INSIGHT by Ceres
Ceres welcomes the harmonized Principles for Climate-Related Financial Risk Management for Large Financial Institutions from the Federal Reserve Board of Governors (Fed), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC).
“We are encouraged by the Fed, OCC, and FDIC’s joint effort to release the first federal guidance for large banks on managing climate-related financial risk. Climate risk permeates capital markets, posing immediate threats to banks of all sizes, business models, and geographies – as well as the communities they serve. With proper implementation, these Principles will help improve consistency and strengthen risk management at large banks, promoting the resilience of individual institutions and our financial system, strengthening the stability of the U.S. financial system.”
-Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets at Ceres
Ceres’ reports consistently show financial institutions are exposed to both the physical impacts of climate change and the risks associated with the transition to a net zero economy. The Principles offer a framework of high-level practical and familiar steps that banks and non-bank systemically important financial institutions (SIFIs) can take within their current risk management practices, encompassing six areas:
〉Governance – how bank boards should understand and oversee these risks and implement risk management
〉Policies, Procedures, and Limits – how management should incorporate these risks to align with bank strategy and risk appetite
〉Strategic Planning – addressing the potential impact of these risks on bank financial condition, operation, and business objectives over various time horizons
〉Risk Management – developing and implementing processes to identify, measure, monitor, and control exposure to these risks within existing frameworks
〉Data, Risk Measurement, and Reporting – incorporating these risks in internal reporting, monitoring, and escalation processes to facilitate timely and sound decision-making
〉Climate-Related Scenario Analysis – providing a comprehensive and forward-looking perspective applied alongside existing risk management practices to evaluate the resiliency of a bank’s strategy and risk management to the structural changes arising from these risks.
The Principles also describe how banks can address climate-related financial risks in traditional risk categories including credit risk, liquidity risk, operational risk, and legal and compliance risk – although the agencies note the Principles will “neither prohibit nor discourage financial institutions from providing banking services to customers of any specific class or type.”
However, the Principles have several key shortcomings, including limiting the principles to banks with over $100 billion in assets, not explicitly requiring banks to consider and take action to reduce or limit impacts on LMI and other disadvantaged communities, and not discussing transition plans, among others. Ceres recommendations for the Principles were outlined in comment letters to the OCC, FDIC, and Fed in 2022 and 2023.
Ceres encourages the Fed, OCC, and FDIC to take additional steps to support this guidance and recommends the actions outlined in our 2023 Climate Risk Scorecard.
Ceres is a nonprofit organization working with the most influential capital market leaders to solve the world’s greatest sustainability challenges. The Ceres Accelerator for Sustainable Capital Markets is a center of excellence within Ceres that aims to transform the practices and policies that govern capital markets to reduce the worst financial impacts of the climate crisis. It spurs action on climate change as a systemic financial risk—driving the large-scale behavior and systems change needed to achieve a net zero emissions economy through key financial actors including investors, banks, and insurers. The Ceres Accelerator also works with corporate boards of directors on improving governance of climate change and other sustainability issues.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
