The Federal Reserve refuses to incorporate climate issues into the regulatory framework, and the Basel global banking report's regulatory provisions may face difficulties in being produced

Informed sources revealed to the media that U.S. regulators, led by the Federal Reserve, may refuse to support a plan proposed by the Basel Committee on Banking Supervision that requires banks to disclose their climate risks.

According to Bloomberg News, although the U.S. may change its stance, the Basel Committee had previously significantly weakened the proposal to accommodate the Federal Reserve. Informed sources told the media that the organization is already prepared to deal with the possibility of being unable to incorporate climate factors into global banking reporting regulations, which could lead to this work being indefinitely shelved.

The Basel Committee is scheduled to meet on November 19 to discuss the disclosure framework again.

As former U.S. President Trump, who opposes climate plans, is set to return to the White House, supporters of climate policy are worried that important parts of the global framework originally aimed at addressing rapidly rising temperatures may be dismantled. Trump has made it clear that he will withdraw from the Paris Climate Agreement again, casting a shadow over the negotiations at the COP29 summit in Azerbaijan.

The U.S. stance sharply contrasts with how European regulators are responding to climate change. The European Central Bank (ECB) has repeatedly informed banks in the region that they will face fines if they do not meet explicit climate risk management requirements. In the U.S., Powell stated that expecting banking regulators to "lead the fight against climate change" is "a significant mistake."

According to reports, in September, a representative from the Federal Reserve disclosed this decision to other Basel Committee members during a conference call. The individual stated on the call that, while the U.S. appreciates the work on developing a banking climate disclosure framework, it is not yet ready to support the compromise draft.

Spokespersons for the Federal Reserve, ECB, and the Basel Committee declined to comment. The Basel Committee stated that it would release a revised or final proposal in the second half of the year in response to feedback received during the consultation process.

The Basel Committee represents central banks and financial regulatory agencies from about 30 countries. If it were not for U.S. opposition, the committee would have approved the proposal in September. In addition to the Federal Reserve, U.S. regulators include the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).

Bloomberg reported in April that the Federal Reserve's negative attitude toward climate policy led the Basel Committee to impose certain limitations on its goals regarding climate rule frameworks. In July, Powell commented on this news, stating that the Federal Reserve does not have the responsibility to "promote energy transition or address climate change." Instead, Powell mentioned that the Federal Reserve's powers are "very limited," only ensuring that the institutions it regulates "understand and can manage these risks," rather than forcing them to adopt transition plans.

In contrast, many European banks are required to disclose the consistency of their credit portfolios with the Paris Climate Agreement, and banks must disclose information as required to allow for comparisons of key risk indicators.

According to informed sources, tensions have arisen within the Basel Committee over different approaches over the past year. Meanwhile, French President Macron stated this month that he believes the EU should "synchronize" its financial regulation with the U.S. to support competitiveness The Basel Committee cannot force countries to implement its standards. Instead, its influence lies in setting benchmarks for global rule-making, which are then formulated and enforced by national regulatory agencies. For example, after the global financial crisis in 2008, jurisdictions around the world pushed through a series of additional capital requirements agreed upon by the Basel Committee.

Analysis suggests that behind the opposition to the Basel climate framework is a legal offensive launched by the Republican Party for more than two years, opposing the incorporation of environmental, social, and governance (ESG) factors into the business and investment decisions of financial institutions.

According to informed sources, during a conference call in September, when the Federal Reserve expressed its position, Basel Committee Chairman Erik Thedéen stated that it would be better to reach a compromise than to ultimately fail to reach an agreement, as such an outcome would affect the committee's credibility. A Basel spokesperson declined to comment.

European officials hoped until the last moment that their compromise efforts could maintain U.S. support for the Basel Committee. If the committee fails to revive the proposal at the November meeting, it may not achieve its established goal of releasing revised or final proposals in the second half of this year