Regulations for Climate-related Risk Management
On October 24, 2023, the federal banking regulators in the US, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) jointly issued Principles for Climate-Related Financial Risk Management for Large Financial Institutions. This regulatory development aligns with comparable supervisory initiatives implemented in jurisdictions outside the United States.
The Principles are intended to help financial institutions direct their attention towards critical aspects of climate-related financial risk management. The principles cover six areas:
Financial institutions are expected to develop frameworks for the safe and sound management of exposure to climate-related financial risks, and they must do so in a consistent fashion with the risk management frameworks prescribed in agencies’ existing rules and guidance.
The principles outline how climate-related financial risks can be addressed in various categories:
Large institutions with over $100 billion in total consolidated assets must now adhere to regulatory principles for climate-related financial risk management. These principles do not apply to community banks.
The principles are designed to help large financial institutions' boards of directors and management incorporate climate-related financial risks into risk management frameworks in a manner consistent with safe and sound practices. They are intended to explain and supplement existing risk management standards and guidance on the role of boards and management.
Boards and management are expected to act accordingly.
Although no timeline has been shared for compliance with the principles, the Federal Reserve takes formal enforcement actions against regulated institutions for violations of any laws, rules, or regulations, unsafe or unsound practices, breaches of fiduciary duty, and violations of final orders.
Similar regulatory guidance was implemented in the EU and the UK, as well as other jurisdictions. The experiences of institutions in those locations illustrate that tackling climate-related financial risks across various risk categories and business areas is a complex endeavor that demands time and collaboration across the financial industry.
The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.
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