Fed refuses to back Basel climate plan, leaving talks in limbo

The committee has started to water down its proposal to accommodate the Fed.

US regulators led by the Federal Reserve 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 US 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.

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The Basel Committee is due to meet on 19 November, 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 US 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 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. Aside from the Fed, the US is represented by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

Spokespeople at the FDIC and the OCC declined to comment.

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 “synchronize” its financial regulation with the US, in order to support competitiveness.

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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. For example, jurisdictions across the world pushed through a range of additional capital requirements that were agreed by the Basel Committee after the global financial crisis of 2008.

The forum for all things climate at the Basel Committee is the Task Force on Climate-related Financial Risks, which is co-chaired by Kevin Stiroh of the Federal Reserve Bank of New York and ECB Executive Board member Frank Elderson. The TFCR takes a holistic view, considering all tools available in the three pillars of the Basel framework – capital requirements, supervision and disclosures.

An initial Basel proposal on climate-risk disclosures for banks was put out for consultation last November, and after receiving comments the TFCR developed a revised version in time for this year’s September meeting, according to documents seen by Bloomberg News.

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.

The concessions won by the US left other members of the Basel Committee frustrated, according to the people familiar with the matter. The Bank of Japan and the Bank of Italy were among members to express dissatisfaction over US insistence that key disclosures be voluntary, the people said.

A number of Basel Committee members, including representatives from the ECB, as well as regulatory authorities from France, Germany and Sweden, wanted to introduce the concept of a review period, a step that would have opened the door to introducing stricter rules in the future.

Spokespeople for Germany’s Bundesbank, the Banque de France, Bank of Japan, Sweden’s Riksbank and the Bank of Italy declined to comment.

Tensions over climate rules come as Powell’s team also watered down additional capital requirements known as the Basel III Endgame, following a wave of resistance from Wall Street. The Fed said in September it will make extensive changes to the bank-capital rules proposal, cutting the expected impact to the largest US banks in half and exempting smaller lenders from large portions of the measure.

The pushback against Basel’s climate framework follows more than two years of Republican-led legal attacks against financial firms that factor environmental, social and governance, or ESG, elements into business and investing decisions.

Erik Thedéen, chair of the Basel Committee, said during the September call on which the Fed made its position known that it would be better to strike a compromise than to end with no agreement at all, given the ramifications such an outcome would have on the committee’s credibility, according to one of the people familiar with the matter. A Basel spokesperson declined to comment.

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.

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