People ride scooters past the Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S., on Tuesday, Aug. 18, 2020. In addition to helping rescue the U.S. economy amid the coronavirus pandemic, Fed Chair Jerome Powell and colleagues also spent 2020 finishing up the central bank’s first-ever review of how it pursues the goals of maximum employment and price stability set for it by Congress. Photographer Erin Scott/Bloomberg
WASHINGTON: US regulators led by the US Federal Reserve (Fed) have refused to endorse a plan that would have seen the Basel Committee on Banking Supervision push lenders to disclose their climate risk, according to people familiar with the matter.
While it’s not impossible the United States could reverse course, the Basel Committee has already watered down the proposal significantly to accommodate the Fed, said the people who asked not to be identified discussing private talks.
The group is now bracing for a scenario in which its work on adding climate considerations to global bank reporting regulations may be shelved indefinitely, they said.
The Basel Committee is due to meet on Nov 19, when the disclosure framework will be debated again.
As the world awaits Donald Trump’s return to the White House after his decisive election win, proponents of climate policies are looking on in dismay as key planks of a global framework intended to help address rapidly rising temperatures are expected to be dismantled.
Trump has made clear he’ll once again withdraw the United States from the Paris climate agreement, a prospect that overshadows talks at the COP29 summit in Azerbaijan.
There’s nothing to indicate that the Fed’s actions have been influenced by the spectre of a Trump presidency.
In fact, chair Jerome Powell has been clear in his assertion of Fed independence.
But the development adds to concerns around the role played by the world’s largest economy in shaping the global climate agenda.
The US position is in stark contrast to how regulators on the other side of the Atlantic are approaching climate change.
The European Central Bank (ECB) has repeatedly told lenders in the region they face fines unless they meet explicit expectations for handling climate risk.
In the US, meanwhile, Powell has called it a “big mistake” to expect bank regulators “to lead the fight on climate change.”
The details of exchanges between the Fed and other Basel Committee members – and of adjustments to the so-called Pillar 3 disclosure proposal – are based on documents seen by Bloomberg News and on conversations with senior officials who asked not to be identified due to the sensitivity of the matter.
The US decision was made known to other Basel Committee members during a call in September by a representative for the Fed.
The person used the call to say that while the US appreciates the work done to craft a climate disclosure framework for banks, it isn’t ready to endorse the compromise draft.
Spokespeople for the Fed, the ECB and the Basel Committee declined to comment.
The committee has said it planned to publish a revised or final proposal in the second half of the year after considering feedback received in a consultation.
The Basel Committee, which represents central bankers and financial regulators from some 30 countries, would have signed off on the proposal in September had it not been for US opposition.
Bloomberg reported in April that the Fed’s concerns had led the Basel Committee to limit the scope of its ambitions with regard to a framework for climate rules.
In July, Powell was asked by the House Financial Services Committee to comment on Bloomberg’s reporting.
His response at the time was to make clear that the Fed doesn’t have a mandate “of fostering an energy transition or dealing with climate change.”
Instead, Powell referred to what he called the Fed’s “very limited” powers to ensure the institutions it supervises “are aware of and can manage those risks,” rather than forcing them to adopt transition plans. By contrast, many European banks have to disclose the alignment of their credit portfolios to the Paris Agreement.
The ECB assesses whether banks comply with disclosure requirements – known as Pillar 3 – and publishes some of the information to allow comparisons of key risk metrics.
The different approaches have fanned tensions inside the Basel Committee over the past year, according to the people familiar with the matter.
Meanwhile, French President Emmanuel Macron said this month he thinks the European Union should “synchronise” its financial regulation with the US, in order to support competitiveness.
The Basel Committee can’t force countries to implement its standards.
Instead, its power lies in arriving at a baseline for global rules that individual regulators then develop and enforce.
Among key concessions already won by the US was a decision to halt talk of introducing industrywide capital rules – known as Pillar 1 – as a regulatory lever for addressing banks’ climate risk.
More recent concessions made in September pertain to proposed risk disclosures via the Pillar 3 lever, documents seen by Bloomberg show.
Specifically, all quantitative climate disclosures – such as financed emissions and exposures to physical risks – would be subject to jurisdictional discretion, something for which the US had lobbied.
European officials had hoped until the last moment that their efforts to reach a compromise might allow the Basel Committee to keep the US onside.
If the committee fails to resurrect the proposal at its November meeting, it will likely miss its stated goal of publishing a revised or final proposal in the second half of this year. — Bloomberg
