Risk Management: Federal Banking Regulators Announce Principles for Climate-Related Financial Risk Management for Large Financial Institutions
On October 24, 2023, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Federal Reserve Board), and the Federal Deposit Insurance Corporation (collectively, the agencies) announced principles for climate-related financial risk management for large financial institutions. These principles apply only to financial institutions with more than $100 billion in total consolidated assets.
Per the Guidance, the term climate-related risks refers to physical risks and transition risks associated with climate change. Physical risks refer to the harm to people and property arising from acute, climate-related events, such as hurricanes, wildfires, floods, and heatwaves, and chronic shifts in climate, including higher average temperatures, changes in precipitation patterns, sea level rise, and ocean acidification. Transition risks refer to stresses to institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes that would be part of a transition to a lower carbon economy.
• The principles are intended to:
– support large financial institutions’ efforts to focus on key aspects of climate-related financial risk management.
– provide a high-level framework for climate-related financial risk management consistent with the agencies’ existing rules and guidance.
• The final guidance contains high-level principles covering six areas:
1. governance;
2. policies, procedures, and limits;
3. strategic planning;
4. risk management;
5. data, risk measurement, and reporting; and
6. scenario analysis.
Additionally, the final principles describe how climate-related financial risks can be addressed in the management of traditional risk areas.
• The final principles neither prohibit nor discourage large financial institutions from providing banking services to customers of any specific class or type, as permitted by law or regulation. The decision regarding whether to make a loan or to open, close, or maintain an account rests with the financial institution, so long as the financial institution complies with applicable laws and regulations.
• The agencies are providing guidance to large financial institutions through these principles on the management of climate-related financial risks just as the agencies provide guidance to financial institutions in identifying and managing other risks.
• The final principles are intended to promote a consistent understanding of the effective management of climate-related financial risks.
Here is the link for more details: https://www.occ.gov/news-issuances/bulletins/2023/bulletin-2023-33.html
