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Finance: I4CE's recommendations to Basel committee
#Foreword
The Basel Committee is finally taking up climate issues. Founded in 1974, this forum which brings together the financial supervisors of the G20 countries and which provides the main guidelines for guaranteeing financial stability has been absent from climate issues since Donald Trump’s mandate. The good news is that it recently published a first consultative document on the principles of climate risk management and supervision, that is – at least we hope – a first signal of greater ambition for climate.
Although the Basel Committee is a G20 institution, it is essential for Europeans to make their point of view known. European regulators and supervisors have not waited for this Committee to change their practices, and there is a risk that it imposes lesser standards. Europe for example advocates “double materiality”, i.e. measuring the financial risks related to climate change but also the impacts that the financial system generates on climate change. United States on the other hand remain focused on measuring financial materiality alone. 
 
In this newsletter, you will find the recommendations addressed by I4CE to the Basel Committee. To us, it must go beyond the mere integration of climate risks and seeks to support an orderly transition to a low-carbon economy, as this is the only way to effectively prevent the risks of financial instability that a disorderly transition would present. You will also have an opportunity to discover or re-discover our last publications related to financial regulation for climate change and get a sneak peek on our future recommendations on transition plan. 

#I4CExpertViewPoint

I4CE’s recommendations to the Basel Committee

In this blog post, Julie Evain presents the recommendations addressed by I4CE's financial experts to the Basel Committee.  The Basel texts are organized according to three pillars: the first defines the minimum capital requirements for banks, the second organizes micro and macro-financial prudential supervision. Finally, the third pillar deals with transparency and market discipline. I4CE’s recommendations address each of these pillars.

#Recommendations #I4CE_Reports

I4CE's recommendations to the Basel Committee are based on our latest studies on the field of financial regulation. Find below the last reports of the Institute's researchers: Anuscka Hilke, Romain Hubert, Clara Calipel and Julie Evain 
Recommendation #1: Strengthen relative minimum capital requirements for the riskiest assets 
I4CE recommends strengthening the minimum capital requirements for the riskiest fossil fuel activities (coal, unconventional energy, new exploration and exploitation) on which there is an international consensus to exit. Risk weights for these activities could be increased from 100% to 250%. To formulate this recommendation, I4CE has conducted an impact study modelling the effects of prudential relief and strengthening factors on banks and transition financing.
Recommendation #2: Incorporate a transition plan requirement for banks
To support the implementation of an orderly transition, I4CE recommends that regulators require “bank transition plans” and climate oversight within the Supervisory Review and Evaluation Process. These transition plans should include a 2050 carbon neutrality target, as well as intermediate GHG emission reduction targets. They should also cover all of bank’s activities: investment lending and investment banking activities. I4CE will publish in Spring a new report on transition plans.

For each sector of activity, banks must take into account a set of risk factors that can potentially combine within the same scenario. While the Stress test pilot exercises use decarbonization scenarios that consider the economy as a whole, I4CE's study explores the value of using more detailed scenarios. To capture the risks to financial institutions, shouldn't we look at how each sector - from cement to real estate - might transform?
Recommendation #4: Clarify the notion of “plausibility” of scenarios and encourage the use of disordered transition scenarios.
Clarifying the notion of “plausible trajectories” is crucial because it conditions the robustness of the approach used. As explored in this I4CE-ILB report (see section 2.5), taking into account “plausible” scenarios can potentially challenge the traditional views or beliefs of financial actors on how the transition can be achieved. It may also cover disorderly transition scenarios, useful for both asset and loan portfolios.
Recommendation #5: Using qualitative information for risk management 
You will find in this report many informations and our latest ideas on physical climate risks. Our research has shown the persistent difficulty of quantifying losses in euros. Faced with this observation, some banks have preferred to focus on classification systems for the level of physical climate risk to which their portfolio is exposed. The result is not perfect, but it allows these banks to start managing this risk without waiting.
 

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