• The Basel Committee on Banking Supervision in its most recent report^[1] addresses the topic of how climate risks could impact economies and consequently the performance of banks. The report introduces the concept of Climate Risk Drivers as i) Physical Risks, that arise from the changes in weather and climate that impact the economy and ii) Transition Risks, that arise from the transition to a low-carbon economy.
• The banking sector needs to speed up the process of quantifying and managing climate change risks, both the transition risk to a low carbon economy and the physical risk of climate change itself to anticipate and mitigate any effects on P&L and balance sheet.
• Market players and regulators are pushing towards action on climate change risks. Banks will need to incorporate climate change risk considerations in their lending decisions and risk appetite, as well as to define specific exposure limits to be incorporated in risk management frameworks and portfolio management.
• To be able to assess climate change risks effectively, banks face the challenge of obtaining the right data in terms of exposures, geographical concentrations, supply chain dynamics, among others, which could allow to develop consistent and robust risk models that can provide enough predictability.

[1] ‘Climate-related risk drivers and their transmission channels’: https://www.bis.org/bcbs/publ/d517.pdf