## Annex I. Different Legal Nature of Regulatory Instruments — Selected Examples (wpiea2024193-print-pdf) ## Source details **Canonical URL:** [Annex I. Different Legal Nature of Regulatory Instruments — Selected Examples (wpiea2024193-print-pdf)](https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024193-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2024/english/wpiea2024193-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2024/english/wpiea2024193-print-pdf.pdf.json) --- ### Overview and purpose - Part of the paper "Banking Law and Climate Change: Key Legal Issues". - Purpose: "to fill a gap by advancing the legal understanding on the intersection between climate change and banking law" and to take stock of the role of banking supervisory agencies in pursuit of climate policies under banking laws (paragraph 6). - Structure preview (paragraph 8): - First section: role of banking supervisory agencies on climate policies (objectives, functions, powers, taxonomies, disclosure). - Second section: legal framework for corporate governance of banks. - Third section: conclusions and key considerations. ### Legal mandate of banking supervisory agencies (paras 9–10; Box 1) - Mandate components: - Objectives = purposes for which the agency is legally required to act. - Functions = scope of activities entrusted to the agency to fulfill objectives. - Powers = specific legal tools and means enabling the agency to carry out assigned functions consistent with objectives. - Legal alignment requirement: - Objectives, functions, and powers should be "internally aligned and clearly established." - Misalignment consequences: - Objective without functions and powers → agency unable to pursue it. - Powers without clear objectives/functions → powers may be exercised unintendedly. - Statutory examples (Box 1): - Australia — Article 8 Australian Prudential Regulation Authority Act 1998: duties include balancing "financial safety and efficiency, competition, contestability and competitive neutrality" and "promote financial system stability in Australia." - Peru — Article 347 Ley General del Sistema Financiero y del Sistema de Seguros y Orgánica de la Superintendencia de Banca y Seguros: supervisory and enforcement role to "defend the public’s interests by overseeing the economic and financial soundness" and pursue enforcement actions. - Use of mission statements/strategies: - Emerging practice to clarify contributions to climate policies (examples: Reserve Bank of New Zealand climate change strategy; Japan Financial Services Agency's Strategy for SDGs). - Caveat: such documents do not create legally enforceable commitments and must be read alongside statutory mandates (paragraph 10). ### Objectives of banking supervision and climate change (paras 11–13; Box 2) - Primary objective: - International best practices: "the primary objective of banking supervision should be to promote the safety and soundness of banks and the banking system" (paragraph 11). - Safety and soundness should prevail over other objectives to guide policies and strengthen accountability. - Recognition of climate risks: - Many agencies recognize climate risks impact financial stability; agencies expected to maintain a forward-looking assessment of banks' risk profiles (BCP, Principle 8 references). - Climate risk characterization (Box 2): - Physical: acute or chronic events (e.g., drought, floods, hurricanes, storms) affecting asset values. - Transition: economic adjustment processes (e.g., moving away from fossil-fuel-reliant industries) prompting reassessment of asset values. - Basel Committee definition: climate-related financial risk = "potential risks that may arise from climate change or from efforts to mitigate climate change, their related impacts and their economic and financial consequences." - Idiosyncratic features: - Irreversibility - Far-reaching impact - Foreseeable nature: "there is a high degree of certainty that climate change events are crystalizing." - Dependency on short-term actions: "the magnitude and nature of the impact will be determined by comprehensive, credible, and forward-looking actions taken today." - Long-term materialization - Assessment challenges: uncertainties and potential non-linearities complicate supervisory risk assessment; further research needed. ### Legal grounds for integrating climate into prudential supervision (paras 3, 4, 13) - Compatibility with existing mandate: - Because climate change alters asset values and affects financial soundness/stability, banking laws can support supervisory actions addressing climate risks (paragraph 3). - Distinction from government climate policies: - Government measures to mobilize finance (subsidized lending, credit guarantee schemes, carbon pricing) are distinct from supervisory mandates and should remain separate (paragraph 4). - Supervisory actions grounded in safety and soundness: - A safety-and-soundness objective provides legal basis to integrate climate risks; supervisory agencies have a duty to consider climate change when discharging responsibilities (paragraph 13). - Types of actions feasible without primary law reform: - Monitoring banks' approach to climate risks/opportunities. - Issuing supervisory expectations or binding rules (e.g., on disclosures). - Developing stress tests and scenario analysis. - Other regulatory or supervisory actions where climate risks increase. ### Key legal tenets and administrative law principles (synthesis) - Legal authorization and accountability: - Agencies can only undertake legally authorized actions and are accountable for their legal mandate (paragraph 9). - Actions inconsistent with mandate risk political and legal challenge and may undermine legitimacy. - Risk-oriented rationale: - Banking law’s risk-oriented rationale supports integrating climate-related financial risks, subject to alignment with statutory objectives, functions, and powers (paras 11–13). - Prudential focus: - Mobilizing financial resources is not within supervisory remit; focus should be on safety, soundness, and financial stability (paras 4, 7). - Five administrative law considerations (Prudential instruments — general administrative law considerations): a) Principle of attribution and alignment of powers with stated objectives: - Supervisors must exercise powers "explicitly or implicitly received from law"; judicial review examines connection to underlying goals. - Safety and soundness objective "provide[s] a solid legal basis for actions aimed to address climate risks (e.g., from adaptation)." b) Principle of proportionality: - Powers must be exercised "commensurate with their underlying objective" and tailored to degree of system-wide risks and bank-specific situation. - Reporting requirements may vary in frequency and scope by bank size. c) Precautionary principle: - Supports regulatory action despite data/methodological limitations provided decisions are reasoned and based on best available science. d) Procedural safeguards and judicial deference: - Support supervisory decisions based on qualitative assessments when subject to ex-ante guidance, consultations, impact analyses, and reasoned decisions. e) Time-horizon in risk assessment: - Supervisors should assess material risks within different time horizons; some climate risks are short-run (physical), others long-term (transition). ### Jurisdictional supervisory approaches and rationales (Box 3 examples) - Canada (OSFI): "approaches climate change through the lens of its legislative mandate as the prudential regulator and supervisor". - Germany (BaFin): duty "to detect risks for the financial system and to call on supervised undertakings to take these into account appropriately." - New Zealand (Reserve Bank): deliver mandate holistically including climate change as kaitiaki. - UK (PRA): climate change relevant to objective to promote safety and soundness; PRA ensures firms identify, measure, manage and mitigate climate-related financial risks. - US (OCC): focused "always [on] the safety, soundness, and fairness of national banks...." and developing knowledge by engaging stakeholders. ### Mandate language variations and implications (paras 14–22; para 21) - Supervisory frameworks lacking explicit safety-and-soundness objectives may face legal challenges in defining role on climate policies. - Depositor-protection formulations vs explicit safety-and-soundness formulations raise interpretive questions for long-horizon supervisory responses. - Stand-alone supervisors without safety-and-soundness in mandate may have unclear roles and face legal, political, reputational risks. - Coordination: - Interagency macroprudential fora can help assess macro risks from climate change but are not designed for broader coordination with government climate policies. - Climate-specific interagency arrangements exist in some jurisdictions; coordination instruments must preserve supervisory autonomy. - Public international law: - Applicability of Paris Agreement obligations for supervisors depends on national law interpretation; some banking laws refer to international obligations (example: Maltese authority must "have regard" to Malta’s international commitments). - Government recommendations to supervisors: - Should be non-binding, preserve autonomy, include prior consultation and ex-post publication to enhance transparency and clarify roles. ### Decision-making arrangements, capacity, and governance (paras 24–25) - Supvervisory governing bodies should be adequately informed on policy impacts on solvency, liquidity, profitability of banks and develop capabilities to evaluate financial stability consequences. - Boards of supervisors "should be required to have, collectively, adequate capacity to design and to assess climate measures appropriately and proportionally." - Internal allocation models adopted by agencies: - Dedicated units (examples: ECB, Bank of Thailand, OCC). - Hubs or centers (examples: Bank of England, Bank of Greece). - Commissions (ACPR in France). - Internal networks (Monetary Authority of Singapore). - Legal frameworks should clearly assign roles and responsibilities among agency bodies to prevent gaps and overlaps. ### Integration into prudential frameworks, progress, and standard-setting - Integration often achieved via secondary instruments; primary law changes rarely necessary. - Prudential instruments aim to "foster prudent risk taking and management by banks" rather than directly reallocate resources. - Multilateral cooperation needed to: - Develop "common principles and good practices" for comparability of climate-related financial risks. - Build climate information architecture for "high-quality, reliable, and comparable data." - Harmonize climate disclosure standards and taxonomies. - International standard setters: - BCBS revised Core Principles in 2024 to include explicit references to climate change. - FSB roadmap covers disclosures, data, analytical tools, and integration into supervisory/regulatory approaches. - ISSB issued IFRS S1 and IFRS S2; IOSCO endorsed ISSB standards. - Basel Committee consulted on a Pillar 3 disclosure framework for climate-related financial risk. ### Market entry, licensing, and prudential instruments - Market entry: - Supervisors may legally consider climate concerns when assessing governance and risk management of proposed banks. - Some laws allow refusal of license based on "economic, financial and commercial needs of the country or market to be served." - Other laws "explicitly preclude considering any other matter not specifically prescribed among licensing conditions." - Prudential instruments addressing climate risks — key supervisory expectations: - Business model and strategies: use stress testing to test resilience; transition to net zero may render some business models unviable (Bank of England CBES 2021 reference). - Governance: allocation of duties, responsibilities, and decision-making processes; APRA and ACPR provided guidance. - Risk management: integrate climate risks into risk appetite, controls, and capital adequacy assessments. - Concentration risk: supervisors expect consideration of concentration by product, region, and sector (EBA). - Regulatory capital: challenges in Pillar 1 calibration; many supervisors expect climate risks in Pillar 2 and ICAAP (examples: ECB, Australia, Hong Kong, UK, Brazil). - Disclosure: climate disclosure incentivizes integration and informs exposure assessment and regulatory capital adequacy. ### Legal nature and interaction of instruments - Most jurisdictions use soft-law instruments ("guidelines" or "guidance"); hard-law instruments also used (example: ICAAP in Brazil). - Importance for banks to understand legal nature and whether instruments are binding. - Prudential instruments and broader legal infrastructure (corporate, bankruptcy, contract, competition, consumer protection law) can be mutually reinforcing. - Contract law tools: - Supervisors may prescribe contractual clauses requiring borrower compliance with environmental obligations; supervisors must ensure enforceability under civil/commercial law. ### Taxonomies — role, limits, and legal design (Box 6, Box 8; paras 40, 43–44) - Purpose: define "environmentally sustainable", "low-carbon" ('green'), and "carbon intensive" ('brown') assets/activities. - Limitations: - "It has not yet been scientifically established that low carbon assets pose lower financial risks than carbon intensive assets." - Taxonomies are not a risk management tool and "cannot offer a precise quantification of climate-related risks and risk exposures." (NGFS (2022c), at page 19.) - Utility: - Aid supervisors to understand banks’ asset sustainability profiles and identify exposure to transition risk. - Transition taxonomies signal activities aligned with transition goals and facilitate funding for transitioning firms. - Comparative examples (summary of Table 1): - EU Sustainable Finance Taxonomy — Adopting body: Legislature — Legal nature: EU Regulation — Binding. - Green Industry Guidance Catalogue (China) — Adopting body: National Development and Reform Commission — Legal nature: Guidelines — Binding (per table). - Green Taxonomy (Bangladesh) — Adopting body: Bangladesh Bank — Legal nature: Regulation — Binding. - Principle-Based Taxonomy (Malaysia) — Adopting body: Bank Negara Malaysia (with Joint Committee on Climate Change) — Legal nature: Guide — Non-binding. - Multiple taxonomies: - Misalignments can weaken standardization and create inconsistencies; recommendation to aim for coherent taxonomy or set of coherent taxonomies supported by government. - Legal form and enforcement: - Taxonomies may be binding or non-binding; as classification systems they typically do not by themselves create enforceable obligations but can inform other enforceable requirements (e.g., disclosure). - Sanctions for non-compliance occur only insofar as taxonomy use causes breach of another enforceable obligation. - Design and revisions: - Need legal clarity on entry into force, transitional arrangements, and periodic review processes. - Example: EU provision allowing bond issuances to align with previous criteria for 7 more years after technical screening changes, subject to transparency. ### Climate disclosures, transition plans, and supervisory roles (paras 51, 73) - Disclosures: - Central policy instrument; many jurisdictions have introduced climate disclosure regimes for banks under corporate or prudential law. - FSB’s TCFD Recommendations include "governance," "risk management," "strategy," and "metrics and targets." - ISSB issued IFRS S1 and IFRS S2; IOSCO endorsed the ISSB’s standards. - Pillar 3 disclosures under the Basel framework can be used to cover climate risks; EU adopted Pillar 3 ESG risk disclosures in CRR. - Legally binding transition plans: - Emerging tool: banks disclose plans aligning business with jurisdictional net zero targets with milestones until 2050. - "Legally binding" often refers to preparation/disclosure obligations rather than compelling undertaking of described activities. - Legal basis and enforcement challenges: linking transition plans to safety-and-soundness provides a prudential basis; otherwise legal challenges may arise. - Confidentiality and disclosures: - Disclosure design must respect confidentiality duties to customers. - Remaining challenges: - Taxonomies under development and more focused on defining sustainability than quantifying risks. - Materiality differences across regimes; some jurisdictions introduce "double materiality." - Multiple overlapping regimes risk misalignment and complexity. ### Corporate governance of banks and climate change (paras 59–68) - Corporate governance principles: - Boards should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and shareholders, taking into account stakeholders (OECD (2023), Principle V.A.). - Basel Committee Guidelines: primary objective of corporate governance should be safeguarding stakeholders’ interests in conformity with public interests on a sustainable basis. - Duties of directors: - Duty of care: requires board members to act prudently and be informed; climate risks affecting safety and soundness fall within duty of care. - Duty of loyalty: complex in climate context where stakeholders’ interests diverge; scope depends on corporate and banking law frameworks. - Governance models and responsibilities: - Conceptual convergence: core objective across models is safety and soundness. - Boards retain ultimate responsibility for strategy, financial soundness, governance, and risk management; duty to understand and integrate climate-related risks with a forward-looking approach. - Legal mechanisms to integrate climate perspectives: - Shareholders can use proxy voting, resolutions, and by-law amendments to influence boards. - Some jurisdictions introduced climate references in primary law (e.g., EU CRD amendments, Art. 91(2b) reference noted). - Allocation of responsibilities and fit-and-proper standards: - Boards should have collective capacity; supervisors may integrate climate considerations into fit and proper assessments. - Example legal text: Art. 91(2b) of the EU CRD (Directive 2013/36/EU), as amended in 2024, requires management bodies to have collective knowledge, skills and experience "taking into account ESG factors." - Remuneration: - Remuneration design should be sensitive to long-horizon risks and may allow deferral of variable compensation consistent with exposures. - Supervision of governance: - Supervisors assess board fulfilment of climate-related responsibilities where risks affect safety and soundness, while taking care not to unduly interfere with business judgment. - Selected supervisory practices (Box 10 highlights): - UK (PRA): expects proportionate response, board oversight with long-term view, adequate resources and expertise, and engagement on disclosures (e.g., TCFD). - Australia (APRA): board ultimate responsibility, ensure understanding and periodic reevaluation, incorporate climate into risk appetite where material, and set senior management responsibilities. ### Time-horizon issues and prudential timeframes (Box 6) - Banks typically define business model and strategy over up to "3 to 5 years." - Licensing assessments and capital planning horizons are often "2 to 3 years." - Supervisors are seeking longer horizons: - beyond 5 years (ECB), - minimum 10 years (Hong Kong), - in the order of decades (UK). - Stress tests: scenarios potentially extending to 2030 or 2050 or beyond (Australia). ### Enforcement, early intervention, and supervisory toolkit (paras 51–52) - Where guidance is not met, failure may be considered when assessing compliance with binding rules under broader supervision regimes. - Enforcement mechanisms under banking law may include warnings, cease and desist orders, and monetary fines. - Early intervention frameworks should preserve supervisory flexibility; automatic triggers may limit this flexibility in extreme weather events. ### Key considerations and policy recommendations (Banking Law and Climate Change: Key Considerations Table) - Legal Mandate: 1. Determine whether and how pursuit of climate policies falls within mandate anchored on safety and soundness; where applicable, take steps to pursue them. #9, 13 2. Mission statements can strengthen public understanding and should align with legal provisions. #10 - Objectives: 3. Analyze applicability of Paris Agreement obligations to supervisory activities. #17 4. Government recommendations taken into account should preserve supervisory autonomy and be guided by transparency. #20 5. Additional supervisory roles must remain subordinated to safety and soundness. #22-23 6. Design decision-making arrangements to integrate climate considerations. #24 7. Board of supervisory agency should have collective capacity for climate measures. #25 - Functions and Powers: 8. Assess how administrative law principles affect climate policies: attribution, proportionality, precautionary principle, procedural safeguards, and time-horizon. #31 9. Evaluate standalone vs combined regulatory instruments addressing climate risks. #33 10. Clarify legal nature of prudential instruments on climate and enforcement implications. #34 11. Consider interaction between prudential instruments and broader legal infrastructure. #35 12. Assess role in taxonomy development in light of mandate. #43 13. Determine whether taxonomy classifications are relevant for supervisory assessments and binding prudential requirements, and potential enforcement role. #43 14. Design taxonomies with legal certainty and periodic review. #44 15. Ensure banking laws do not impede supervisory flexibility (e.g., automatic intervention triggers). #52 - Banks’ Corporate Governance: 16. Determine legal avenues for interpreting boards’ duties with respect to climate over long-term. #59 17. Clarify boards bear ultimate responsibility and maintain monitoring mechanisms. #61, 62, 64 18. Designation of responsibilities across bank decision-making bodies and executive management to avoid gaps/overlaps. #63, 64 19. Integrate climate considerations into fit and proper assessments and remuneration policies where appropriate. #65, 66 20. Assess appropriateness of board evaluation of climate change material risks. #67 21. Evaluate whether disclosures and external audits provide input on boards’ responsibilities. #67, 68 ### Conclusions (paras 69–72) - 69: Supervisory climate actions must be consistent with legal framework; supervisors should incorporate climate considerations where they affect bank soundness, operating within legally assigned mandate aligned with best practices. - 70: Many supervisors have adopted measures within current legal regimes; recent Basel Core Principles revisions reinforce supervisors’ ability to integrate climate risks. Administrative law principles and appropriate safeguards should guide actions despite quantification uncertainties and differing time horizons. - 71: Legal concerns arise if supervisory climate actions conflict with safety and soundness. In frameworks lacking clear safety-and-soundness objectives, supervisors may face role-definition challenges; additional responsibilities must remain subordinated to the main objective to avoid legal, political, reputational risks. - 72: Taxonomies are important policy instruments but limited for risk quantification; variations in legal form, scope, and governance create implementation challenges. Supervisors need clarity on role in taxonomy development and potential back-up powers where taxonomy classifications diverge from prudential considerations. _International Monetary Fund — Banking Law and Climate Change: Key Legal Issues (Working Paper No. WP/2024/193; selected excerpts from wpiea2024193-print-pdf)_. ### Annex I. Different Legal Nature of Regulatory Instruments-Selected Examples ........................................ 42 ### Annex I. Different Legal Nature of Regulatory Instruments-Selected Examples ........................................ 42 ### Overview - This content is part of the paper "Banking Law and Climate Change: Key Legal Issues" and frames the legal intersection between climate change and banking supervision. - Purpose of the paper: "to fill a gap by advancing the legal understanding on the intersection between climate change and banking law" and to take stock of the role of banking supervisory agencies in pursuit of climate policies under banking laws (paragraph 6). - Structure preview (paragraph 8): first section examines the role of banking supervisory agencies on climate policies (objectives, functions, powers, taxonomies, disclosure); second section assesses the legal framework for corporate governance of banks; third section offers conclusions and key considerations. ### Legal mandate of banking supervisory agencies (paragraphs 9–10; Box 1) - Mandate definition: - A mandate comprises three interlinked legal aspects: objectives, functions, and powers (Box 1). - Objectives: purposes for which the agency is legally required to act. - Functions: scope of activities entrusted to the agency to fulfill objectives. - Powers: specific legal tools and means enabling the agency to carry out assigned functions consistent with objectives. - Legal alignment requirement: - For effectiveness, objectives, functions, and powers should be "internally aligned and clearly established." - Misalignment consequences: - Objective without functions and powers → agency unable to pursue it. - Powers without clear objectives/functions → powers may be exercised unintendedly. - Examples of statutory formulations (Box 1): - Australia—Article 8 Australian Prudential Regulation Authority Act 1998: duties include balancing "financial safety and efficiency, competition, contestability and competitive neutrality" and "promote financial system stability in Australia." - Peru—Article 347 Ley General del Sistema Financiero y del Sistema de Seguros y Orgánica de la Superintendencia de Banca y Seguros: broad supervisory and enforcement role to "defend the public’s interests by overseeing the economic and financial soundness" and pursue enforcement actions. ### Objectives of banking supervision and climate change (paragraphs 11–13; Box 2) - Primary objective: - International best practices: "the primary objective of banking supervision should be to promote the safety and soundness of banks and the banking system" (paragraph 11). - Law should clearly indicate that safety and soundness prevail over other objectives to guide policies and strengthen accountability. - Recognition of climate risks: - Many banking supervisory agencies recognize climate risks impact the financial stability objective, though understanding remains evolving (paragraph 12). - Agencies expected to maintain a forward-looking assessment of banks' risk profiles and address risks emanating from banks and the banking system (BCP, Principle 8 references). - Climate risk characterization (Box 2): - Two main categories: - Physical: acute or chronic climate events (e.g., drought, floods, hurricanes, storms) affecting asset values and valuation challenges. - Transition: economic adjustment process (e.g., moving away from fossil-fuel-reliant industries) where legal/regulatory changes, technological innovation, or market sentiment may prompt reassessment of asset values. - Basel Committee definition: climate-related financial risk = "potential risks that may arise from climate change or from efforts to mitigate climate change, their related impacts and their economic and financial consequences." - Idiosyncratic features of climate risks (as listed): - Irreversibility: mounting evidence of abrupt and irreversible consequences. - Far-reaching impact: can affect all countries and economic agents. - Foreseeable nature: "there is a high degree of certainty that climate change events are crystalizing." - Dependency on short-term actions: "the magnitude and nature of the impact will be determined by comprehensive, credible, and forward-looking actions taken today." - Long-term materialization: materialization of climate change risk would occur in the long term. - Assessment challenges: - Despite foreseeability, uncertainties and potential non-linearities (e.g., location, frequency, severity) complicate supervisory risk assessment. - Basel Committee indicates further research is needed to better understand climate risk drivers and transmission channels. ### Legal grounds for integrating climate into prudential supervision (paragraphs 3, 4, 13) - Compatibility with existing mandate: - Argument: because climate change alters value of physical and financial assets and affects financial soundness and financial stability, banking laws can support supervisory actions addressing climate risks within existing mandates (paragraph 3). - Distinction from government climate policies: - Government policies to mobilize finance (e.g., subsidized lending, credit guarantee schemes, carbon pricing) are distinct from supervisory agency mandates and should remain separate (paragraph 4). - Supervisory actions grounded in safety and soundness: - A safety-and-soundness objective provides legal basis to integrate climate risks into supervision (paragraph 13). - Duty implied: supervisory agencies have a duty to consider climate change when discharging supervisory responsibilities. - Types of actions taken by supervisory agencies without primary law reform (paragraph 13): - Monitoring banks' approach to climate risks and opportunities. - Issuing supervisory expectations or binding rules (e.g., on disclosures). - Developing stress tests and scenario analysis. - Other regulatory or supervisory actions in case of increased climate risks. - Use of mission statements/strategies (paragraph 10): - Emerging practice: issuance of mission statements or strategy documents to clarify contributions to climate policies (examples: Reserve Bank of New Zealand climate change strategy; Japan Financial Services Agency's Strategy for SDGs). - Important caveat: such documents do not create legally enforceable commitments and must be read alongside statutory mandates. ### Key legal considerations and tenets (synthesis from multiple paragraphs) - Legal authorization and accountability: - Banking supervisory agencies can only undertake legally authorized actions and are accountable for performance of their legal mandate (paragraph 9). - Actions inconsistent with legal mandate risk political and legal challenges and may undermine legitimacy. - Risk-oriented approach: - Banking law’s risk-oriented rationale supports supervisory integration of climate-related financial risks, subject to alignment with statutory objectives, functions, and powers (paragraphs 11–13). - Role of corporate governance: - Corporate governance mechanisms in banks are "a key instrument framing the integration of climate change risks and opportunities" into bank activities (paragraph 5). - Prudential focus: - Mobilizing financial resources is not within supervisory remit; supervisory focus should be anchored on safety, soundness, and financial stability while integrating climate considerations (paragraphs 4, 7). *Source: IMF Working Paper: "Banking Law and Climate Change: Key Legal Issues" (selected excerpts, Annex I title and surrounding sections).* ### Box 3. Examples of Approaches followed by the Banking Supervisory Agencies to Address Climate Risks ### Box 3. Examples of Approaches followed by the Banking Supervisory Agencies to Address Climate Risks ### Jurisdictional approaches and supervisory rationales - Canada: OSFI “approaches climate change through the lens of its legislative mandate as the prudential regulator and supervisor”. Its role is to facilitate the preparedness and resilience of supervised institutions to navigate uncertainty related to climate change, contributing to continued public confidence in the Canadian financial system. - Germany: BaFin: “As a financial supervisory authority, it is our duty to detect risks for the financial system and to call on supervised undertakings to take these into account appropriately. To do this, we must be able to thoroughly examine, quantify and understand the complexities of sustainability risks”. - New Zealand: Reserve Bank of New Zealand aims to deliver on its mandate holistically by looking at a broad range of challenges and opportunities impacting its effectiveness as kaitiaki (guardians), including the economic impacts of COVID-19, climate change, financial inclusion and other areas. - UK: PRA’s primary objective is to promote the safety and soundness of the firms it regulates. Climate change is relevant to this objective as the regulated entities are exposed to climate related financial risks; the PRA is taking action to ensure firms identify, measure, manage and mitigate the climate related financial risks they face, consistent with existing supervisory and regulatory principles. - US: OCC interprets its role as focused “always [on] the safety, soundness, and fairness of national banks.... Our role is to ensure that those financial institutions understand the risks they face and have robust risk management to control and monitor the risks and their impacts. Accordingly, in common with others, we are developing our knowledge of the risks in this area by engaging with relevant stakeholders.” ### Legal mandate issues and implications for supervisory action (paras 14–22) - Bank supervisors without a clear safety and soundness objective in their legal framework may face challenges defining their role on climate policies; several supervisors consider their mandate presents no specific legal barriers to address climate risks within existing frameworks. - Depositor-protection formulations versus explicit safety-and-soundness formulations raise interpretive questions about support for long-time-horizon supervisory responses to climate change, given the short-term nature of depositor claims. - Stand-alone supervisors that do not include safety and soundness in their legal mandate may have unclear roles on climate change, exposing them to legal, political, and reputational risks. - Governmental climate policies (e.g., a carbon tax or an emission trading scheme) can reallocate capital across industries and affect banks’ risk management; banking supervisory agencies must assess implications of governmental climate policies on the safety and soundness of banks and the banking system. - Coordination mechanisms: - Existing interagency fora for macroprudential policies could serve to assess and tackle macro risks arising from climate change but are not designed for broader coordination between supervisory policies and government climate policies. - Some jurisdictions have established climate-specific interagency coordination arrangements involving financial sector regulators; legal instruments establishing coordination should not undermine the autonomy of the banking supervisory agency or require departure from core objectives. - Public international law and Paris Agreement considerations: - Governments must determine, submit, and update nationally determined contributions under the Paris Agreement. - Applicability of Paris Agreement obligations for banking supervisors depends on national constitutional and legal interpretation; some banking laws refer to international obligations (example: Maltese authority must “have regard” to Malta’s international commitments). - The applicability of obligations under the Paris Agreement for banking supervisors warrants national legal analysis for legal certainty and accountability. - Support for government economic policies: - Central bank laws often list support to governmental economic policy as an objective; this may inform central banks acting as supervisors. - Explicit support objectives are less common for stand-alone supervisory agencies, though inferred mandates exist in some jurisdictions (examples cited: Latin America, Japan, Turkey). - Whether an objective to support government policies provides legal ground to adopt climate policies depends on statutory interpretation and possible government clarification; environmental legislation can also require regulatory alignment with environmental protection and management principles (example: Indonesia Law 32 of 2009, Articles 42 and 44). - Government recommendations to supervisors: - Recommendations may be taken into account without weakening operational autonomy; such instruments should preserve autonomy, be non-binding, and avoid altering the legally assigned objective of the supervisor. - Prior consultation and ex-post publication (including a public response by the supervisor on compliance intentions) can enhance transparency and clarify distinct roles of government and banking supervisor. ### Variations in mandate language and interpretive consequences (para 21) - Use of “sustainability” in supervisory objectives has different interpretations and is not necessarily synonymous with climate-related objectives: - Indonesia: objective includes “a financial system growing in a sustainable and stable manner”. - Malaysia: supervisory objective is “financial stability conducive to the sustainable growth of [the economy]”. - The link between these formulations and climate change is not evident; “sustainability” may not be limited to climate issues. - Financial sector or market development objectives (examples: Chile, Kazakhstan, Poland, Turkey) could be interpreted to support policies that foster efficient markets in the context of climate mitigation (e.g., transparency of climate risk information), especially for integrated supervisors overseeing banking and capital markets. ### Legal risks and recommended legal design principles (paras 22 and related) - Any additional roles assigned to supervisory agencies should remain subordinated to the primary safety-and-soundness objective. - International good practices recommend that broader responsibilities be subordinated to the primary objective of safety and soundness. - Legal concerns arise if supervisors adopt measures to mitigate climate change (e.g., mandating green lending) that conflict with safety-and-soundness obligations, particularly if no risk differentials between low-carbon and carbon-intensive assets are found. - Supervisory action should be guided by the existence of climate risks; where climate risks are identified, supervisors have a foundation for action within prudential risk-management mandates. *Source: Box 3. Examples of Approaches followed by the Banking Supervisory Agencies to Address Climate Risks, IMF Working Papers, Banking Law and Climate Change: Key Legal Issues.* ### 23. The prioritization of a safety and soundness objective serves as a key legal mechanism to ### 23. The prioritization of a safety and soundness objective serves as a key legal mechanism to ### Legal mechanism, autonomy, and accountability - The supremacy of the safety and soundness objective, when firmly enunciated in law, "grants a clear and binding legislative instruction that safeguards the autonomy of the banking supervisory agency, including when governments incorporate climate change mitigation into financial sector policies." - Supremacy of the objective "enhances its accountability in case of judicial review of supervisory actions or for public scrutiny over them." - Distinguishing the roles of government and bank supervisors: - "is key to an effective implementation of climate policies in a harmonious and synergic fashion," - "helps to ensure legitimacy and avoids detrimental effects on financial stability, while mitigating legal and reputational risks." - Clarifies supervisor role when fiscal policies for climate change mitigation involve state-owned banks (e.g., through subsidized or directed lending). ### Decision-making arrangements, capacity, and governance - Supervisory governing bodies "should be adequately informed on the impact that specific policies or events may have on the solvency, liquidity, and profitability of banking institutions and on the sector as a whole" and "should develop sufficient capabilities to evaluate the potential financial stability consequences." - Supervisors should ensure "they have adequate resources and capacity to effectively assess the management by banks of climate-related financial risks." (Basel Committee recommendation referenced: Principle 17) - The board of a banking supervisory agency "should be required to have, collectively, adequate capacity to design and to assess climate measures appropriately and proportionally." - Integration of climate policies "may not entail specific legal underpinnings in the primary law" but boards still should have collective capacity. ### Internal allocation of responsibilities and organizational models - Agencies are adopting different models to integrate climate change into their internal structure: - dedicated units (examples: ECB, Bank of Thailand, and OCC in the US), - hubs or centers (examples: Bank of England, Bank of Greece), - commissions (example: the ACPR in France), - internal networks (example: Monetary Authority of Singapore). - "The specific functions and reporting lines vary across jurisdictions." - Legal frameworks should "clearly assign roles and responsibilities among the different bodies of the agency, preventing gaps and overlaps." - Integration should "preserve the overall role of the main governing bodies of bank supervisors and their different function (e.g., policy making, oversight, executive management)." - Allocation of functions and reporting lines may be effected through changes in primary law or more frequently via secondary legislation or regulation (e.g., charters of supervisory agencies). ### Functions and powers: scope and implementation - Definitions: - Functions = the scope of activities the authority is responsible for to achieve its objectives ("the what"). - Powers = the specific legal tools available to implement functions ("the how"). - Powers "confer legal capacity to carry out the functions in a manner that is consistent with the stated objective." - The section examines integration of climate change into three key supervisory functions: market entry, regulation (including taxonomies and disclosure), and supervision. ### Integration into prudential frameworks and legislative implications - "The integration of climate change considerations into banking prudential frameworks may not always entail changes in the primary law." - "Apart from a few recent examples, banking laws do not include explicit provisions on climate change." - Many supervisory agencies "have been able to develop policies and to issue secondary instruments related to climate change without any amendment in their primary legislation." - Prudential powers are intended to "foster prudent risk taking and management by banks" rather than "directly pursue the objective of an efficient allocation of resources." - Several banking laws "explicitly recognize" supervisors must observe bank autonomy in managing their affairs. - Prudential instruments in the area of climate are informed by this general approach. ### Progress, multilateral cooperation, and information architecture - Integration of climate risks into prudential frameworks is "work in progress" and "multilateral cooperation is essential for a global response." - Banks are "at an early stage in developing their approach to climate risks," while supervisors "are focused on the integration of climate risks into banks' governance and risk management." - NGFS guide recognizes "the relevance and flexibility of existing good practices to accommodate supervisory responses to climate risks." - BCBS concluded its core principles were "sufficiently broad to accommodate additional supervisory responses to climate financial risks." - Revisions to core principles in 2024 include explicit references to climate change. - There is a need to develop: - "common principles and good practices to pursue the comparability of climate-related financial risks," - "building climate information architecture for high-quality, reliable, and comparable data," - "harmonized and consistent climate disclosure standards, and climate finance taxonomies and other classification approaches to align investments with climate goals." - International standard setters and soft law "can play a critical role in this convergence." - IMF plays a role "through its analytical work and by bringing different perspectives of its membership" and in capacity building to support jurisdictions. ### Cross-border dimensions and coordination - Domestic supervisory approaches to climate risks can have cross-border spillovers: "create regulatory arbitrage opportunities, or affect financial flows." - Example risk: "differences in supervisory review processes over Pillar 2 capital requirements to capture climate risks may impact the location and amount of additional loss absorbing capacity across a group." - "Undue divergences across jurisdictional requirements on disclosures can affect the global comparability and interoperability of climate-related disclosures." - Cross-border coordination mandates in banking laws, if aligned with best practices, "offer a sufficient legal basis for cooperation among supervisors." ### Boxed summary: International standard setting activity (high-level) - FSB roadmap covers four interrelated areas: - (i) climate-related disclosures based on TFCD recommendations; - (ii) comprehensive, consistent, and comparable data to monitor and assess climate-related financial risks; - (iii) analytical tools used to assess climate-related vulnerabilities; - (iv) integration of climate-related risks to supervisory and regulatory approaches that address financial risks. - BCBS (June 2022) developed principles for management and supervision of climate-related financial risks. - Revisions in 2024 to Basel Core Principles: - introduce a definition of climate-related financial risks; - require supervisors to consider climate-related financial risks in supervisory methodologies and processes (Supervisory approach (CP8) and Supervisory reporting (CP10)); - Revised CP15 requires banks to have comprehensive risk management policies and processes for all material risks (including climate-related financial risks) over varying time horizons; - Adjustments to Internal control and audit (CP26) require banks to consider climate-related financial risks as part of their internal control framework. - ISSB issued IFRS S1 on general sustainability-related disclosures and IFRS S2 on climate-related disclosures. - IOSCO endorsed the ISSB’s Financial Disclosures Standards as a global framework. - Basel Committee consulted on a Pillar 3 disclosure framework for climate-related financial risk, to build on and complement ISSB standards. ### Market entry of new banking institutions - Banking authorities' wide discretion "arguably allow[s] them to incorporate climate concerns into their licensing decisions." - Supervisory assessment of a proposed bank's governance and risk management can legally factor in climate risks. - In some jurisdictions, even when a bank appears to have sound governance and sufficient financial resources, a license application can be refused based on "the economic, financial and commercial needs of the country or market to be served." - In contrast, some laws "explicitly preclude considering any other matter not specifically prescribed among licensing conditions," which "seems conducive to legal certainty and even-handedness" while still allowing assessment of climate integration into business strategy, corporate governance, and risk management. ### Prudential instruments — general administrative law considerations - Five common administrative law considerations relevant to supervisory use of prudential powers for climate policies: a) Principle of attribution and alignment of powers with stated objectives: - Supervisors must exercise powers "explicitly or implicitly received from law." - Judicial review examines "whether this is used in connection with the underlying goals." - A safety and soundness objective "provide[s] a solid legal basis for actions aimed to address climate risks (e.g., from adaptation)." - Supervisors should consider whether use of existing powers for certain climate policies (e.g., mitigation) complies with stated objectives. - Example: Swiss FINMA focuses "on the associated potential financial risks and client protection issues." Danish FSA also exercises supervision to ensure products labeled as sustainable can be classified as such—a mandate legally assigned to the FSA. b) Principle of proportionality: - Requires prudential powers to be "exercised in a manner commensurate with their underlying objective, by tailoring them to the degree of system-wide risks and to the idiosyncratic situation of banks." - Supervisory requirements should be commensurate "to the size, business and risk profile of banks." - Supervisors should have authority to exercise judgment and rectify assessments. - Reporting requirements may be observed "with lower frequency and reduced scope" for smaller banks but still appropriate to manage climate risks. c) Precautionary principle: - Recognizes "challenges in the availability, comparability, and reliability of climate-related data and in the development of appropriate methodologies." - Several supervisors have been cautious given evolving understanding of climate risks, timelines, and magnitudes. - The precautionary principle, embedded in administrative laws of many jurisdictions, supports regulatory action despite limitations in determining exact impact, provided decisions are reasoned and based on best available science. *Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024193-print-pdf.pdf* ### conclusion. ### conclusion. ### Procedural safeguards and judicial deference - Administrative law principles can support supervisory decisions on climate where those decisions are based on qualitative assessments and available data and methodologies, provided they are subject to procedural safeguards such as: - ex-ante guidance and consultations with industry, - impact analyses, - reasoned decisions. - Due process safeguards may be explicit in law or inferred from standards of judicial review; adherence to procedural safeguards may affect the degree of deference by courts to supervisory decisions. ### Quantification limits and supervisory judgment - Banking laws do not require exact quantification of risks; financial policy is inherently prone to uncertainties. - Post-global financial crisis frameworks recognize quantitative assessments may not fully capture risks to which banks and the banking system are exposed and recommend a forward-looking supervisory judgement on qualitative aspects as well. ### Time-horizon in risk assessment and pursuing financial stability - Banking supervisory agencies should assess material risks, including climate-related ones, within their different time horizons. - Some climate risks (physical) can emerge in the short run; other types (especially transition risks) require combining business-as-usual risk management with structural, long-term considerations due to high uncertainty around timing. - Banking laws rarely establish a time horizon for risk assessments; financial stability presents time inconsistencies and trade-offs between short-term benefits and long-term risks, entailing a continuum of actions. - It can be argued that supervisors may adopt policies to address material risks that could crystalize in the long-term, including climate risks, subject to administrative law principles and due process requirements. - Some jurisdictions have amended primary supervisory law to reinforce a long-term approach to climate risk management (for example, Articles 73(1), 74(1), 76(1), and 87a of the EU’s Capital Requirements Directive (Directive 2013/36/EU), as amended in 2024, require institutions to include short, medium and long-term horizons of ESG risks). ### Box 6 — Prudential time horizons and climate change (key points) - Banks mostly define business model and strategy over a time horizon of up to 3 to 5 years. - Licensing requirements and assessments of financial strength may adopt similar horizons; it is not immediately evident how licensing authorities can factor climate risk exposures that could materialize in the long-term for the bank or significant shareholders. - Supervisory stress tests and credit risk analyses are typically short to medium term; risk weightings under the standardized model do not recognize long-term risks from climate change; typical capital planning horizon for banks is usually 2 to 3 years. - Supervisors are seeking to expand horizons to capture longer-term risks (including climate-related financial risks) across risk identification and assessment, capital and liquidity planning, and scenario analysis (revised Basel Core Principles, Principle 15 on Risk Management). - Prudential instruments emphasize a long-term perspective; examples of indicative timescales expected by supervisors include: - beyond 5 years (ECB), - minimum 10 years (Hong Kong), - in the order of decades (UK). - Stress testing requirements expect consideration of climate-related scenarios potentially extending to 2030 or 2050 or beyond (Australia). ### Prudential instruments addressing climate risks - A growing number of banking supervisors have issued or plan instruments to integrate climate change risks into prudential frameworks; most aim to recommend banks develop a strategic approach to climate risks. - Scope varies: some guidelines cover all climate risks and activities; others apply only to credit risk or certain lending categories. - Key areas supervisors expect or require banks to incorporate climate risks include: - Business model and strategies: use stress testing findings to test business model resilience; transition to net zero can significantly impact some sectors and compel banks to adapt or become unviable (Bank of England Climate Biennial Exploratory Scenario 2021). - Governance: allocation of duties, responsibilities, and sound decision-making processes; some authorities (e.g., APRA, ACPR) provided further governance guidance. - Risk management: banks should integrate climate risks into risk appetite, processes, and policies; themes include adapting risk limits and controls and integrating climate into capital adequacy assessments. - Concentration risk: limits for large exposures and single counterparties do not specifically factor climate risks; some supervisors have high-level expectations for considering concentration by product, region, and sector (EBA). - Regulatory capital: challenges in calibrating Pillar 1 risk weightings due to data gaps and methodological uncertainty; many supervisors expect incorporation of climate risks into Pillar 2 and ICAAP (examples: ECB, Australia, Hong Kong, UK, Brazil). - Disclosure: climate disclosure can incentivize integration of sustainability, enable market discipline, and inform assessment of exposure and regulatory capital adequacy. ### Legal nature and interaction of instruments - Most jurisdictions have adopted soft-law instruments ("guidelines" or "guidance") whose non-binding nature is explicit or inferred; hard-law instruments have also been used (for example, ICAAP in Brazil). - It is important that banks understand the legal nature of instruments and whether binding requirements may apply. - Prudential instruments and broader legal infrastructure can be mutually reinforcing: climate laws and international agreements enacted into domestic law affect corporate, bankruptcy, contract, competition, and consumer protection law relevant to banks. - Legally binding sustainability reporting standards for corporate clients could assist banks in assessing portfolio exposure and developing transition plans. ### Use of contract law and enforceability - Supervisors may prescribe inclusion of contractual clauses in deposit, loan, or outsourcing contracts requiring borrower compliance with environmental and social legislation, environmental risk management plans, and reporting. - Banks may be expected to treat material non-compliance as default; when leveraging contractual law, supervisors must ensure prescribed clauses are valid and enforceable under civil and commercial law. ### Taxonomies - Well-defined taxonomies are necessary to support climate policies by defining concepts such as “environmentally sustainable”, “low-carbon” (‘green’), and “carbon intensive” (‘brown’) assets, activities, technologies, production processes, products, and services. - Clear and widely accepted taxonomies can: - contribute to consistency in supervisory standards and climate risk management, - underpin disclosure, - limit opportunities for regulatory arbitrage (e.g., ‘greenwashing’), - help direct financial flows toward sustainable development priorities, - anchor supervisory actions on sound scientific premises and buttress legitimacy. - Legal form and issuing authority of taxonomies vary; many are subsidiary legislation. When taxonomies cover both financial and non-financial activities (e.g., EU’s “Taxonomy Regulation”), primary laws may be more appropriate to ensure application to non-financial corporations. - Governments and banking supervisors sometimes jointly develop taxonomies; banking authorities have also contributed to industry-led initiatives. - Differing objectives and scope create implementation challenges: multiplicity of objectives (climate and other environmental goals) can increase complexity. Some taxonomies apply to certain bank operations or vary by activity type; some are granular with technical screening criteria, while others define broad principles and criteria to facilitate classification (examples: Bangladesh, Indonesia, Malaysia). *IMF WORKING PAPERS Banking Law and Climate Change: Key Legal Issues — conclusion.* ### 40. Taxonomies seem to focus on defining what is “low-carbon” or environmentally sustainable, ### 40. Taxonomies seem to focus on defining what is “low-carbon” or environmentally sustainable, ### Role and limits of taxonomies - Purpose: encourage capital flows into activities defined as “low-carbon” or environmentally sustainable. - Limitation: “It has not yet been scientifically established that low carbon assets pose lower financial risks than carbon intensive assets.” - Taxonomies are not a risk management tool per se and “cannot offer a precise quantification of climate-related risks and risk exposures.” (Network for Greening the Financial System (2022c), at page 19.) - Utility for supervisors: - Help supervisors develop a better understanding of banks’ assets based on their sustainability or lack thereof. - Allow identification of exposure to transition risk and assets that may become stranded in the future. - Transition taxonomies signal activities aligned with transition goals and can facilitate funding for firms transitioning to less harmful activities. - Disclosure over transition taxonomies in legally binding plans is a promising avenue to support climate efforts by supervisors and banks. ### Comparison of selected taxonomies (summary of Table 1) - Jurisdictions compared: EU, China, Bangladesh, Malaysia. - Taxonomy names and adopting bodies: - EU Sustainable Finance Taxonomy — Adopting body: Legislature — Legal nature: EU Regulation — Binding. - Green Industry Guidance Catalogue (China) — Adopting body: National Development and Reform Commission — Legal nature: Guidelines — Binding (per table). - Green Taxonomy, as part of Sustainable Finance Taxonomy (Bangladesh) — Adopting body: Bangladesh Bank — Legal nature: Regulation — Binding. - Principle-Based Taxonomy (Malaysia) — Adopting body: Bank Neyagara Malaysia (in collaboration with the Joint Committee on Climate Change) — Legal nature: Guide — Non-binding. - Role of the supervisor: varies across jurisdictions — Advisory, Collaborator, Issuer, Issuer. - Purpose and intended users: range from identifying environmentally sustainable activities to promoting green development; intended users include financial market participants, policymakers, Chinese businesses and financial institutions, banks and other financial institutions. - Level of granularity: ranges from “Granular criteria” to “Principle-based.” - Relevance to high-carbon activities: EU and China — “No”; Bangladesh and Malaysia — “Partially (exclusion list).” - Relevance to banks: Yes in multiple entries, including as issuer of bonds, portfolio manager for product disclosure, reference point for green taxonomies design, and for green lending. ### Multiple taxonomies, misalignment, and governance - Concern: When multiple taxonomies exist within a jurisdiction, misalignments can weaken standardization and create significant inconsistencies (e.g., between a banking supervisor’s taxonomy and a central bank’s collateral taxonomy). - Recommendation: Aim for a coherent taxonomy (or set of coherent taxonomies) supported by the government, while allowing modifications for different areas of use. - Trade-offs: Centralized standards can increase costs and weaken flexibility; these risks can be minimized by strong interagency coordination. ### Applicability to banks and indirect relevance - Direct applicability: When banks issue listed securities or products subject to disclosure requirements, relevant taxonomies will govern these securities and products, requiring bank compliance. - Indirect applicability: Corporate client disclosures under taxonomies inform banks’ climate risk assessments and business strategy. ### Legal role and mandate of banking supervisors - Need for careful legal assessment of supervisors’ role and mandate in taxonomy development and adoption. - Supervisors should determine whether taxonomy classifications are aligned with prudential considerations. - Legal approach: Recognize that banking supervisors may have the power to back up taxonomies with modifications to capture climate-related risks to safety and soundness of banks. - Clarity required on whether taxonomies are directly applicable for supervisory purposes or require adoption of a legal instrument by supervisors. ### Legal design, revisions, and transitional arrangements - Taxonomies should include legal clarity on entry into force to ensure transparent transitioning to environmentally sustainable activities. - Taxonomies should set a minimum floor but not prevent banks from “gold plating.” - Need for regular revisions of screening criteria and metrics to cover new activities, technologies, production processes, and to review transition status. - Governance gaps: existing instruments often unclear on how taxonomies will be adjusted and by whom. - Examples of revision processes: - UK authorities: plan to follow public consultation and legislation, with parliamentary scrutiny and due notice to stakeholders. - EU: new regulation on European Green Bonds allows bond issuances made before a change in technical screening criteria to continue to align with previous criteria for 7 more years, subject to transparency requirements. ### Box 8 — Legal nature of taxonomies and enforcement (summary) - Legal forms vary: binding instruments (e.g., EU and Bangladesh) and non-binding instruments (e.g., China and Malaysia). - Adoption choices: Authorities may choose binding or non-binding secondary instruments unless adopted as primary law. - Transparency: Secondary instruments often do not describe legal basis; good practice is for supervisory authorities to disclose the legal basis of their instruments. - Enforcement linkage: As classification systems, taxonomies typically do not create enforceable requirements by themselves but can inform qualification of assets in implementing other requirements (e.g., disclosure requirements). - Sanctions: Failure to follow a taxonomy may be sanctioned only insofar as it leads to a failure in another enforceable obligation (e.g., inaccurate disclosure) that falls within prudential remit. - “Comply or explain” frameworks: Failures to comply may prompt enforcement only if they cause a breach of a different obligation; disclosure based on soft law can still contribute positively. ### Climate disclosures and role of law - Disclosures under corporate and securities laws can incentivize banks to integrate environmental sustainability and can lead investors to discipline banks, promoting “climate finance.” - FSB’s TCFD Recommendations: include “governance,” “risk management,” “strategy,” and “metrics and targets.” - ISSB (established by the IFRS Foundation) issued standards integrating TCFD recommendations and monitors progress in climate-related disclosures. - Many jurisdictions have strengthened transparency on climate risks; some introduced climate disclosure regimes applicable to banks as corporations or under prudential frameworks. - Multiple disclosure regimes: Some jurisdictions have multiple regimes layered on corporate, banking, and securities law disclosures. ### Supervisory expectations and legal mandates for climate disclosures - Several bank supervisors consider climate disclosures relevant to their legal mandate and have clarified disclosure expectations, often incorporating TCFD recommendations. - Legal mandates define the purpose and scope of disclosure requirements supervisors can impose (e.g., to promote market development, protect investors and market confidence). ### Legally binding transition plans for banks - Emerging policy tool: banks disclose plans to align business with jurisdictional net zero targets under the Paris Agreement, with tangible milestones until 2050. - Typically, “legally binding” refers to preparation and/or disclosure obligations rather than compulsory undertaking of the activities described. - Key legal issues: - Legal basis: If transition plans are linked to safety and soundness objectives, they can be a prudential tool; otherwise legal challenges may arise. Consideration could be given to introducing legal provisions in primary laws or implementing regulations to establish binding requirements to develop and disclose transition plans. - Ongoing enforcement: Monitoring and enforcing transition plans raises challenges because plans involve business judgment; supervisory action may be justified only to the extent failure to adhere results in financial risks. ### Pillar 3 disclosures and confidentiality - Pillar 3 disclosures under the Basel framework provide market participants key information on banks’ exposures and regulatory capital adequacy. - Disclosure of climate risks by banks could enhance market discipline and complement regulatory capital requirements. - EU implementing technical standards adopted Pillar 3 disclosures for ESG risks and risk mitigation actions as required by the CRR; scope expanded to all banks with reporting frequency calibrated to bank size. - Confidentiality constraint: In defining disclosure requirements, banks must not be put in a position to breach confidentiality duties to individual customers. ### Disclosures by banks’ clients - Client disclosures on climate are relevant for banks’ safety and soundness by enabling assessment of counterparty climate performance. - Supervisory powers typically do not extend to counterparties; where applicable (e.g., listed counterparties), supervisors can coordinate with securities regulators to develop appropriate disclosure rules. ### Remaining challenges in disclosure and taxonomy use - Supervisory stocktakes show banks are far from meeting all supervisory expectations on disclosures. - “Low-carbon” taxonomies aid comparability but remain under development in most jurisdictions and are more geared to defining environmental sustainability than quantifying climate risks for disclosure purposes. - Materiality differences: Meaning of materiality can differ by purpose and requirement (e.g., financial reporting vs. Pillar 3). - Some jurisdictions (e.g., EU, UK, and Switzerland) have introduced the notion of double materiality to recognize feedback loops between financial activities and climate change (or more broadly ESG). - Multiple climate disclosure requirements within a jurisdiction risk undue misalignment, frustrating transparency objectives and creating additional complexities. *IMF Working Papers — Banking Law and Climate Change: Key Legal Issues* ### 51. Banking laws aligned with good practices are in general sufficiently broad to allow banking ### 51. Banking laws aligned with good practices are in general sufficiently broad to allow banking ### Legal framework for supervisory assessment and enforcement - Banking supervisory agencies can assess compliance with climate rules and expectations and enforce them where laws are aligned with good practices. - The principles for the effective management and supervision of climate-related financial risks, adopted by the Basel Committee, advocate integrating these risks into banks' business strategies, corporate governance, and internal controls, and recommend adopting adequate follow-up measures in case of material misalignment with supervisory expectations. - Some jurisdictions established legally binding climate requirements via hard law instruments (e.g., Brazil). - Several instruments issued by banking supervisory agencies are not binding per se but often presuppose that climate change aspects fall within existing, more general binding rules. - Where a banking supervisory agency identifies that its guidance is not met, such failure may not be a breach of a climate-specific requirement per se, but it will be considered a factor to determine if binding rules under the broader bank supervision regime have been observed. - If binding rules are not observed, the banking supervisor may utilize enforcement mechanisms under the banking law, such as warnings, cease and desist orders, and monetary fines. - Some agencies issue non-binding guidance aimed to assist banks in tackling climate concerns without envisaging legally enforceable actions. ### Early intervention toolkit and climate-related bank distress - Early intervention frameworks in line with good practices grant authorities an adequate degree of discretion to respond flexibly to different circumstances. - Automatic and mandatory early intervention triggers may limit such flexibility, for instance when the impact of an extreme weather event on banks within a specific region is at stake. ### Corporate governance of banks and climate change: framing against best international practices - Corporate governance determines how a company is directed and managed by its decision-making bodies; integrating climate change into corporate governance of banks is evolving but can be supported by general good practices. - General international principles for corporate governance indicate that “board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders, taking into account the interests of stakeholders.” (OECD (2023), Principle V.A.) - The Basel Committee’s Guidelines on Corporate Governance Principles for Banks state the primary objective of corporate governance should be safeguarding stakeholders’ interests in conformity with public interests on a sustainable basis, noting that for retail banks shareholders’ interests would be secondary to depositors’ interests. (Basel Committee on Banking Supervision (2015)) - Best practices require bank boards to have ultimate responsibility for the bank’s business strategy and financial soundness, governance structure and practices, and risk management, and call for boards to understand and assess climate-related financial risks with a forward-looking approach and integrate them into the bank’s business model, strategy, and risk management framework. ### Duties of directors: duty of care and duty of loyalty - Duty of care: - The duty of care of directors remains generally applicable to climate risks and opportunities, although the precise scope is under development. - Duty of care requires board members to act in an informed and prudent manner as expected from a reasonable director under similar circumstances; this standard is dynamic and informed by evolving understanding of risks and opportunities. - As climate risks affect a bank’s safety and soundness, board members’ duty of care requires considering them. - Some supervisors (e.g., APRA) clarified that a prudent institution should consider both the opportunities and the financial risks of climate change in setting its strategy. - Duty of loyalty: - Framing the duty of loyalty in furtherance of climate policies is complex because it raises the question of whose interests directors should protect when stakeholder interests diverge. - The duty of loyalty traditionally concerns the interests directors should protect, not conflicts between directors’ own interests and those of the company or shareholders. - For banks, delineating the duty of loyalty is complicated by layers of banking legal framework and a wider range of stakeholders, including depositors. - Climate change exacerbates complexities due to its intertemporal nature and potential misalignments between shareholders and other stakeholders. - Companies’ by-laws and contractual arrangements can help determine the scope of the duty of loyalty and related accountability. ### Corporate governance models and implications for climate-related decisions - Conceptually, corporate governance models converge in catering for climate risks because the shared core objective across models is the safety and soundness of the bank. - When a bank’s viability is exposed to risks, stakeholders’ and shareholders’ interests align in protecting the bank’s resilience; the board’s duty of loyalty entails identifying, quantifying, mitigating, and managing climate-related risks to ensure resilience. - Box 9 summary: jurisdictions range between models: - Shareholder primacy and “enlightened shareholder value” variants (board considers stakeholders’ interests to the extent they affect long-term shareholder value). - Models where directors owe loyalty to shareholders and other predefined stakeholders equally (e.g., India) or where societal goals are part of directors’ duties (e.g., public benefit companies in Delaware). - The scope of the bank board’s duties varies in banking legislation; some banking laws require regard to depositors’ interests, others to investors and other creditors and all clients, and some refer only to the interest of the bank. - The debate is more nuanced when boards might be expected to reallocate capital to low-carbon activities where short-term value maximization is not evident but expected long-term value could increase. - Stakeholder models may be more apt for such behavior since they allow consideration of other constituencies’ interests even when not tied to financial performance. - Skepticism exists about stakeholder models because boards may face challenges balancing non-financial trade-offs and could use stakeholder considerations to avoid accountability for financial performance. - The shareholder model can still permit boards to consider non-shareholder interests if doing so promotes the company’s and shareholders’ long-term value. ### Legal mechanisms and corporate governance changes to integrate climate perspectives - Several legal changes and mechanisms can shape boards’ duties to integrate climate change over a long-term perspective, including statutory or contractual avenues. - Shareholders can: - Influence board composition and request information. - Use proxy voting and shareholder engagement to amend the entity’s foundational legal instruments (e.g., articles of association) to clarify firm goals beyond short-term value maximization. - Pass resolutions at shareholders’ meetings asking the bank board to take actions (e.g., reduce greenhouse gas emissions); even when not binding, such resolutions are difficult for boards to ignore. - Other instruments include disclosure requirements (addressed elsewhere in the source). - Some jurisdictions introduced references to climate change in primary law relevant to boards’ duties, including factoring climate risks within a longer time horizon. - Good practices recommend corporate governance frameworks “allow for dialogue between a company, its shareholders and stakeholders to exchange views on sustainability matters as relevant for the company’s business strategy and its assessment of what matters ought to be considered material,” which is acknowledged as particularly relevant for assessing risks and benefits over different time horizons. (OECD (2023), Principle VI.B) - Shareholders’ meetings remain the primary forum for dialogue with shareholders, although good practices are not prescriptive about relevant mechanisms. *IMF WORKING PAPERS — Banking Law and Climate Change: Key Legal Issues (excerpt).* ### 60. General corporate accountability mechanisms may contribute to the pursuit of climate policies ### 60. General corporate accountability mechanisms may contribute to the pursuit of climate policies ### Corporate accountability and shareholder mechanisms - Boards are generally responsible for the bank’s business, including its strategy, financial soundness, risk management, and disclosing relevant information. - Shareholders have corporate-law mechanisms to hold board members accountable, including: - Voting against management and board directors failing to make progress in disclosing climate risks (noted practice by some large asset managers). - Requesting information from the board—where permitted under corporate law—on climate-related financial risks or progress in implementing the bank’s climate strategy and metrics. - Pursuing board member liability for failure to fulfill fiduciary duties and the duty of care; however, the standard for liability is high and untested in the climate context (difficulties include establishing causation and damage given long-run materialization of climate risks). - Legal standing to use these accountability routes generally rests with the company (represented by the board) and shareholders (under certain conditions); other stakeholders typically lack standing (except creditors in insolvency). ### Clarifying allocation of competences between shareholders and boards - Legal frameworks often define the board’s ability to set strategy and allocate roles between the board and the shareholders meeting. - Strategy may include climate objectives (e.g., development of sustainable products). - If certain strategic matters are reserved for shareholders by corporate law or the bank’s articles of association, boards may need shareholder approval for those strategic changes. - Typically, boards retain ultimate responsibility for: - The bank’s business strategy and financial soundness. - Corporate culture, governance structure and practices. - Risk management and compliance obligations. ### Climate responsibilities in banks’ corporate governance bodies - Approaches to assigning climate responsibilities within bank governance vary across jurisdictions: - Some banks establish board-level committees to address climate-related financial risks (e.g., credit risk at transaction and counterparty level). - Others assign reporting to the board via the risk management function or set up risk committees. - Jurisdictional focus varies: some emphasize climate risks (e.g., UK); others also highlight business opportunities for banks (e.g., Australia). - EBA recommends allocating duties among board members rather than to a single board member, without prejudice to collective liability of the board. - Practices across jurisdictions: - UK: responsibilities can be assigned to one or more board persons or to executive management at the highest level. - Some jurisdictions allow board discretion to establish sub-committees (e.g., Australia, Germany, Singapore). - Some jurisdictions require a dedicated committee for large and complex institutions (e.g., Brazil). - Regardless of delegation, the board bears ultimate responsibility and should maintain mechanisms to monitor delegated authority (e.g., via executive committees). ### Executive management level allocation and internal organization - Supervisory expectations for senior management commonly include: - Implementing the bank’s climate strategy (risks and opportunities) and its risk management framework and policies. - Regularly updating the board to enable effective oversight (example: Singapore). - Hong Kong expects clear allocation of responsibilities to designated individuals or management-level committees. - Some jurisdictions require dedicated units to coordinate environmental and social risk management (examples: Pakistan and Bangladesh). - Supervisors caution against siloed climate functions being insufficient to manage climate risks (example: UK). - Where dedicated climate units exist, responsibilities and interaction with governance structures should be clearly defined. - Authorities generally allow banks flexibility to decide arrangements based on structure and business model. - Annex II (in the source) presents examples of how banks integrate climate risks into governance models. ### Avoiding gaps and overlaps in allocation of responsibilities - Gaps/overlaps can arise when governance frameworks: - Do not assign responsibilities relevant to climate change (strategy setting, oversight, execution) among bank organs. - Assign the same responsibility to multiple bodies. - Lack clear formulation on board responsibility or conflate shareholder and board roles. ### Fit and proper requirements, remuneration, and supervisory mandate - Fit and proper: - Board members and senior managers should collectively be fit and proper to fulfill responsibilities, including climate risks. - Good practices require collective suitability based on the bank’s business and risk profile; embedding this in banking law enables supervisors to vet board composition with regard to climate risks. - Supervisory agencies may consider climate considerations when applying fit and proper tests to individuals, particularly those charged with climate responsibilities. - Example textual reference: Art. 91(2b) of the EU CRD (Directive 2013/36/EU), as amended in 2024, stating that “The management body shall possess adequate collective knowledge, skills and experience to be able to understand the entity’s activities, as well as the associated risks it is exposed to, and the impacts it creates in the short, medium and long term, taking into account ESG factors.” - Remuneration: - Adequate remuneration policies can support integration of climate considerations. - Remuneration policies should be sensitive to the time horizon of risks and could allow deferral of variable compensation payments accordingly. - Authorities have recognized the relevance of considering climate concerns in remuneration design (e.g., EBA). - Authorities could assess whether deferral periods of variable compensation are commensurate with exposures to longer-horizon risks (e.g., transition risks), while retaining flexibility in primary law and adapting implementing regulations. - Supervisory mandate and scope: - Supervisors’ mandate to assess board fulfilment of climate-related responsibilities varies depending on whether issues concern climate risks or climate mitigation/opportunity policies. - For climate risks that affect safety and soundness, supervisors should assess banks’ evaluation of such risks and request action where shortcomings exist. - Board members must attest to supervisors that the bank complies with laws and regulations, including climate change. - External audits can inform supervisors and stakeholders on board responsibilities, especially with adequate expertise for special audits. - For climate mitigation policies (opportunities), supervisory assessment should be limited to implications for strategy and viability and to the decision-making process, not to substitute for technical business judgment. ### Climate disclosures and corporate governance interplay - Corporate law enables shareholders and creditors to monitor excessive risk-taking by management; financial standards require disclosure of information influencing investor/creditor analysis. - Banks’ assets may be difficult to value in a climate context, complicating monitoring; improved climate disclosures can address this valuation challenge. - Laws and regulations increasingly require banks and boards to disclose and integrate climate risks into governance and risk management processes. - Disclosures inform board accountability to internal/external stakeholders, with variation depending on whether disclosure regimes are mandatory or “comply or explain.” ### Selected supervisory examples (Box 10 — highlights) - UK: PRA expects banks’ response to climate risks to be proportionate to nature, scale, complexity of business and embedded in the supervisory framework; boards should assess, address and oversee climate risks with a sufficiently long-term view and ensure adequate resources and expertise; banks should consider engagement on initiatives on climate financial disclosures (e.g., the TCFD framework). - Australia: APRA underlines ultimate responsibility of the board for sound and prudent management; a prudent board is likely to: - Ensure understanding and regular assessment of climate risks at board and sub-committee levels (including training); - Set clear roles and responsibilities for senior management and hold them accountable; - Re-evaluate risks, opportunities and accountabilities periodically; - Take short-term and long-term views when assessing climate risks and opportunities; - Ensure, where climate risks are material, that risk appetite frameworks incorporate exposure limits and thresholds for financial risks. - Typical senior management responsibilities include applying the risk management framework to climate risks, regularly reviewing framework effectiveness, providing board recommendations on objectives and strategy, and ensuring allocation of adequate resources, skills and expertise (including training and capacity building). ### Conclusions (paragraphs 69–72) - 69: Bank supervisory agencies’ climate actions must be consistent with the legal framework. Supervisory agencies should incorporate climate considerations into their actions given climate impacts on banks, but must operate within their legally assigned mandate aligned with best practices. - 70: Within current legal regimes, many supervisory agencies have adopted measures to respond to climate change where it affects banking sector stability and bank soundness. Banking laws aligned with good practices are generally broad enough to support supervisory actions within existing mandates; recent revisions to the Basel Core Principles reinforce this. Measures include issuing supervisory expectations or binding rules, developing stress tests and scenario analysis, incorporating climate considerations into supervisory practices, taking actions on increased risks, and contributing to taxonomy development. Supervisors should assess how climate integration affects decision-making arrangements and how general administrative law principles (principle of attribution, proportionality, precautionary principle, due process safeguards) could affect climate-related regulatory decisions. Uncertainties in exact quantification of risks and differing climate time horizons should not preclude supervisory decisions under general administrative law, subject to appropriate safeguards. - 71: Legal concerns arise if supervisory climate actions conflict with safety and soundness objectives. Where legal frameworks lack a clear safety and soundness objective or depart from international best practices, supervisors may face challenges defining their role on climate policies. Any additional responsibilities for supervisory agencies should remain subordinated to the main objective of banking supervision law (safety and soundness). Pursuing climate objectives in ways that compromise this anchor could expose supervisors to legal, political, and reputational risk and undermine operational autonomy. Coordination mechanisms between government and financial sector policies should respect supervisory autonomy. - 72: Taxonomies are important policy instruments to promote adequate policies but have limitations. Current taxonomies focus on defining “low-carbon” or environmentally sustainable activities and are not risk management tools nor do they provide precise quantification of climate-related risks and exposures. There are significant variations in legal form, objective, scope, issuing authority of taxonomies, and multiple taxonomies within a jurisdiction may cause misalignments. Legal issues include supervisor participation in taxonomy development, fitting taxonomies within supervisory mandates, and granting supervisors back-up powers where taxonomy classifications diverge from prudential considerations around safety and soundness. Implementation challenges include governance of instruments (how they will be adjusted and by whom, balancing flexibility and legal certainty) and the scope of disclosures. *IMF Working Paper — Banking Law and Climate Change: Key Legal Issues (Section 60).* ### 73. Climate disclosures have so far been the key policy instrument to tackle climate change and in ### 73. Climate disclosures have so far been the key policy instrument to tackle climate change and in ### Climate disclosures — findings and challenges - Disclosures are the common theme across all guidance issued or under consideration by different standard setting bodies. - Many jurisdictions have introduced climate disclosure regimes applicable to banks as corporations or under the prudential regulatory framework, and in some cases, multiple climate disclosure regimes apply to banks. - Supervisors consider climate disclosures relevant to their legal mandate in various respects. - Existing disclosure requirements (e.g., Pillar 3 under the Basel framework) can be utilized to cover climate risks. - Transition plans that require banks to prepare and disclose tailored mitigation plans are gaining growing attention as new instruments. - Banking supervisory agencies should assess: - whether they can impose such transition plans under their existing powers; - how they will monitor and enforce these plans. - Challenges remain despite progress, linked to: - issues around taxonomies; - the meaning of “materiality”; - misalignments between multiple disclosure regimes. - Banking supervisors should recognize that their efforts on disclosures should be complemented by progress on disclosures related to the non-financial corporate sector and should engage with relevant authorities accordingly. ### Corporate governance and legal mechanisms — findings and recommendations - Corporate governance frameworks and banking laws could assist in integrating climate considerations into the bank’s business model. - Building on existing international good practice, such frameworks could help delineate the contours of board members’ duties with regards to climate risks. - Several legal mechanisms can help clarify fiduciary duties and board accountability in a climate change context, including how trade-offs between short-term value maximization and long-term value are struck. - These mechanisms could be statutory or involve corporate law arrangements (i.e., articles of association). - The interplay between climate disclosures and corporate governance as well as general corporate accountability mechanisms may contribute to the pursuit of climate policies by bank bodies, although those mechanisms that rely on civil liability are yet to be tested. ### Supervisory expectations and prudential limits - Banking supervisors can define expectations on how climate change considerations feed into corporate governance, including: - the ultimate responsibility of the board for the integration of climate change into the bank’s business strategy and risk management; - a clear allocation of climate-related responsibilities across different bodies without gaps and overlaps. - Banking supervisors should incorporate climate considerations into fit and proper assessments and in defining remuneration policies. - When assessing the board’s fulfillment of climate-related responsibilities, supervisors should exercise care to avoid undue interference with the technical business judgment underlying board decisions. ### Key considerations and policy recommendations (Banking Law and Climate Change: Key Considerations Table) - Legal Mandate 1. Banking supervisory agencies should determine whether and how the pursuit of climate policies, and what type of climate policies, fall within their mandate anchored on the safety and soundness of the banking system. To the extent that climate policies fall within their mandate, banking supervisory agencies should take steps to pursue them. #9, 13 2. Mission statements or similar documents are helpful instruments to strengthen the public understanding of banking supervisory agencies’ contributions to climate policies and should be aligned with the legal provisions governing their mandate. #10 - Objectives 3. In the interest of legal certainty and accountability, bank supervisory authorities should analyze the applicability of obligations under the Paris Agreement to their activities. #17 4. Where recommendations by governments or similar instruments can be taken into account by the bank supervisors, such instruments should not weaken the bank supervisor’s operational autonomy. Their design should be guided by transparency principles, in light of the distinct roles played by the government and banking supervisory agencies. #20 5. Any roles assigned to the supervisory agency should remain subordinated to the main objective of banking supervision law, anchored on safety and soundness in line with best international practices. #22-23 6. Banking supervisory agencies should design their decision-making arrangements in a manner that integrates climate considerations into their mandate. #24 7. The board of a banking supervisory agency should be required to have, collectively, adequate capacity to design and to assess climate measures appropriately and proportionally. #25 - Functions and Powers 8. Banking supervisory agencies should assess how general administrative law principles guiding their activities affect their policies on climate issues, in particular: (a) Principle of attribution and alignment of powers with stated objectives; (b) Principle of proportionality; (c) Precautionary principle; (d) Procedural safeguards; and (e) Time-horizon in the assessment of risks and pursuit of financial stability. Legal reforms may be pursued to provide higher legal certainty in carrying out climate goals by the banking supervisory agency. #31 9. Authorities should evaluate whether their regulatory instruments should address climate risks on a standalone basis or in combination with other relevant risks or policy goals. #33 10. Banking supervisory authorities should clarify the legal nature of their prudential instruments on climate change, and how this affects their ability to take supervisory measures if a bank fails to act in line with the relevant instrument. #34 11. To pursue climate policies within their mandate, authorities should consider the interaction between prudential instruments and the broader legal infrastructure relevant to banks’ activities. #35 12. Banking supervisory agencies should assess their role in the development of taxonomies in light of their mandate. #43 13. Banking supervisors should determine whether the classification system in taxonomies could be relevant for supervisory assessments and binding prudential requirements, which would then inform their possible role in enforcing the taxonomy. #43 14. The design and governance of taxonomies should give consideration to legal certainty and require their periodic review. #44 15. Banking laws should not impede (e.g., as a result of automatic triggers for intervention) the banking supervisory agency’s flexibility to adopt appropriate policies while dealing with the impact of extreme weather events. #52 - Banks’ Corporate Governance 16. Jurisdictions should determine the legal avenues available in their legal system in interpreting the board of directors’ duties with respect to climate change activities, particularly over a long-term perspective. #59 17. Jurisdictions should clarify that boards bear the ultimate responsibility in relation to climate change and maintain mechanisms to monitor the exercise of any delegated authority. #61, 62, and 64 18. Banking supervisory agencies should seek a clear designation of responsibilities related to climate change among decision-making bodies of a bank and at the executive management level, avoiding gaps and overlaps. #63, and 64 19. Banking supervisory agencies should integrate climate change risk considerations into their assessment of collective and individual suitability of the board and of remuneration policies, and evaluate updating their regulations and policies to reflect climate changes aspects, if needed. #65 and 66 20. Banking supervisory authorities should assess the appropriateness of the evaluation of climate change material risks by the bank’s board. #67 21. Banking supervisors could evaluate whether disclosures and external audits can provide them and other stakeholders with input on the responsibility of the boards in relation to climate change. #67 and 68 _International Monetary Fund — Banking Law and Climate Change: Key Legal Issues (selected excerpts)_ ### References ### References ### Regulatory guidance, supervisory statements, and prudential authorities - Australian Prudential Regulation Authority. 2021. “Prudential Practice Guide CPG 229 Climate Change Financial Risks”. Sydney - BaFin. 2019a. “Guidance Note on Dealing with Sustainability Risks”. Bonn. - BaFin. 2019b. “Sustainable Finance Conference”. Berlin. - Bangladesh Bank. 2017. “Guidelines on Environment & Social Risk Management (ESRM) for Banks and Financial Institutions in Bangladesh. Sustainable Finance Department”. Dhaka. - Bank of England Prudential Regulation Authority. 2018. “Transition in thinking: The impact of climate change on the UK banking sector”. London - Bank of England Prudential Regulation Authority. 2019a. “Supervisory Statement SS3/19 Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change”. London. - Bank of England Prudential Regulatory Authority. 2019b. “Policy Statement PS11/19 Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change”. London. - Bank of England Prudential Regulatory Authority. 2021. “Climate-related financial risk management and the role of capital requirement”. London. - Basel Committee on Banking Supervision. 2015. “Guidelines on Corporate Governance Principles for Banks”. Basel. - Basel Committee on Banking Supervision. 2020. “Climate-Related Financial Risks: A Survey On Current Initiatives”. Basel. - Basel Committee on Banking Supervision. 2021. “Climate related risk drivers and their transmission channels”. Basel. - Basel Committee on Banking Supervision. 2022. “Principles for the Effective Management and Supervision of Climate Related Financial Risks”. Basel. - Basel Committee on Banking Supervision. 2024. “Core Principles for Effective Banking Supervision”. Basel. - China Banking and Insurance Regulatory Commission. 2012. “Notice of the CBRC on Issuing the Green Credit Guidelines.” Beijing. - Commodity Futures Trading Commission. 2020. “Managing Climate Risk in the U.S. Financial System.” Washington, D.C. - De Nederlandsche Bank. 2021. “Climate-Related Risks Are Now A Part Of Fit And Proper Assessments” - Danish Financial Supervisory Authority. 2019. “Climate change and sustainable finance in the financial sector” - European Central Bank. 2020. Final Guidance on Climate-related and environmental risks. Frankfurt am Main. - European Central Bank. 2022. “Supervisory assessment of institutions' climate-related and environmental risks disclosures”. Frankfurt am Main. - European Banking Authority. 2019. “EBA Report On Undue Short-Term Pressure From The Financial Sector On Corporations”. - European Banking Authority. 2021. “EBA Report on Management and Supervision of ESG Risks for Credit Institutions and Investment Firms.” Paris. - European Banking Authority. 2022. EBA draft ITS on Pillar 3 disclosures on ESG risks. - Financial Conduct Authority. 2019. “Climate Financial Risk Forum (CFRF)”. London. - Financial Market Commission of Chile. 2020. “Strategy to face climate change”. - Financial Stability Board. 2014. “Supervisory Intensity and Effectiveness Progress Report on Enhanced Supervision”. - Financial Stability Board. 2020. “Stocktake of Financial Authorities’ Experience in Including Physical and Transition Climate Risks as Part of Their Financial Stability Monitoring.” - Financial Stability Board. 2021a. "Report on Promoting Climate-related Disclosures”. - Financial Stability Board. 2021b. “FSB Roadmap for Addressing Climate-related Financial Risks”. - Financial Services Agency. “Japan Financial Services Agency.” Tokyo. Accessed March 23, 2022. - FINMA. Dossier on Sustainable Finance. Bern. Accessed August 22, 2024. - Hong Kong Monetary Authority. Supervisory Policy Manual GS-1: Climate Risk Management, December 2021. - International Auditing and Assurance Standards Board (IAASB). 2023. “IAASB launches public consultation on landmark proposed global sustainability assurance standard.” - International Capital Market Association. 2022. “Ensuring the usability of the EU Taxonomy”. - Japan Financial Services Agency. 2021. “Report by the Expert Panel on Sustainable Finance Building A Financial System that Supports a Sustainable Society”. - Monetary Authority of Singapore. 2020. “Reply to Parliamentary Question on including climate change-related risk in MAS' annual industry-wide stress test”. - Network for Greening the Financial System. 2019.“A call for action: Climate change as a source of financial risk”. First Comprehensive Report. Paris. - Network for Greening the Financial System. 2020. “Guide for Supervisors Integrating climate-related and environmental risks into prudential supervision”. Paris. - Network for Greening the Financial System. 2021. “Climate-related Litigation: Raising Awareness About a Growing Source of Risk.” Paris. - Network for Greening the Financial System. 2022a. “Capturing risk differentials from climate-related risks A Progress Report: Lessons learned from the existing analyses and practices of financial institutions, credit rating agencies and supervisors”. Paris. - Network for Greening the Financial System. 2022b. “Report on Bridging Data Gaps”. Paris. - Network for Greening the Financial System. 2022c. “Enhancing Market Transparency in Green and Transition Finance”. Paris. - Network for Greening the Financial System. 2022d. “NGFS scenarios for central banks and supervisors”. Paris. - Office of the Comptroller of the Currency. 2021. “OCC Announces Climate Change Risk Officer, Membership in the NGFS”. Washington D.C. - Office of the Comptroller of the Currency, Treasury, Board of Governors of the Federal Reserve System, and Federal Deposit Insurance Corporation. 2023. “Principles for Climate-Related Financial Risk Management for Large Financial Institutions”. - Office of the Superintendent of Financial Institutions Canada. 2021.“Navigating Uncertainty in Climate Change: Promoting Preparedness and Resilience to climate-related Risks” - Reserve Bank of New Zealand. “Our Climate Strategy”. Accessed March 23, 2022. - Reserve Bank of New Zealand. 2021. Climate Change Report 2021 and Beyond”. - Securities Commission Malaysia. Malaysian Code of Corporate Governance. - Superintendencia General de Entidades Financieras of Costa Rica. 2021. (CIRCULAR EXTERNA SGF-1742-2021) June 23, 2021 ### Central banking, financial stability, and macroprudential perspectives - Alexander, K. and Fischer, P. 2020. “Central Banking and Climate Change” - Bolton P., Morgan Després, Luiz Awazu Pereira da Silva, Frédéric Samama and Romain Svartzman. 2020. “The Green Swan: Central Banking and Financial Stability in the Age of Climate Change”. Bank for International Settlements. Basel, Switzerland. - Chenet H., Ryan-Collins J., van Lerven F. 2021. “Finance, climate-change and radical uncertainty: Towards a precautionary approach to financial policy”, Ecological Economics Volume 183, May 2021. - Ferreir a, C., Lukáš Rozumek, D., Singh R., and Suntheim F. 2021. “Strengthening the Climate Information Architecture”. IMF Staff Climate Notes. - International Monetary Fund. 2021. “Global Financial Stability Report: COVID-19, Crypto, and Climate: Navigating Challenging Transitions”. Washington, D.C. - International Monetary Fund. 2022a. “Climate Change”. Washington D.C. - International Monetary Fund, 2022b. “Climate Policy Options: A Comparison of Economic Performance” Jean Chateau, Florence Jaumotte, and Gregor Schwerhoff, Washington, D.C. - Tamez, M., Weenink H., and Yoshinaga A. 2024. “Central Banks and Climate Change: Key Legal Issues” IMF Working Paper. Washington D.C. - Schinasi, J. Garry. 2004. “Defining Financial Stability.” IMF Working Paper, Washington, DC. - Kirakul S, Yong, J,and Zamil, R. 2021. “The Universe of Supervisory Mandates – Total Eclipse of the Core?” Bank for International Settlement. Basel. - Financial Stability Board. 2020. “Stocktake of Financial Authorities’ Experience in Including Physical and Transition Climate Risks as Part of Their Financial Stability Monitoring.” ### Banking law, corporate governance, and legal scholarship - Alexander, K. and Lastra R. 2019. “Banking regulation and sustainability” - Alexander, K. and Lastra, R. 2023. “International Banking Regulation and Climate Change” - Bebchuk, Lucian A. and Tallarita R. 2020. “The Illusory Promise of Stakeholder Governance”, The Harvard John M. Olin Discussion Paper Series, No 1052. - Calster, G.V. and Leonie Reins. 2021. “The Paris Agreement on Climate Change: a commentary”, edited by Calster, Geert Van, and Leonie Reins, Edward Elgar Publishing Limited. - Glicksman, R. L., Daniel K., and Groth-Tuft K. 2022. “Judicial Review of Scientific Uncertainty in Climate Change Lawsuits: Deferential and Nondeferential Evaluation of Agency Factual and Policy Determinations”; at 46 Harvard Envtl. L. Rev., Issue # 2. - Kokkinis, A. 2015. “A Primer on Corporate Governance in Banks and Financial Institutions: Are Banks Special?” in Iris H. -Y. Chiu et al. (eds.) The Law on corporate governance in banks. Elgar financial law and practice. Cheltenham, UK. - Marshall Shelley Ramsay Ian. 2012. “Stakeholders and Directors’ Duties: Law, Theory and Evidence”, University of New South Wales Law Journal 35 U.N.S.W.L.J. - Monnin, P. 2018. “Integrating Climate Risks into Credit Risk Assessment - Current Methodologies and the Case of Central Banks Corporate Bond Purchases.” Council on Economic Policies, Discussion Note 2018/4. - OECD. 2022. “Climate Change and Corporate Governance”, OECD Publishing, Paris. - OECD. 2023. “G20/OECD Principles of Corporate Governance”, OECD Publishing, Paris. - Paulson, Blake J. “Statement by Acting Comptroller of the Currency at the Financial Stability Oversight Council”. March 31, 2021. - Varottil, U. 2022.“The Role of Corporate Governance in Addressing Climate Change: The Case of India”. ### Policy proposals, taxonomy, disclosure, and transition planning - Enria, A. (2020, June 17). “ECB Banking Supervision’s Approach to Climate Risks” [Speech Transcript]. ECB Climate and Environmental Risks Webinar. Frankfurt am Main. - Elderson, F. (2022, February 23). “Sustainable finance: what is expected from transition scenarios?” [Speech Transcript]. ECB High Level Seminar 2022. Frankfurt am Main. - Evain, J., Calipel Clara, and Noguès Louise. 2022. “Include mandatory banking transition plans within Pillar 2”. The Institute for Climate Economics (I4CE), Paris. - European Commission. 2018. “Financing a Sustainable European Economy: Final Report 2018 by the High-Level Expert Group on Sustainable Finance”. Frankfurt am Main. - European Commission. 2020. Summary Report of the Stakeholder Consultation on the Renewed Sustainable Finance Strategy. Brussels. - European Commission. 2021. Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor. Brussels. - International Capital Market Association. 2022. “Ensuring the usability of the EU Taxonomy”. - Institute for Climate Economics. 2020. “Integrating Climate-related Risks into Banks’ Capital Requirements.” Paris. - Natixis. 2023. “The New Geography of Taxonomies”. - Network for Greening the Financial System. 2022c. “Enhancing Market Transparency in Green and Transition Finance”. Paris. - Office of the Comptroller of the Currency. 2021. “OCC Announces Climate Change Risk Officer, Membership in the NGFS”. Washington D.C. - Torsten E., Diwen (Nicole) Gao and Frank Packer. 2021. “A taxonomy of sustainable finance taxonomies” - United Nations. 2015. Paris Agreement to the United Nations Framework Convention on Climate Change. - World Bank. 2020. “Developing a National Green Taxonomy: A World Bank Guide”. Washington DC. ### Industry reports, bank publications, and other organizational outputs - BlackRock. 2020. Client Letter. - Berenguer, M., Cardona M. and Evain J. 2020. “Integrating Climate-related Risks into Banks’ Capital Requirement.” Institute for Climate Economic. Paris. - Canadian Securities Administrators. 2019. “CSA Staff Notice 51-358: Climate Change Related Risks”. Montréal. - Coelho, R., and Restoy F. 2022. “The regulatory response to climate risks: some challenges” - Evain, J., Calipel Clara, and Noguès Louise. 2022. “Include mandatory banking transition plans within Pillar 2”. The Institute for Climate Economics (I4CE), Paris. - Financial Services Agency. “Japan Financial Services Agency.” Tokyo. Accessed March 23, 2022. - Gelzinis, G. 2021. “Addressing Climate-related Financial Risk Through Bank Capital Requirements, Center for American Progress.” Washington, DC. - ING Group. 2023. “Climate Report”. - Monnin, P. 2018. “Integrating Climate Risks into Credit Risk Assessment - Current Methodologies and the Case of Central Banks Corporate Bond Purchases.” Council on Economic Policies, Discussion Note 2018/4. - Principles for Responsible Investment. 2022. “Support Australian banks shareholder climate resolutions” - Reuters. 2020. “Indonesia Regulator Eases Lending Rules for Electric Vehicles” - Westpac Banking Corporation. 2020. “Sustainability Performance Report.” - YES Bank Limited. 2022. Sustainability Report 2021-22: Shaping the Future with Responsible Banking - Sarra, J. and Elisabeth (Lisa) DeMarco, Elisabeth. 2021. “Climate-Related Legal Risks for Financial Institutions: Executive Brief”. - Glicksman, R. L., Daniel K., and Groth-Tuft K. 2022. “Judicial Review of Scientific Uncertainty in Climate Change Lawsuits: Deferential and Nondeferential Evaluation of Agency Factual and Policy Determinations”; at 46 Harvard Envtl. L. Rev., Issue # 2. *Banking Law and Climate Change: Key Legal Issues — Working Paper No. WP/2024/193* --- _Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024193-print-pdf.pdf_