

Suggestion
GHG emissions are generated at different stages of a particular sector’svalue chain. Accordingly, we advise the BCBS to consider requiring banks
to disclose GHG emissions based on which scope(s) are material for agiven sector. For instance, for the electricity utilities sector, the vast
majority of the emissions generation derives from owned electricity
generation (scope 1), whereas for oil & gas, all scopes are material withthe use of companies’ sold products (scope 3 category 11) accounting forthe largest share (e.g. burning oil and gas to provide energy for buildings,
electricity generation, industry and transport).
It should further be clarified whether BCBS’ interpretation of materiality
is determined based on financial materiality (i.e. a given sector’s
contribution to the entire loan portfolio) or emissions materiality.
The sector-specific GHG emissions materiality approach detailed above
also applies to the targets (‘forecasts’) set by banks. For a science-based
approach to determining which scopes are material for each highemitting sector, as defined by the TPI Centre (see footnote 6), please
consult the TPI Centre’s sectoral methodologies.
BCBS’ proposal states that “Banks’ chosen metrics and forecasts shall
include their clients’ Scope 1, Scope 2 and Scope 3 emissions, wherematerial and data allow.” The TPI Centre welcomes the use of emissions
intensity metrics per physical output and by sector. However, to ensurecomparability, banks should be advised to follow a given set of physicaloutputs that are relevant to the sector. Please consult the TPI Centre’s
sectoral methodology documents for our recommended use of physicaloutputs.
Moreover, BCBS notes that banks should provide a “description ofgeographies covered by the GHG intensity metrics in columns (c), (e)and (g) and description of the sub-sectors covered by the GHG intensity
metrics.” It is our firm view that sectoral decarbonisation targets should
cover all material geographical locations where the bank provides
financing in to guarantee the completeness of these targets. Banks
should provide a comprehensive explanation in cases where the targets
do not cover all geographical exposures.
With respect to the technical implementation of target setting in Table
CRFR4 (columns D-G), where regional target setting is scientificallyjustified, e.g. different regional carbon intensity pathways forOECD/non-OECD, North American and EU companies operating in theelectricity utilities sector9, banks may set separate targets.

Priority

High

High

High

See TPI’s methodology note on the carbon performance assessment of electricity utilities (November 2021).

5

Bank-wide
Revenues
Covered by
SectoralTargets

Gross
Carrying
Amount(per sector)

CRFR1

GHG
emissions
reduction
targets

CRFR5

Facilitatedemission

To assess the materiality of banks’ sectoral decarbonisation targets, the
TPI Centre recommends disclosing the proportion (%) of bank-wide
revenues covered by the sectoral targets.
Evidence suggests that banks can hedge their exposure to climaterelated financial risks (e.g. credit risk) by diversifying their loan books andactively investing in sustainable financial strategies (Umar et al.,2021;
Lang et al., 2023).
Given this dynamic, a bank’s share of climate solutions investments inrelation to its lending book can be a good proxy for measuring its progressin mitigating climate-related transition risks. Therefore, the TPI Centre
believes that the proportion of sector-level gross carrying amountdedicated to climate/transition finance solutions should be reported in a
separate column.
Considering the differences surrounding defining climate solutions, werecommend leaving it up to banks’ discretion to define their own terms
so long as they are transparent about it (e.g. referring to externaltaxonomies or developing their own). In an ideal setting, however, The
TPI Centre highlights the definition provided by IIGCC.
The TPI Centre stresses the importance of banks setting credible GHG
emissions reduction targets, as it also functions as a proxy for theircommitment to achieving net zero financed/facilitated emissions by
2050 or sooner and is a key indicator used by investors. We believe thatreferring to targets as ‘forecasts’ is not aligned with current industry bestpractices and would signal a more passive approach rather than an
active intention to realise these forecasts. In some ways, this language
appears to contradict the strategy-disclosure recommendations in the
consultation report, as strategy implies the active pursuit of a set ofobjectives.
Similar to CRFR1 and CRFR4, given the importance of banks having set
science-based sectoral decarbonisation targets, facilitated emissions
should be disclosed in both absolute and intensity units, the latter using
the same set of relevant physical outputs as in CRFR4.
In addition, the TPI Centre cautions that the BCBS should evaluate its
approach to requiring banks to only set one facilitated emissions
reduction target per sector given the short-term (one-year) nature ofemissions reporting. The TPI Centre suggest that banks should set regularfacilitated emissions reduction targets (e.g. in a waterfall manner, at 5year intervals) to ensure an orderly transition.

MediumMediumMediumMedium

Q29. Would it be useful to require disclosure of the specific methodology (such as Partnershipfor Carbon Accounting Financials (PCAF)) used in calculating financed emissions?
The TPI Centre encourages the alignment of climate-change disclosures with external standards tofacilitate comparability and consistency between banks' climate risk disclosures. The TPI Centre
supports the initiative's goal of increasing transparency within the financial sector, as illustrated, forexample, by the inclusion of the PCAF financial emissions standard in several of the NZBAF indicators.

6

It is important to recognise that PCAF is guided by industry stakeholders, which suggests that thepriorities and perspectives of financial institutions may play a role in shaping the standard's objectives.
For example, the recently published Facilitated Emissions Standard is not currently aligned with the
TPI Centre methodology. The new standard requires financial institutions to report their facilitatedemissions using a 33% weighting factor, which can give a misleading picture of actual emissions
facilitated by the bank and also creates inconsistencies in how banks report other climate data suchas their green financing, where they use a 100% weighting factor. We therefore recommend BIS adopt
a full disclosure requirement for facilitated emissions or consider considerably lifting the threshold
above the currently recommended 33%.
Q39. What type of forecasts would be most useful for assessing banks’ exposure to climaterelated financial risks?
The TPI Centre’s experience assessing the carbon performance of companies has been predominantly
based on the Sectoral Decarbonisation Approach (SDA)10. The SDA translates greenhouse gas
emissions targets made at the international level (e.g. under the 2015 UN Paris Agreement) into
appropriate benchmarks, against which the performance of individual companies can be compared.
The SDA recognises that different sectors of the economy (e.g. food production, electricity generation
automobile, manufacturing, etc.) face different challenges arising from the low-carbon transition,
including where emissions are concentrated in the value chain and how costly it is to reduce emissions.
Other approaches to translating international emissions targets into company benchmarks haveapplied the same decarbonisation pathway to all sectors, regardless of these differences. Suchapproaches may be misleading, as not all sectors have the same emissions profiles or face the samechallenges: some sectors may be capable of faster decarbonisation, while others require more timeand resources. Therefore, The SDA takes a sector-by-sector approach, comparing companies withineach sector and, from the bank's perspective, comparing the emissions intensity of a given portfolio
in a given sector with the sector's international emissions targets. Please see the TPI Centre’salignment matrix for banks as an example of a practical implementation of the SDA for banks asshown in Figure 1 below.
In this context, from a transition perspective, the TPI Centre highlights that sectoral finance andfacilitated emissions estimates, using a relevant sector-specific physical intensity unit, can help
compare the bank's overall financial emissions pathway with temperature goals. This helps to identify
the banks' misalignment and it could serve as a proxy for the potential transition risk that the bank
may face.

10 The Sectoral Decarbonisation Approach (SDA) was created by CDP, World Resources Institute (WRI) and the World Wide Fund for

Nature (WWF) in 2015. See Science-Based Targets Initiative [SBTi]: https://sciencebasedtargets.org/resources/files/SectoralDecarbonization-Approach-Report.pdf

7Figure 1: TPI Centre’s alignment matrix (showing BNP Paribas for illustrative purpose). For more details, please visit the TPI Centre’s
websiteQ54. What are your views on the Committee exploring disclosure requirements for the impactsof climate-related financial risks on deposits/funding and liabilities?
While the literature on climate-related financial risks is still emerging, TPI believes that liquidity risk
can have a material adverse impact on banks' deposits and funding costs and should therefore be
included in Pillar III disclosure.
More specifically, Lang et al. (2023) identify a link between climate change and bank liquidity. They
posit that both physical risks (e.g. weather-driven deposit withdrawals) and transition risks (e.g.
increasingly stringent climate regulations) can constrain banks’ ability to create liquidity. Theirfindings suggest a positive correlation between a country’s climate risk exposure and the pressure
placed on banks’ liquidity. On a broader scale, climate-related risks can negatively influence economic
activities (e.g. increased business expenses due to the Carbon Border Adjustment Mechanism (CBAM)in the European Union, and supply chain disruptions) and therefore decrease consumer spending,which might, in turn, translate into below-anticipated liquidity creation for banks. Concerning climate
risk sensitivity, Lee et al. (2022) deduce that the influence of climate-related risks on liquidity creation
appears to be more pronounced for larger banks with the following characteristics: i) lower capital,ii) banks in lower-GDP and developing countries, and iii) those in Asian countries.

8

Finally, Choi et al. (2022) explore how non-financial signals of banks’ environmental reputation might
impact their deposits and credit provisions and find that “banks with a poor environmental reputation
are more likely to experience declining branch-level deposits the following year in counties exposed tosevere climate change risks”.
With regard to current practices, HSBC (p.224 of the FY2023 annual report) and Barclays (p.275 of
the FY2023 annual report) have both mentioned that climate-related liquidity risks are incorporated
into their ILAAP (Internal Liquidity Adequacy Assessment Process) and plan to develop theirassessment further. Rabobank (p.139 of the FY2022 Pillar III report) also concluded that climate
scenarios have a significant liquidity impact. They also note that “…The liquidity risks which were
impacted most by the climate risk scenarios, were already assessed as material (e.g. facility drawings
and retail deposits outflow). Hence, the overall assessment did not uncover new risk drivers forliquidity risk and therefore did not change the materiality for liquidity risk.”
Consequently, TPI believes that banks should report on how climate-related liquidity risk
considerations are incorporated into their climate stress tests and disclose the assumptions andmethodologies they have developed for measuring these risks.

If you would like to engage with us further on our response to this consultation, please contact the
Banking Team (gri.banking@lse.ac.uk) at the TPI Centre.
Yours sincerely,
Nelson Diaz, Policy OfficerÁkos Hajagos-Tóth, Policy Officer
Valentin Jahn, Research Lead

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Appendix 1 – Additional proposed improvement for qualitative and Pillar 3 climate-related financial
risk disclosure requirements
Table

SectionGovernance

Strategy

CRFRA

Risk
Management

Suggestion
Item 1(b): Banks should disclose how they have assessed board
members' competence to oversee climate risks and disclose theresults of this assessment. In addition, banks should have an action
plan in place to ensure that their board members acquire sufficient
climate-related risk competencies, e.g. through training.
Climate policy engagement (additional item): TPI's assessment
suggests that while banks have endorsed the goals of the Paris
Agreement and have begun to develop decarbonisation strategies,
this is not reflected in their policy engagement and lobbying
practices.
Given the influence and importance of banks in driving climate
action, TPI believes that banks should be required to disclose
whether they have a position statement on 1.5⁰C-aligned lobbying
within the trade associations of which they are a member and to
publish a review of their trade associations' climate positions.
Point 3(a): The item "whether and how the bank prioritises
climate-related financial risks relative to other types of risks" maybe confusing to the general reader, as it signals that climaterelated financial risks should be prioritised above all other risk
drivers. While climate-related financial risks can undoubtedly
have a material impact on the performance of financial
institutions, a balanced approach to risk assessment isrecommended.
Perhaps the sentence could be reworded as "whether the bankassesses climate-related financial risks based on their materiality
and evaluates the linkages between climate-related financial
risks and other risk drivers, such as credit risk".

Priority
Low

Low

Low

10