Climate-Related Financial Risks Are Systemic Financial Risks

Credit: Photo by Maxim Hopman on Unsplash

“Climate change poses significant risks to the financial system.”

Michael J. Hsu, Acting Comptroller of the Currency, Office of the Comptroller of the Currency, November 8, 2021

We have been saying the same thing. That is why back in September 2021, we sent a letter to regulators asking them to consider climate risk in their bank oversight by issuing supervisory guidance, which the OCC committed to a few weeks later.

As explained in more detail here, supervisory guidance lets banks know that their bank regulators—and specifically the bank examiners that look at their records and ask questions to make sure banks are following safe practices for the health of the bank—expect each bank to include climate risk in their risk management analysis and practices. And, as Acting Comptroller Hsu aptly said, this is because climate change poses a real risk to the health and safety of both individual banks and the broader financial system. The goal of banks, and our bank regulators, should be to protect their clients, customers and investors from sudden financial shocks due to the rising dangers and costs of climate change.

Eleven US senators see similar risks, as do many central banking authorities across the globe. As the US central bank and financial regulators begin to play catch-up with other countries, the US Office of the Comptroller of the Currency (OCC) took a critical stance in recognizing the need to incorporate climate change into a financial institution’s risk management framework to ensure the safety and soundness of the financial system. As an initial, very important step, the Office of the Comptroller of the Currency (OCC) drafted the Principles for Climate-Related Financial Risk Management for Large Banks on December 16th, 2021, and sought public feedback on the principles designed to support the identification and management of climate-related financial risks by banks with more than $100 billion in total consolidated assets.

Similarly, on an international level, the Basel Committee on Banking Supervision (BCBS), an international committee of banking supervisors, published the Principles for the Effective Management and Supervision of Climate-related Financial Risks and is seeking public comments. The BCBS provides a forum for regular cooperation on banking supervisory matters and heavily influences the quality of banking supervision worldwide. These principles are one part of the BCBS’s overall plan to address climate-related financial risks to the global banking system.  

NRDC’s Green Finance Center drafted comments (OCC Comments 2-14-22 and BCBS Comments 2-16-22)  to both entities commending their efforts in recognizing the significance of climate-related financial risks to the banking system and suggesting that supervisors and banks worldwide consider these risks. Moreover, suggestions for improvement were made to ensure that both Principles take a holistic consideration of all climate risks (scope 1, 2, 3), utilize existing tools (scenario analyses and various global standards), and address the adverse impact such rules will have on low-income and minority communities.

More details can be found in our comment letters linked below:

OCC Comment Letter

BCBS Comment Letter

The BCBS’s Principles will establish guardrails for global banking supervisors while the OCC’s Principles will set an important precedent that will encourage other US financial regulators (SEC, FDIC) to follow suit and begin incorporating climate risks into their respective supervisory guidance.

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