US regulators release climate-related financial risk guidelines for banks

​​US federal banking regulators released their final principles for managing climate-related financial risk at large financial institutions. The principles recognise climate change as a threat to the financial stability of the economy but fail to suggest banks take steps to help the transition to a greener economy.

The joint principles from the Federal Reserve, Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) lay out how the management and boards of financial institutions with over US$100bn in assets under management should approach climate-related risks.

The three organisations released initial drafts of the framework separately over the last two years, drawing hundreds of comments including criticism that the regulators were overstepping their reach, but also for calls to do more.

However, not all regulators supported the final guidance, with Fed governors Michelle Bowman and Christopher Waller voting against it. Sustainable policies have come under fire in recent years amid a Republican backlash against ESG measures, raising questions about their impact on climate disclosures.

In a press release, the Fed reiterated that the principles do not “prohibit nor discourage large financial institutions from providing banking services to customers of any specific class or type, as permitted by law or regulation”.

Fed chair Jerome Powell stressed that the central bank was not a “climate policymaker” and that the guidance “is squarely focused on prudent and appropriate risk management”.

“Decisions about policies to address climate change must be made by the elected branches of government. Over time, we must be vigilant to avoid crossing or blurring that line. It is not the Fed’s role to tell banks which businesses they can and cannot lend to, and this guidance is not intended to do so,” he said.

What do the guidelines say?

The final guidelines do not include calls for the agencies to promote a transition to a lower-carbon economy, although they acknowledge the economic threats of climate change and the transition to a greener economy.

The principles include directing management to provide board members with timely and accurate information on potential climate risks, including operation and legal ones. It reiterates that management is responsible for implementing, measuring and monitoring risks, and should regularly report on risks to the board “including material climate-related financial risks”. Banks should also consider climate-related risks during underwriting and monitoring of portfolios.

In addition, the board should encourage management to consider climate financial risk on operational and legal risks. Any public statements or communication should be consistent with internal strategies and risk management frameworks. The regulatory guidelines also direct management to develop a process to measure and monitor risks, and report on the materiality of those risks to stakeholders, as well as develop and implement climate-related scenario analysis frameworks.

More work needed, advocates say

Some climate finance advocates applauded the agencies’ guidelines, calling them a solid start, while others have been more critical.

“Supervisors and examiners must now turn their attention to effective implementation, and the regulators should provide more detailed guidance in coordination with the Treasury Department on credible net-zero transition plans that include fossil fuel criteria and align with these megabanks’ public climate commitments,” said Alex Martin, climate finance policy director at Americans for Financial Reform Education Fund.

Dennis Kelleher, president and CEO of Better Markets, said the principles are “grossly inadequate” in protecting banks and the US economy from climate-related financial risks.

“Climate events and the damage they cause to communities, property, small businesses, and the livelihoods of so many Americans are going to lead to a banking crisis. The issue is not if, but when such a crisis will happen,” he said.

The joint regulatory rules come as regulators around the world are considering how to implement climate factors in capital requirement and disclosure rules. Separately, the three regulators also updated regulations under the Community Reinvestment Act to include new investment categories for community investment in areas like disaster preparedness and weather resiliency.

The US Securities and Exchange Commission is expected to publish its rules on climate disclosures but the process has been delayed over lawsuit concerns, with some lawmakers urging the regulator to finalise the rules soon.