Banking Law and Climate Change: Key Legal Issues

IMF Working Papers, September 10, 2024

Source details

Paper explores the intersection of climate change policies with banking supervisory law.
Statutory mandates define banking supervisory agencies’ objectives, functions and powers.
Policies aimed at addressing climate change risks are described as fully germane to banking supervisors’ main objective of safety and soundness.
Authors: Mario Tamez, Ender Emre, Alessandro Gullo.
Date: September 10, 2024.
Series: Working Paper No. 2024/193.
Pages: 56.

Banking supervisory agencies have a duty to address climate risks in light of their mandate.
A mandate not anchored on safety and soundness in light of best practice would blur the accountability of banking supervisory agencies and undermine their legitimacy also with respect to climate.
Legal changes can help provide greater legal certainty, particularly given the long-term perspective of climate change.
Bank supervisory agencies can take action without fundamental reforms of their legal framework.
Banking supervisors have set expectations or requirements for banks to incorporate climate into their strategy and business model, risk management, and governance.
A combination of legal instruments—based on soft law and hard law—helps to achieve the objective of integrating climate considerations into banking supervision.
Notwithstanding implementation challenges, taxonomies and disclosures remain important tools.
Banking supervisors should assess their role in the development of taxonomies and disclosures in light of their mandate.
The key responsibility to address climate risks rests on banks, and corporate governance frameworks could assist.

Statutory mandates determine what is germane to banking supervision; climate-related policies relate directly to the supervisory objective of safety and soundness.
Anchoring mandates on safety and soundness is presented as best practice to preserve accountability and legitimacy for supervisors addressing climate issues.
Supervisory action on climate can be taken within existing legal frameworks, although legal reform can enhance certainty given climate’s long-term horizon.

Soft law and hard law instruments are both relevant and can be combined to encourage or require banks to manage climate risks.
Taxonomies and disclosures are highlighted as important tools despite implementation challenges.
Banking supervisors should evaluate their appropriate role in developing taxonomies and disclosure frameworks, consistent with their mandate.

The primary responsibility for addressing climate risks lies with banks.
Corporate governance frameworks are identified as potential mechanisms to help ensure banks incorporate climate into strategy, business model, risk management, and governance.