Climate-Related Financial Risk

By Rachel Wolf, Esq. & Summer Pannizzo

Just as record temperatures recently have been recorded across the globe, climate-related financial risk is a growing concern for bank regulators and other industry stakeholders. In 2021, President Biden signed Executive Order No. 14,030 directing the Financial Stability Oversight Council (FSOC) to assess climate-related financial risk to the stability of the Federal Government and the stability of the financial system. In October 2021, the FSOC identified climate change as an “emerging threat to the financial stability of the United States” in its Report on Climate-related Financial Risk.[1]

Over the past couple of years, bank regulators have proposed guidance to address the emerging economic and financial risks associated with the physical effects of climate change and the transition to a low carbon economy. Both the OCC and the FDIC published and requested comment on very similar draft supervisory guidance aimed at providing a framework for the management of climate-related financial risks faced by large banks with over $100 billion in total consolidated assets. And federal banking regulators jointly published a notice of proposed rules modernizing the implementing regulations for the Community Reinvestment Act (CRA) by, among other things,  adding “disaster preparedness and climate resiliency” activities as a new category of community development eligible for CRA credit.[2]

Not all federal bank regulators believe that the financial and economic risks from climate change are imminent. In his May 11, 2023, speech on Climate Change and Financial Stability, Federal Reserve Board Governor Christopher J. Waller shed some doubt on whether the financial risks associated with climate change are “sufficiently unique or material to merit special treatment relative to others” suggesting that the focus must be on building a financial system that is resilient enough to withstand the broader range of potential risks.[3]

In July 2023, regulators from the Federal Reserve and FDIC testified on the legitimacy of climate-related financial risk policies in risk management before the House Financial Services Subcommittee on Financial Institutions and Monetary Policy. Pushing back on claims that action to address climate-related financial risks is an unnecessary result of political influence, federal regulators discussed their roles as regulators and why climate-related risks are material.

Michael S. Gibson, Director of the Division of Supervision and Regulation at the Federal Reserve,  urged lawmakers that weaknesses in addressing climate-related financial risks could negatively impact a bank’s safety and soundness.  While future regulation addressing climate-related financial risk in the U.S. remains unclear, banks might consider the inevitable climate-related challenges that lie ahead as the U.S. transitions to a low-carbon economy, and senior leadership should seek opportunities to gain knowledge on how to integrate climate risk into existing risk management systems.

The information contained herein is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this blog should be construed as legal advice from Shumaker Williams P.C. or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. This blog is current as of the date of original publication.

[1]           https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf (accessed 6/13/2023).

[2]              https://www.federalreserve.gov/consumerscommunities/files/cra-npr-fr-notice-20220505.pdf (accessed 6/13/2023)

[3]              https://www.federalreserve.gov/newsevents/speech/waller20230511a.htm (accessed 6/6/2023)