On October 24, US banking regulators, including the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (termed “the agencies”), issued highly anticipated guidance on how vast financial institutions should manage financial dangers concomitant with climate change. The new guidance has been under review and development for several months and aims to provide a much-needed risk management framework for banks.
As detailed in a report provided by ArentFox Schiff, the newly released guidance focuses on financial risks posed by severe weather events, longer-term shifts in climate patterns and the transitioning to a lower-carbon economy. It outlines an expectation for large banking organizations to understand and manage financial risks arising from climate change, focusing not solely on current environmental conditions, but also on potential future scenarios.
As per the guidance, banks are expected to infuse climate change considerations into their overall risk management processes, including but not limited to governance, risk assessment, risk management, and disclosure practices. This implies that not only should banks be concerned about immediate operational risks related to climate-induced events like flooding or storms but should also ponder upon the market risks relating to the transition to a low-carbon economy. It is worth noting that the new rules do not create explicit regulatory requirements, but rather offer a benchmark against which a bank’s risk management practices can be evaluated.
For legal professionals working in this sphere, this guidance signifies a renewed emphasis on the part of regulators on climate change considerations within the financial industry, particularly in risk management strategies. By understanding and applying these guidelines, attorneys can assist banks and large financial institutions in implementing an appropriate risk management strategy that is cognizant of the changing climate and its associated financial risks.
The guidance also serves as a timely reminder of the crucial role banks and other financial institutions have to play in mitigating the impacts of climate change, both by managing their own risks and by facilitating a broader societal transition towards a more sustainable, low-carbon economy.