Agencies issue principles for climate-related financial risk management for large financial institutions

On October 24, 2023, the Board of Governors of the Federal Reserve System (FED or Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) published a joint press statement to announce the finalization of their Principles for Climate-Related Financial Risk Management for Large Banks. The Principles were meanwhile published in the Federal Register on October 30, 2023. The final version follows corresponding consultations in 2021 and 2022 (EventID 13504 and EventID 18690).
In detail, the Principles aim to promote a consistent understanding of the effective management of climate-related financial risks among large financial institutions and to assist them in their assessment and in their development of prudent risk management policies to mitigate financial risks arising from climate change. Large financial institutions are thereby those with more than $100 billion in total consolidated assets. The final document covers a large variety of issues, ranging from the adoption of adequate policies and procedures at governance level, to the detailed analysis of the consequences of climate change on credit risk, counterparty risk, or liquidity risk, to name a few. The document also addresses issues such as data sources, data quality, and methods used to assess those risks and ways to properly report on the assessment (both formal and timing aspects).
Compared to the draft versions issued by the regulators, the final version contains some modifications in response to the feedback the regulators have received to their consultations including the following:
– the agencies have clarified that the principles also apply to foreign banking organizations and branches and agencies of foreign banks operating in the United States so long as they meet the specified thresholds ($100 billion in „U.S. operations“);
– the agencies have clarified (separated) the role of the Board of Directors and that of management in „overseeing the financial institution’s risk-taking activities“ and in executing the strategic plan of an institution, respectively; and
– the agencies have removed a reference with respect to compensation practices in view of the management of climate-related risks as such practices are discussed in their guidelines on compensation.
To conclude, either regulator emphasizes that the principles are not meant to prohibit or discourage large institutions from offering banking services to customers of any particular class or category. The determination of whether to grant a loan or to initiate, terminate, or uphold an account is the responsibility of the financial institution, as long as it adheres to the relevant legal and regulatory requirements.