Banks should review their pay and bonus structures to make sure they are consistent with long-term goals on tackling climate change, the world’s most powerful financial regulator said on Wednesday, opening a new front in the battle to mobilise finance against environmental threats.
The Basel Committee on Banking Supervision, a Switzerland-based body that includes regulators from 28 large economies and sets global policies, added the pay proposal to the final version of the climate change framework it has been working on since 2020.
Regulators are trying to ward off threats to the “safety and soundness” of individual banks and the broader financial system by pushing lenders to prepare for climate change’s potential to devastate the industries, countries and individuals to which they lend.
Banks have been frequently criticised for paying lip service to climate change initiatives by proclaiming their green credentials while continuing to barely cut lending to the fossil fuels industry and failing to meet disclosure requirements.
HSBC last month suspended a banker who said regulators were trying to “out-hyperbole the next guy”, remarks that were condemned by the bank but which some believe reveal the industry’s true stance on greening.
Most of the Basel recommendations standardise practices that are already common among many banks, such as assessing how borrowers could be affected by climate change and introducing controls so climate change risks are well managed and understood across sprawling lenders.
One of a handful of new clauses to the global framework says banks’ boards and senior managers should “consider” whether including climate risks in their business plans “may warrant changes to its compensation policies”.
The regulators do not spell out how this would work but it has the potential to result in longer timeframes for payouts. Bank bonus schemes typically run for fewer than seven years while climate change risks can take decades to materialise.
Companies including Starbucks, Apple and Disney have already added environmental factors to their pay plans. Some banks, including NatWest and HSBC in the UK, Citigroup in the US and Société Générale in France, have general measures in their bonus scorecards, such as reducing carbon emissions and boosting sustainable finance.
The final Basel framework also includes a new policy ordering banks to ensure “their internal strategies and risk appetite statements are consistent with any publicly communicated climate-related strategies and commitments”.
In a six-month consultation, industry representatives criticised the committee’s original proposals for relying too heavily on supervisory reviews of banks’ positions, through a process known as Pillar 2, rather than setting hard and fast rules, including favourable capital treatment for environmentally friendly lending.
“Members have suggested that supervisors are not using many of the Pillar 2 measures already available to them,” UK Finance, a lobby group, said in its submission.
The committee said supervisors should consider running “scenario analysis” to see how their banks would be affected by climate change. Several jurisdictions, including the UK and the EU, have already run these kinds of tests.
The framework will come in “as soon as possible”, the committee said.
In its consultation response, the European Banking Federation argued for a “phased-in approach to a way forward”, citing the “current lack of available quality data, harmonised definitions and forward-looking risk methodologies to assess the impact of climate-related risk”.
The American Bankers Association expressed concern about the extent to which banks were being asked to quantify climate-related risks, given how uncertain the outlook was.
Additional reporting by Owen Walker and Stephen Morris
Source: ft.com
