International standard setters are getting ahead on sustainable finance and climate-related issues

If your credit union is still planning the role it may play in providing sustainable economic activities and projects, or even offering products that will further sustainable finance options for members—know that international organizations that set the prudential standards often followed by national-level regulators are well out in front on these matters.

In 2022 alone, the Financial Stability Board (FSB), Bank of International Settlements (BIS) and the BIS’ Basel Committee on Banking Supervision have all issued guidance or launched programs on climate-related risks and sustainable finance issues. Even the newly created International Sustainability Standards Board (ISSB), an agency developed by the IFRS Foundation to establish accounting standards for sustainable finance, issued two proposals to develop disclosure requirements for sustainability and climate-related financial information.

Perhaps most noteworthy, The Basel Committee in June published its Principles for the Effective Management and Supervision of Climate-related Financial Risks. The document forms part of the Committee’s holistic approach to addressing climate-related financial risks to the global banking system and seeks to improve banks’ risk management and supervisors’ practices in this area.

World Council of Credit Unions (WOCCU) International Advocacy commented on this document during the consultation process, noting the principles may result in a significant increase in regulatory burden for smaller, community-based deposit taking institutions, such as credit unions. The principle of proportionality is key to allowing credit unions to address climate-related risks, but in a manner appropriate for their size and complexity.

The Committee included its strong support of the principle of proportionality by stating that:

• The principles seek to accommodate a diverse range of banking systems and are intended to be applied on a proportional basis depending on the size, complexity and risk profile of the bank or banking sector for which the authority is responsible.
• Supervisors should set expectations in a manner proportionate to the nature, scale and complexity of relevant banks’ activities.
• Where appropriate, supervisors should determine that banks have in place a scenario analysis program that is proportionate to their size, business model and complexity, in order to assess the resilience of their business models and strategies to a range of plausible climate-related outcomes.
• Banks should manage climate-related financial risks in a manner that is proportionate to the nature, scale and complexity of their activities and the overall level of risk that each bank is willing to accept.

This strong embrace of proportionality should provide clear direction to credit union supervisors and regulators to engage in the important and necessary process of tailoring these principles in a manner that does not impose an unreasonable regulatory burden on credit unions, while allowing the regulated entities to address climate-related risks.

The Financial Stability Board has also been active—in February publishing a letter from their chair, Klass Knot, to the G20 Finance Ministers and Central Bank Governors, which stated that addressing financial risks from climate change is needed for the market to transition to post-pandemic life.

In its April Work Programme for 2022, the FSB also laid out its own roadmap on the issue, that focuses on:

• building and strengthening the analytical basis for monitoring climate-related risks to financial stability.
• identifying regulatory and supervisory approaches to address climate-related financial risks.
• taking stock of progress in the implementation of the roadmap.

The relatively new International Sustainability Standards Board (ISSB) is also getting involved. The IFRS Foundation established the ISSB at the 2021 UN Climate Change Conference (COP26) to develop a comprehensive global baseline of sustainability disclosures for capital markets, which are compatible with jurisdiction-specific reporting requirements. The objective is for investors, creditors, lenders and others to be able to use such information in conjunction with traditional financial statements to assess an entity’s enterprise value. As part of its work in 2022, the ISSB issued two “exposure drafts” for IFRS Sustainability Disclosure Standards, with the objective of establishing standards that will allow access to high-quality, consistent and verifiable ESG information regarding businesses (and their supply chains), regardless of jurisdiction. Expect the principles of these disclosures to be utilized by prudential bank and credit union financial regulators as part of the reporting process.

Finally, the Bank of International Settlements (BIS) in February launched the Asian Green Bond Fund to aid green project finance investments within the Asia and Pacific region. The fund will support environmental projects, such as renewable energy production and energy efficiency within this region. The open-ended, USD-denominated fund will help channel central bank reserves to green projects in the Asia and Pacific region. Since 2019, the BIS has launched two other green bond funds totaling $3.5 billion for central banks and “other official sector investors.” More information on the Asian Green Bond Fund is available here.

These types of measures are only likely to increase in the coming years. Staying up to date with The World Council Advocate is a good way to ensure your credit union is apprised of the latest developments to keep you ahead of the game on climate-related risks and sustainable finance.