The Basel Committee on Banking Supervision, is the primary global standard setter for the prudential regulation of banks.&nbsp;It has 45 members comprising central banks and bank supervisors from 28 jurisdictions.&nbsp;Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability.&nbsp;It has been the developer of the Basel Accords, a widely applied framework for the regulation, supervision and risk management of banks.&nbsp;The Basel Committee made one step further in its strategy to integrate climate-related financial risks in the prudential framework for banking regulation.&nbsp;On April 14th 2021, The Basel Committee released two reports on climate-related financial risks: on the transmission channels&nbsp;[<a target="_blank" rel="noopener noreferrer" href="https://www.bis.org/bcbs/publ/d517.pdf">1</a>] between (i) climate physical and transition risks and (ii) traditional financial risk categories; and on measurement methodologies [<a target="_blank" rel="noopener noreferrer" href="https://www.bis.org/bcbs/publ/d518.pdf">2</a>], outlining the need for improved climate data and methodologies, naming the Climate Risk Impact Screening methodology [<a target="_blank" rel="noopener noreferrer" href="http://crisforfinance.com/">3</a>], developed in 2017 by Carbon4 Finance.&nbsp;Climate change is an existential threat posing major risks to our economies. The Basel Accords and their implementation are key elements of the financial system stability, requiring banks to maintain capital buffers against the risk they take. We thus welcome this step forward by the Basel Committee, as banks are still lacking data and methodologies to properly integrate climate change in their risk management framework.<h4>The Basel Committee has developed a strategy on prudential climate change integration.&nbsp;</h4>On February 2020, the Basel Committee on Banking Supervision announced the set up of a high-level Task Force on Climate-related Financial Risks (TFCR) with the mandate of enhancing global financial stability through the following initiatives:&nbsp;<ul><li>A stocktake on members’ existing regulatory and supervisory initiatives on climate-related financial risks,</li><li>A set of analytical reports on transmission channels and measurements methodologies&nbsp;for climate-related financial risks,</li><li>The development of supervisory practices in order to mitigate climate-related financial risks.</li></ul>The results of the stocktake&nbsp;[<a target="_blank" rel="noopener noreferrer" href="https://www.bis.org/bcbs/publ/d502.pdf">4</a>] on existing initiatives has been published on April 2020. The two reports on transmission channels and measurements methodologies have been published on April 14th, 2021. We will expect Basel Committee members to build upon the results of these reports and market reactions to develop supervisory practices integrating climate related financial risks into prudential banking regulation.<h4>Basel Committee members would like to integrate climate change; but data, methodologies and understanding are lacking.</h4>In the April 2020 stocktake of existing initiatives, the Basel Committee looks at the way in which climate-related financial risks are integrated by its members: among which the European Central Bank, the European Banking Authority, national central banks and financial markets regulatory and supervisory bodies.&nbsp;It notes that the members "consider it appropriate to address climate-related financial risks within their existing regulatory and supervisory frameworks” and that research has been conducted to determine how this can be achieved. However, operational hurdles remain such as data availability, methodological challenges, and difficulties in mapping transmission channels.&nbsp;<figure class="image"><img src="http://www.carbone4.com/files/wp-content/uploads/2021/04/1.png" alt=""></figure>Key challenges identified by Basel Committee (number of votes)Source: Basel Committee&nbsp;&nbsp;3 responding members out of 5 had not integrated climate-related financial risks into their prudential capital framework.&nbsp;<figure class="image"><img src="http://www.carbone4.com/files/wp-content/uploads/2021/04/2.png" alt=""></figure>Number of respondents who have issued supervisory guidance on climate-related financial risksSource: Basel Committee&nbsp;<h4>The April 2021 publication of two analytical reports precises what needs to be done and which type of data and methodologies is needed.</h4>Transmission channels&nbsp;&nbsp;The report outlines how the banking system is exposed to climate change through micro and macro economic transmission channels that arise from two distinct types of climate risk drivers: physical risks and transition risks.&nbsp;<figure class="image"><img src="https://strapipreprod.s3.eu-west-3.amazonaws.com/bale_publi.svg"></figure>Financial risks from climate risk driversSource: <a href="https://www.bis.org/bcbs/publ/d517.pdf">https://www.bis.org/bcbs/publ/d517.pdf</a> (p4)Traditional banking risk categories (Credit, Market, Liquidity and Operational risk) can then be used to assess climate-related financial risks impacts on banks and the banking system stability. This mapping of transmission channels from climate risk drivers to traditional risk categories will allow climate risk integration into the existing prudential rules without the need to completely overhaul the existing framework. &nbsp;<figure class="image"><img src="http://www.carbone4.com/files/wp-content/uploads/2021/04/Capture-d’écran-2021-04-21-à-12.56.07.png" alt=""></figure><figure class="image"><img src="https://strapipreprod.s3.eu-west-3.amazonaws.com/2_Capture_d_ecran_2021_04_21_a_12_56_07_1.png"></figure>&nbsp;Source: <a href="https://www.bis.org/bcbs/publ/d517.pdf">https://www.bis.org/bcbs/publ/d517.pdf</a>Measurement methodologies&nbsp;&nbsp;To date, measurement of climate-related financial risks by banks and supervisors have focussed on short-term transition risks, with a dominant use of the carbon footprint/carbon intensity and sectoral exposure such as coal sectoral exposure.&nbsp;The report outlines the need for granular, bottom-up and forward looking data and methodologies.&nbsp;High granularity of exposure data may as well be necessary, both in terms of geolocational data and counterparty- and industry-level data.&nbsp;New and unique type of data will be needed, spanning across three areas:&nbsp;<ul><li>data translating climate risk drivers into economic risk factors,</li><li>data linking climate-adjusted economic risk factors to exposures,</li><li>and data to translate climate-adjusted economic risk into financial risk.</li></ul>The report evaluates candidate methodologies for estimating climate-related financial risks. It describes that conventional risk measurements approaches can be adapted to assess climate risks but “[in] practice, […] the range of impact uncertainties, time horizon inconsistencies, and limitations in the availability of historical data on the relationship of climate to traditional financial risks, in addition to a limited ability of the past to act as a guide for future developments, render climate risk measurement complex and its outputs less reliable as risk estimators”.&nbsp;Among those risk measurement processes, the report highlights the most prominent and conventional practices:&nbsp;climate risk scores and ratings, scenario analysis, stress testing and sensitivity analysis.&nbsp;Climate risk scores aim to assess the relative climate exposure of existing and prospective credit intermediation. Among the measurement processes&nbsp;identified, the Basel Committee report&nbsp;outlines the Climate Risk Impact Screening methodology, developed in 2017 by Carbon4 Finance, noting that “Climate risk rating methodologies [are] often developed with highly granular data, enabling them to be location-specific, and incorporate supply chain and company-specific information”.&nbsp;We note that the French central bank (Banque de France) has also built on the data provided by Carbon4 Finance to assess the climate change-related transition risks associated with its collateral portfolio&nbsp;[<a target="_blank" rel="noopener noreferrer" href="https://blocnotesdeleco.banque-france.fr/en/blog-entry/climate-risks-and-collateral-methodological-experiment">5</a>].&nbsp;The report concludes with the need for investments to address methodological and data gaps, which will foster improved prudential management and mitigation of climate-related financial risks.<h4>Futur developments in global prudential regulation</h4>The next objective for the Basel Committee and its&nbsp;Task Force on Climate-related Financial Risks is to develop climate-related financial risk supervisory practices.&nbsp;These practices will be ultimately translated into banking regulation, building on improved climate data and methodologies.&nbsp;As a pioneer in the development of bottom-up and forward-looking climate data and methodologies, Carbone 4 welcomes the issuance of these two analytical reports clearly paving the way for climate-integrated global prudential regulation standards.&nbsp;

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<a target="_blank" rel="noopener noreferrer" href="https://www.bis.org/bcbs/publ/d517.pdf">Climate-related risk drivers and their transmission channels</a>, Basel Committee on Banking Supervision, April 2021.

<a target="_blank" rel="noopener noreferrer" href="https://www.bis.org/bcbs/publ/d518.pdf">Climate-related financial risks – measurement methodologies</a>, Basel Committee on Banking Supervision, April 2021.

<a href="http://crisforfinance.com/">Climate Risk Impact Screening</a>, Carbon4 Finance.

<a target="_blank" rel="noopener noreferrer" href="https://www.bis.org/bcbs/publ/d502.pdf">Climate-related financial risks: a survey on current initiatives</a>, Basel Committee on Banking Supervision, April 2020.

<a target="_blank" rel="noopener noreferrer" href="https://blocnotesdeleco.banque-france.fr/en/blog-entry/climate-risks-and-collateral-methodological-experiment">Climate risks and collateral: a methodological experiment</a>, Banque de France.

Towards climate integration into global prudential banking regulation

At COP26 in Glasgow, most member countries pledged to "Conserve and accelerate the restoration of forests and other terrestrial ecosystems" <a class="footnoteLink" href="#footnote-1">[1]</a>. However, a number of factors cast doubt on the effectiveness of this type of high-profile voluntary commitment: previous unfulfilled pledges, such as the New York Declaration on Forests<a class="footnoteLink" href="#footnote-2">[2]</a>, the absence of quantified targets by 2030, and the insincerity of some of the main signatories, such as Indonesia<a class="footnoteLink" href="#footnote-3">[3]</a>.However, climate science is seizing on the subject in a concrete way: new reporting and carbon accounting standards<a class="footnoteLink" href="#footnote-4">[4]</a> are emerging and give to the deforestation a central place.On the institutional front, France has adopted a national strategy to end imported deforestation. It is being followed by Europe, which recently enacted the EUDR<a class="footnoteLink" href="#footnote-5">[5]</a>, a law designed to exclude from the European market all products derived from deforestation, i.e. the sustainable conversion of forest ecosystems to other land uses. Although our territories are little affected by the direct risk of deforestation, products imported by Northern countries are responsible for more than half of global deforestation<a class="footnoteLink" href="#footnote-6">[6]</a>. According to WWF France<a class="footnoteLink" href="#footnote-7">[7]</a>, a dozen products are responsible for almost a quarter of the emissions generated by our agricultural system. One of these, even before palm oil, is one of the flagship products of our Western diet: cocoa.&nbsp;<h3>Why does cocoa cause deforestation?</h3>Cocoa first appeared 4,000 years ago in the northern Amazon, where it was the object of worship by the Mayas and Aztecs, who attributed medicinal virtues to it, and was even used as currency. After the Spanish conquest, it was introduced by Europeans to new territories in South America, notably Venezuela, before reaching Africa and Oceania at the beginning of the 20th century thanks to the new, stronger Trinitario and Forestaro varieties, which account for 95% of current production.Cocoa cultivation is now concentrated in the "cocoa belt", close to the equator, in tropical areas where forests were relatively preserved because cocoa requires rich soils<a class="footnoteLink" href="#footnote-8">[8]</a>. In addition to replacing these areas of high ecological value - notably as carbon sinks and reserves for biodiversity - cocoa plantations deplete soil and water resources when grown as single-crops.They are also highly sensitive to climatic hazards, particularly in intensive monocultures. These have the highest yields, but eventually collapse due to disease, pests and soil degradation<a class="footnoteLink" href="#footnote-9">[9]</a>.Despite these "agronomic" difficulties, it is above all the growing demand from Western countries and the low remuneration of producers that is driving them to release ever more land for this crop, since it is less costly<a class="footnoteLink" href="#footnote-9">[9]</a><a class="footnoteLink" href="#footnote-13">[13]</a>, to create new areas than to restore existing ones<a class="footnoteLink" href="#footnote-10">[10]</a>.One way of limiting this pressure is to increase the yields of part of the cocoa plantations whose cultivation is extensive and poorly optimized. According to a CIRAD study<a class="footnoteLink" href="#footnote-9">[9]</a>, there is an optimum that guarantees decent yields while enabling cocoa plantations to produce for around a hundred years, compared with 30 to 40 years for intensive monocultures, before being replaced by another crop. But even if yield gains can be expected for part of the production, these improvements will not be infinite. Current acreage will not be sufficient to meet the growing demand for cocoa. To meet it, an increase in cultivated area will be necessary.&nbsp;<h3>What does this mean for chocolate's carbon footprint?</h3>Not surprisingly, emissions from deforestation account for almost all (~95%) of the carbon footprint of cocoa production<a class="footnoteLink" href="#footnote-11">[11]</a>. The country of production and the local situation of the forests therefore have a considerable influence on the footprint of beans of different origins (Fig.1)&nbsp;&nbsp;

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Figure 1 - Average carbon intensity of cocoa beans leaving the farm, by origin (in kgCO2e/kg)

These emissions from deforestation are therefore reflected in the carbon footprint of chocolate, whose carbon intensity depends first and foremost on the origin of the beans (Fig. 2). But the milk powder used in the recipe for milk or white chocolate also has a relatively high carbon intensity, ahead of the other ingredients - mainly sugar.

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Figure 2 - Carbon intensity of different chocolates according to recipe (in kgCO2e/kg)

A chocolate's footprint will therefore depend on the origin of the cocoa and its recipe. For example, a dark chocolate with a high cocoa content from an area where deforestation is high will have most of its emissions associated with cocoa production. Conversely, for a white chocolate with low cocoa content from an area where deforestation is low, it is the milk powder, which is more emissive than non-deforesting cocoa, that accounts for most emissions. (Fig. 3)

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Figure 3 - Carbon intensity of three chocolate recipes according to the origin of the cocoa beans (in kgCO2e/kg)

<h4>Why has cocoa's carbon footprint recently increased?</h4>In WFLDB3.5<a class="footnoteLink" href="#footnote-12">[12]</a>, the main source of carbon data on cocoa, greenhouse gas (GHG) emissions associated with the production of one bean have doubled between 2019 and 2022. Why this sharp increase?The first answer is methodological: the state of knowledge about deforestation, its consequences and, above all, its measurement, continues to mature. It's not the emissions from cultivation that are increasing, but our ability to estimate them that is improving.The second answer is physical: cocoa cultivation is having an increasingly significant direct or indirect impact, for two reasons:- it's a product grown in areas where forest loss is accelerating;- it is a product for which demand, and therefore the increase in cultivated areas, is rising sharply (Fig. 4), while yields have been stable since the 1990s. This accentuates the responsibility of cocoa cultivation for the pressure exerted on the land.

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Figure 4 - Change in cocoa-growing areas among the world's top 10 producers since 1961 (in ha)

In Ivory Coast, the world's leading cocoa producer, which accounts for almost half of all cocoa volumes, the area planted with cocoa trees has increased 18-fold in 60 years (Fig. 4), while the forest has lost more than 80% of its original area.<a class="footnoteLink" href="#footnote-13">[13]</a><h3>Conclusion</h3>&nbsp;Following the adoption of the EUDR (European Union Deforestation Regulation), for each commodity (or by-product) on the list<a class="footnoteLink" href="#footnote-14">[14]</a>, companies will have to report the place and date of production of agricultural raw materials to enable them to be placed on the European market. Cocoa companies will therefore have to pay close attention to these impacts. The regulator's role will be to verify via satellite images that the product in question has not directly caused deforestation. These regulations will require considerable work on the part of the companies concerned but will help to improve traceability within agri-food chains, a crucial step in limiting the negative impacts of this sector and creating virtuous cycles.&nbsp;However, deforestation will not be curbed unless restrictions are implemented worldwide. European countries will be able to switch to cocoa from lands deforested before 2021 and not covered by regulations<a class="footnoteLink" href="#footnote-15">[15]</a>. Other consuming regions, on the other hand, will have no difficulty in sourcing cocoa from recently converted land.&nbsp;Faced with these facts, is it possible to think of happy sobriety without chocolate? Its irresistible nature makes it a taboo in ecological discourse, yet the more we consume it, the greater the pressure on tropical forests.&nbsp;It is therefore inevitable to reverse the trend by reducing our chocolate consumption, which reached 8.1 kg in 2019 for an average French person (compared with 6.3 in 2010)<a class="footnoteLink" href="#footnote-16">[16]</a>, mostly (~54%) in the form of spreads, confectionery, and chocolate bars<a class="footnoteLink" href="#footnote-17">[17]</a>. Perhaps it's time to ask ourselves: do we need so much chocolate so regularly? Shouldn't we first reduce our consumption of many processed products containing chocolate, and restore cocoa's festive and exceptional character? As our grandmothers used to say: "Earth is the only planet where you can find chocolate, so let's preserve it!

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145 countries covering 90% of the world's forests have co-signed the following declaration :<a href="https://ukcop26.org/glasgow-leaders-declaration-on-forests-and-land-use/">Glasgow Leaders’ Declaration on Forests and Land Use - UN Climate Change Conference (COP26) at the SEC – Glasgow 2021</a>

In 2014, the New York Declaration on Forests had already set the goal of halting deforestation by 2030 and halving it by 2020.

Indonesia has its own interpretation of the text, which would be a commitment to "sustainable forest management and not the elimination of deforestation by 2030." Indonesia's Minister of the Environment considers that "forcing Indonesia to achieve zero deforestation by 2030 is manifestly inappropriate and unfair".

The FLAG (Forest, Land and Agriculture) sector guide of the Science Based Target initiative and the Land Sector &amp; Removals sector guide of the GHG Protocol.

EUDR = European Deforestation Regulation

Crippa and al. Food systems are responsible for a third of global anthropogenic GHG emissions. 2021

“Déforestation importée : arrêtons de scier la branche”, 2018

Cirad, «&nbsp;Cacaoculture agroforestière en Afrique : l’art de concilier production durable et services écologiques»

Replacement of dead trees and pruning of old cocoa trees, with prior restoration of shade and soil fertility using a large quantity of inputs.

Deforestation generates sudden emissions when wood is burnt, and then progressively as the carbon contained in the soil escapes.

The World Food LCA Database is an international LCA (Life Cycle Assessment) database resulting from an initiative led by Quantis in partnership with leaders in the agri-food sector.

Solagro, «&nbsp;La face cachée de nos consommations&nbsp;»

Meat products (beef, mutton, poultry and pork), cocoa, coffee, palm oil, soy, corn, rubber, paper and wood.

The regulations exclude all products from deforested land after December 31, 2021.

Statista in cooperation with Kantar, L’Alliance 7 and the Syndicat du Chocolat.

Is it possible to be happily sober without chocolate?

Fanny joined the Carbone 4 team in&nbsp;June 2019 as a consultant.She graduated from ISAE-Supaero, as a general engineer specialized in energy, transport and environment, as well as in the science of decision-making.At Carbone 4, she participates in the environmental evaluation of public and private investments and calculates carbon footprints for companies and local authorities.During her studies, Fanny had an experience in a start-up which offered wooden houses with photovoltaic panels. She complemented her education with an immersive course questioning the issues of an ecological and social transition.&nbsp;

Fanny Deschamps

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