In 2009, the Bank for International Settlements (BIS) introduced the Basel III accord to improve the regulation, supervision, and risk management of banks worldwide. At this time, much of the focus was on improving capital requirements and liquidity rules. However, in recent years there has been an increased focus on environmental, social, and governance (ESG) disclosures under Pillar 3 of this accord. Let’s take a look at what these disclosures are and why they are important.
What is Pillar 3?
Pillar 3 is one of three pillars that make up the Basel III Accord. It focuses on providing disclosure requirements related to capital adequacy and risk management. This includes providing information about a bank’s credit risk exposures, operational risk exposures, market risk exposures, and liquidity risks. The goal is to provide transparency into how well a bank is meeting its obligations under international banking regulations.
Why ESG Disclosure Matters
In recent years there has been an increased focus on ESG disclosures under Pillar 3. This is due in part to increasing public pressure on businesses to be more transparent when it comes to their sustainability practices. By reporting ESG-related data in accordance with Pillar 3 requirements, banks can help ensure that they are meeting their obligations while addressing customer concerns about sustainability practices.
Types of Disclosures Required Under Pillar 3
Under Pillar 3 of the Basel III Accord, banks must disclose information related to their environmental policies and initiatives; social responsibility programs; corporate governance structures; financial stability; credit ratings; liquidity coverage ratios; leverage ratios; concentration limits; off-balance sheet activities; derivatives exposure limits; securitization exposures limits; counterparty credit risks limits; stress testing results; loan loss provisioning methods; capital adequacy ratios; interest rate risk profiles; and other matters related to capital adequacy and risk management. These disclosures must be provided in a timely manner so that investors can make informed decisions when evaluating a bank’s performance.
The introduction of ESG disclosure requirements under Pillar 3 of the Basel III Accord is an important step forward for banks looking to become more transparent about their sustainability practices. By understanding what types of disclosures are required under this pillar, banks can ensure that they are meeting their regulatory obligations while also responding appropriately to changing customer expectations regarding ESG-related issues such as climate change and corporate governance structures. With this knowledge in hand, risk professionals and change management professionals can better equip themselves when preparing for upcoming compliance deadlines.