Preparatory actions by regulatory agencies
Even before FSOC published its report, a number of agencies and individual officials had already begun accelerating their preparatory activities and public statements related to climate-related financial risk. For example, in March 2021, the Federal Reserve (Fed) formed two separate climate committees.
The first of these, the Supervision Climate Committee, brought together senior staff from the Fed and from reserve banks across the system, with the goal of making sure that Fed-supervised organizations are resilient to climate-related financial risks. The second, the Financial Stability Climate Committee, is charged with identifying, assessing, and addressing the broader, macroeconomic aspects of climate change across the financial system, including the potential for climate-generated economic shocks.
More recently, Michael Barr, the recently sworn-in Fed vice chair of supervision, told the Senate Banking Committee that the Fed’s role in climate change issues is “important, but quite limited, quite narrow,” adding that the Fed should not be involved in directing financial services organizations on where they should or should not lend.
Shortly after the FSOC report was published, the Office of the Comptroller of the Currency (OCC) issued OCC Bulletin 2021-62, a set of draft principles outlining the agency’s proposed approach to questions related to effective risk governance frameworks, policies and procedures, and risk management practices in organizations it supervises. The initial release generated thousands of comment letters from financial services organizations and industry stakeholders, which the agency is currently reviewing and will take into account as it develops more specific requirements.
For its part, the Federal Deposit Insurance Corp. (FDIC) issued a set of draft principles for public comment in March 2022. The FDIC principles are parallel to OCC principles, and they are intended to provide a high-level framework for insured organizations to use as they begin incorporating climate-related financial risks into their risk management frameworks.
In his remarks to the Institute of International Bankers on March 7, 2022, Acting Comptroller Michael Hsu said the OCC intends to work with the FDIC and the Fed on an interagency basis so that the agencies can finalize the principles documents and begin to develop more detailed guidance, which is generally expected sometime in 2022. Although both the OCC and FDIC guidance initially would apply only to banks with more than $100 billion in assets, Hsu also added that smaller and mid-sized banks should expect comparable requirements in coming years and should “use the time wisely” to prepare.
In those same remarks, Hsu noted, “To the extent that midsize and community banks can develop thoughtful, tailored assessments of their climate risk profiles, they will help mitigate the risk of a ‘trickle down’ of large bank climate risk management expectations in the future.” More specifically, he said that “doing a ‘what if?’ scenario analysis is bread-and-butter risk management for banks” and that such practices “should be applied to climate risks in the same, objective, dispassionate way that banks approach geopolitical risk.”
In addition to the industry-specific guidance that is expected in coming months, publicly traded banks and bank holding companies also need to pay attention to the broader ESG disclosure requirements now being developed by the Securities and Exchange Commission. Although the comment period for the proposed climate-related disclosure rule closed in June 2022, uncertainty remains about when these standards will be finalized. When it eventually is completed, publicly traded companies – including publicly traded financial services organizations – likely will be required to disclose climate-related risks to their business, greenhouse gas emissions, and certain climate-related financial statement metrics.
The National Credit Union Administration (NCUA) has taken a somewhat lighter approach to climate-related financial risk management. However, its board of directors recently did include comments on the issue in its five-year strategic plan for 2022-2026: “Credit unions, not the NCUA, are best positioned to assess various risks and opportunities within their field of membership. Credit unions will need to make their own decisions on diversification and expanded fields of membership.”
Although it has not yet issued any specific guidance or draft principles for public comment, the NCUA is nevertheless a member of the FSOC, and it likely will work jointly with other banking regulators to develop a response that is generally consistent with the overall direction of the FSOC’s report on climate-related financial risk.