Notice2022-26648
Principles for Climate-Related Financial Risk Management for Large Financial Institutions
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 8, 2022
Issuing agencies
Federal Reserve System
Abstract
The Board is requesting comment on draft principles that would provide a high-level framework for the safe and sound management of exposures to climate-related financial risks for Board-supervised financial institutions with over $100 billion in assets. Although all financial institutions, regardless of size, may have material exposures to climate-related financial risks, these principles are intended for the largest financial institutions, i.e., those with over $100 billion in total consolidated assets. The draft principles are intended to support efforts by large financial institutions to focus on key aspects of climate-related financial risk management.
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<title>Federal Register, Volume 87 Issue 235 (Thursday, December 8, 2022)</title>
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[Federal Register Volume 87, Number 235 (Thursday, December 8, 2022)]
[Notices]
[Pages 75267-75271]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-26648]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1793]
Principles for Climate-Related Financial Risk Management for
Large Financial Institutions
AGENCY: The Board of Governors of the Federal Reserve System (Board).
ACTION: Notice and request for comment.
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SUMMARY: The Board is requesting comment on draft principles that would
provide a high-level framework for the safe and sound management of
exposures to climate-related financial risks for Board-supervised
financial institutions with over $100 billion in assets. Although all
financial institutions, regardless of size, may have material exposures
to climate-related financial risks, these principles are intended for
the largest financial institutions, i.e., those with over $100 billion
in total consolidated assets. The draft principles are intended to
support efforts by large financial institutions to focus on key aspects
of climate-related financial risk management.
DATES: Comments on the draft principles must be received on or before
February 6, 2023.
ADDRESSES: Interested parties are encouraged to submit written
comments. When submitting comments, please consider submitting your
comments by email or fax because paper mail in the Washington, DC area
and at the Board may be subject to delay. You may submit comments,
identified by Docket No. OP-1793, by any of the following methods:
<bullet> Agency Website: <a href="http://www.federalreserve.gov">http://www.federalreserve.gov</a>. Follow the
instructions for submitting comments at <a href="http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm">http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm</a>.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#53213634207d303c3e3e363d2720133536373621323f213620362125367d343c25"><span class="__cf_email__" data-cfemail="55273032267b363a3838303b21261533303130273439273026302723307b323a23">[email protected]</span></a>. Include docket
number in the subject line of the message.
<bullet> Fax: (202) 452-3819 or (202) 452-3102.
<bullet> Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
In general, all public comments will be made available on the
Board's website at <a href="http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm">www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm</a> as submitted, and will not be modified to remove
confidential, contact or any identifiable information. Public comments
may also be viewed electronically or in paper in Room M-4365A, 2001 C
St. NW, Washington, DC 20551, between 9:00 a.m. and 5:00 p.m. during
federal business weekdays.
FOR FURTHER INFORMATION CONTACT: Anna Lee Hewko, Associate Director,
(202) 530-6260; Morgan Lewis, Manager, (202) 452-2000; Matthew
McQueeney, Senior Financial Institution Policy Analyst II, (202) 452-
2942 Katie Budd, Senior Financial Institution Policy Analyst I, (202)
452-2365; Susan Ali, Senior Financial Institution Policy Analyst I,
(202) 452-3023; Division of Banking Supervision and Regulation; or Asad
Kudiya, Assistant General Counsel, (202) 475-6358; Kelley O'Mara,
Senior Counsel (202) 973-7497; Matthew Suntag, Senior Counsel, (202)
452-3694; or David Imhoff, Attorney, (202) 452-2249, Legal Division.
Board of Governors of the Federal Reserve System, 20th and C Streets
NW, Washington, DC 20551. For the hearing impaired and users of TTY-
TRS, please call 711 from any telephone, anywhere in the United States.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Board is requesting comment on draft principles that would
provide a high-level framework for the safe and sound management of
exposures to climate-related financial risks for financial institutions
with over $100 billion in assets. The financial impacts that result
from the economic effects of climate change and the transition to a
lower carbon economy pose an emerging risk to the safety and soundness
of financial institutions \1\ and the financial stability of the United
States. Financial institutions are likely to be affected by both the
physical risks and transition risks associated with climate change
(collectively, ``climate-related financial risks''). Physical risks
refer to the harm to people and property arising from acute, climate-
related events, such as hurricanes, wildfires, floods, and heatwaves,
and chronic shifts in climate, including higher average temperatures,
changes in precipitation patterns, sea level rise, and ocean
acidification.\2\ Transition risks refer to stresses to certain
institutions or sectors arising from the shifts in policy, consumer and
business sentiment, or technologies associated with the changes that
would be part of a transition to a lower carbon economy.\3\
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\1\ In this issuance, the term ``financial institution'' or
``institution'' includes state member banks, bank holding companies,
savings and loan holding companies, foreign banking organizations
with respect to their U.S. operations, and non-bank systemically
important financial institutions (SIFIs) supervised by the Board.
\2\ The Financial Stability Oversight Council has described the
impacts of physical risks as follows: ``The intensity and frequency
of extreme weather and climate-related disaster events are
increasing and already imposing substantial economic costs. Such
costs to the economy are expected to increase further as the
cumulative impacts of past and ongoing global emissions continue to
drive rising global temperatures and related climate changes,
leading to increased climate-related risks to the financial
system.'' Report on Climate-Related Financial Risk, Financial
Stability Oversight Council, page 10 (Oct. 21, 2021) (``FSOC Climate
Report''), available at <a href="https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf">https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf</a>.
\3\ The Financial Stability Oversight Council has described the
impacts of transition risks as: ``. . . [Changing] public policy,
adoption of new technologies, and shifting consumer and investor
preferences have the potential to impact the allocation of capital .
. . . If these changes occur in a disorderly way owing to
substantial delays in action or abrupt changes in policy, their
impact on firms, market participants, individuals, and communities
is likely to be more sudden and disruptive.'' FSOC Climate Report,
page 13.
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Weaknesses in how financial institutions identify, measure,
monitor, and control potential climate-related financial risks could
adversely affect financial institutions' safety and soundness, as well
as the stability of the overall financial system. The Board is
therefore seeking comment on draft principles that would promote a
consistent understanding of how climate-related financial risks can be
effectively identified, measured, monitored, and controlled among the
largest institutions, those with over $100 billion in total
consolidated assets. Many financial institutions are considering these
risks and would benefit from guidance as they develop strategies,
deploy resources, and make necessary investments to manage climate-
related financial risks.
The draft principles would provide a high-level framework for the
safe and
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sound management of exposures to climate-related financial risks,
consistent with the risk management frameworks described in the Board's
existing rules and guidance. The draft principles are intended to
support financial institutions' efforts to incorporate climate-related
financial risks into financial institutions' risk management frameworks
in a manner consistent with safe and sound practices.
The Board developed the proposed guidance in consultation with the
Office of the Comptroller of the Currency (OCC) and Federal Deposit
Insurance Corporation (FDIC). The OCC and FDIC requested comment on
similar draft principles in December 2021 and March 2022, respectively.
The agencies seek to promote consistency in their climate risk
management guidance and to clearly articulate risk-based principles on
climate-related financial risks for large financial institutions.
Accordingly, after reviewing comments received on the proposed
guidance, the Board intends to coordinate with the OCC and FDIC in
issuing any final guidance.
II. Request for Comment
The Board welcomes comments on all aspects of the draft principles,
including on the following questions.
Question 1: In what ways, if any, could the draft principles be
revised to better address challenges a financial institution may face
in managing climate-related financial risks?
Question 2: Are there areas where the draft principles should be
more or less specific given the current data availability and
understanding of climate-related financial risks? What other aspects of
climate-related financial risk management, if any, should the Board
consider?
Question 3: What challenges, if any, could financial institutions
face in incorporating these draft principles into their risk management
frameworks?
III. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521) (PRA)
states that no agency may conduct or sponsor, nor is the respondent
required to respond to, an information collection unless it displays a
current valid Office of Management and Budget (OMB) control number.
These draft principles would not revise any existing, or create any
new, information collections pursuant to the PRA. Consequently, no
submissions will be made to the OMB for review.
IV. Proposed Principles
The financial impacts that result from the economic effects of
climate change and the transition to a lower carbon economy pose an
emerging risk to the safety and soundness of financial institutions \4\
and the financial stability of the United States. Financial
institutions are likely to be affected by both the physical risks and
transition risks associated with climate change (collectively referred
to as ``climate-related financial risks''). Physical risks refer to the
harm to people and property arising from acute, climate-related events,
such as hurricanes, wildfires, floods, and heatwaves, and chronic
shifts in climate, including higher average temperatures, changes in
precipitation patterns, sea level rise, and ocean acidification.
Transition risks refer to stresses to institutions or sectors arising
from the shifts in policy, consumer and business sentiment, or
technologies associated with the changes that would be part of a
transition to a lower carbon economy.
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\4\ In this issuance, the term ``financial institution'' or
``institution'' includes state member banks, bank holding companies,
savings and loan holding companies, intermediate holding companies,
foreign banking organizations with respect to their U.S. operations,
and non-bank systemically important financial institutions (SIFIs)
supervised by the Board.
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Physical and transition risks associated with climate change could
affect households, communities, businesses, and governments--damaging
property, impeding business activity, affecting income, and altering
the value of assets and liabilities. These risks may be propagated
throughout the economy and financial system. As a result, the financial
sector may experience credit and market risks associated with loss of
income, defaults and changes in the values of assets, liquidity risks
associated with changing demand for liquidity, operational risks
associated with disruptions to infrastructure or other channels, or
legal risks.\5\
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\5\ FSOC Climate Report, page 13.
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Weaknesses in how a financial institution identifies, measures,
monitors, and controls the physical and transition risks associated
with a changing climate could adversely affect a financial
institution's safety and soundness. The adverse effects of climate
change could also include a potentially disproportionate impact on the
financially vulnerable, including low- to moderate-income (LMI) and
other disadvantaged households and communities.\6\
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\6\ For further information, see Staff Reports, Federal Reserve
Bank of New York, Understanding the Linkages between Climate Change
and Inequality in the United States, No. 991 (Nov. 2021), available
at <a href="https://www.newyorkfed.org/research/staff_reports/sr991.html">https://www.newyorkfed.org/research/staff_reports/sr991.html</a>.
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These draft principles provide a high-level framework for the safe
and sound management of exposures to climate-related financial risks,
consistent with the existing risk management frameworks described in
the Board's existing rules and guidance.
The principles are intended to support efforts by financial
institutions to focus on key aspects of climate-related financial risk
management. The principles are designed to help financial institutions'
boards of directors and management make progress toward incorporating
climate-related financial risks into financial institutions' risk
management frameworks in a manner consistent with safe and sound
practices. The principles are intended to supplement existing risk
management standards and guidance on the role of boards and
management.\7\
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\7\ References to the board and senior management throughout
these principles should be understood in accordance with their
respective roles and responsibilities, and is not intended to
conflict with existing guidance from the Board regarding the roles
of board and senior management or advocate for a specific board
structure. See, e.g., SR 21-3/CA 21-1: Supervisory Guidance on Board
of Directors' Effectiveness (Feb. 26, 2021) <a href="https://www.federalreserve.gov/supervisionreg/srletters/SR2103.htm">https://www.federalreserve.gov/supervisionreg/srletters/SR2103.htm</a>.
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Although all financial institutions, regardless of size, may have
material exposures to climate-related financial risks, these principles
are intended for the largest financial institutions, those with over
$100 billion in total consolidated assets.\8\ Effective risk management
practices should be appropriate to the size of the financial
institution and the nature, scope, and risk of its activities. In
keeping with the Board's risk-based approach to supervision, the Board
anticipates that differences in financial institutions' complexity of
operations and business models will result in different approaches to
addressing climate-related financial risks. Some large financial
institutions are developing the governance structures, processes, and
analytical methodologies to identify, measure, monitor, and control for
these risks. The Board understands that expertise in climate risk and
the incorporation of climate-related financial risks into risk
management frameworks remains under development in many financial
institutions and will continue to evolve over time. The Board also
recognizes that the incorporation of
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material climate-related financial risks into various planning
processes will be iterative, as measurement methodologies, models, and
data for analyzing these risks continue to mature.
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\8\ The Board will consider the total consolidated assets of a
branch or agency itself for branches and agencies of foreign banking
organizations subject to Board supervision.
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Through this and any subsequent climate-related financial risk
guidance, the Board will continue to encourage financial institutions
to manage climate-related financial risks in a manner that will allow
them to continue to prudently meet the financial services needs of
their communities. The Board encourages financial institutions to take
a risk-based approach in assessing the climate-related financial risks
associated with individual customer relationships and to take into
consideration the financial institution's ability to manage the risk.
General Principles
Governance. An effective risk governance framework is essential to
a financial institution's safe and sound operation. A financial
institution's board of directors (board) should understand the effects
of climate-related financial risks on the financial institution in
order to oversee management's implementation of the institution's
business strategy, risk profile, and risk appetite. The board should
oversee the financial institution's risk-taking activities and hold
management accountable for adhering to the risk governance framework. A
financial institution's board should acquire sufficient information to
understand the implications of climate-related financial risks across
various scenarios and planning horizons, which may include those that
extend beyond the institution's typical strategic planning horizon.
Sound governance by the board should include allocating appropriate
resources to support climate-related financial risk management and
clearly communicating to management the information the board needs to
oversee the measurement and management of climate-related financial
risks to the financial institution. The board should assign
accountability for climate-related financial risks within existing
organizational structures or establish new structures for climate-
related financial risks.
The board should oversee the financial institution's risk-taking
activities and hold management accountable for adhering to the risk
governance framework. The board should consider whether the
incorporation of climate-related financial risks into the financial
institution's overall business strategy and risk management frameworks
may warrant changes to its compensation policies, taking into account
that compensation policies should be aligned with the business, risk
strategy, objectives, values, and long-term interests of the financial
institution.
Management is responsible for implementing the financial
institution's policies in accordance with the board's strategic
direction and for executing the financial institution's overall
strategic plan and risk governance framework. This responsibility
includes assuring that there is sufficient expertise to execute the
strategic plan and effectively managing all risks, including climate-
related financial risks. This also includes management's responsibility
to oversee the development and implementation of processes to identify,
measure, monitor, and control climate-related financial risks within
the financial institution's existing risk management framework.
Management should also hold staff accountable for controlling risks
within established lines of authority and responsibility. Management is
responsible for regularly reporting to the board on the level and
nature of risks to the financial institution, including climate-related
financial risks. Management should provide the board with sufficient
information for the board to understand the impacts of climate-related
financial risks to the financial institution's risk profile and make
sound, well-informed decisions. Where dedicated climate risk
organizational structures are established by the board, management
should clearly define these units' responsibilities and interaction
with existing governance structures.
Policies, Procedures, and Limits. Management should incorporate
climate-related financial risks into policies, procedures, and limits
to provide detailed guidance on the financial institution's approach to
these risks in line with the strategy and risk appetite set by the
board. Policies, procedures, and limits should be modified when
necessary to reflect (i) the distinctive characteristics of climate-
related financial risks, such as the potentially longer time horizon
and forward-looking nature of the risks, and (ii) changes to the
financial institution's operating environment or activities.
Strategic Planning. The board and management should consider
material climate-related financial risk exposures when setting the
financial institution's overall business strategy, risk appetite, and
capital plan. As part of forward-looking strategic planning, the board
and management should address the potential impact of climate-related
financial risk exposures on the financial institution's financial
condition, operations (including geographic locations), and business
objectives over various time horizons. The board and management should
also consider climate-related financial risk impacts on the financial
institution's other operational and legal risks, and stakeholders,
including low-to-moderate income and other disadvantaged households and
communities. This consideration should also include assessing physical
harm or access to the financial institution's products and services.
Any climate-related strategies and commitments should align with
and support the financial institution's broader strategy, risk
appetite, and risk management framework. In addition, where financial
institutions engage in public communication of their climate-related
strategies, boards and management should assure that any public
statements about their institutions' climate-related strategies and
commitments are consistent with their internal strategies and risk
appetite statements.
Risk Management. Climate-related financial risks can impact
financial institutions through a range of traditional risk types.
Management should oversee the development and implementation of
processes to identify, measure, monitor, and control climate-related
financial risk exposures within the financial institution's existing
risk management framework. Financial institutions with sound risk
management practices employ a comprehensive process to identify
emerging and material risks related to the financial institution's
business activities. The risk identification process should include
input from stakeholders across the organization with relevant expertise
(e.g., business units, independent risk management, internal audit, and
legal). Risk identification includes assessment of climate-related
financial risks across a range of plausible scenarios and under various
time horizons.
As part of sound risk management, management should develop
processes to measure and monitor material climate-related financial
risks and to communicate and report the materiality of those risks to
internal stakeholders. Material climate-related financial risk
exposures should be clearly defined, aligned with the financial
institution's risk appetite, and supported by appropriate metrics
(e.g., risk limits and key risk indicators) and escalation processes.
Management should incorporate climate-related financial
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risks into the financial institution's risk management system,
including internal controls and internal audit.
Tools and approaches for measuring and monitoring exposure to
climate-related financial risks include, among others, exposure
analysis, heat maps, climate risk dashboards, and scenario analysis.
These tools can be leveraged to assess a financial institution's
exposure to both physical and transition risks in both the shorter and
longer term. Outputs should inform the risk identification process and
the short- and long-term financial risks to a financial institution's
business model from climate change.
Data, Risk Measurement, and Reporting. Sound climate-related
financial risk management depends on the availability of timely,
accurate, consistent, complete, and relevant data. Management should
incorporate climate-related financial risk information into the
financial institution's internal reporting, monitoring, and escalation
processes to facilitate timely and sound decision-making across the
financial institution. Effective risk data aggregation and reporting
capabilities allow management to capture and report material and
emerging climate-related financial risk exposures, segmented or
stratified by physical and transition risks, based upon the complexity
and types of exposures. Data, risk measurement, modeling methodologies,
and reporting continue to evolve at a rapid pace; management should
monitor these developments and incorporate them into the institution's
climate-related financial risk management as warranted.
Scenario Analysis. Climate-related scenario analysis is emerging as
an important approach for identifying, measuring, and managing climate-
related financial risks. For the purposes of these draft principles,
climate-related scenario analysis refers to exercises used to conduct a
forward-looking assessment of the potential impact on a financial
institution of changes in the economy, changes in the financial system,
or the distribution of physical hazards resulting from climate-related
financial risks. These exercises differ from traditional stress testing
exercises that typically assess the potential impacts of transitory
shocks to near-term economic and financial conditions. An effective
climate-related scenario analysis framework provides a comprehensive
and forward-looking perspective that financial institutions can apply
alongside existing risk management practices to evaluate the resiliency
of a financial institution's strategy and risk management to the
structural changes arising from climate-related financial risks.
Management should develop and implement climate-related scenario
analysis frameworks in a manner commensurate to the financial
institution's size, complexity, business activity, and risk profile.
These frameworks should include clearly defined objectives that reflect
the financial institution's overall climate-related financial risk
management strategies. These objectives could include, for example,
exploring the impacts of climate-related financial risks on the
financial institution's strategy and business model, identifying and
measuring vulnerability to relevant climate-related financial risk
factors including physical and transition risks, and estimating
climate-related exposures and potential losses across a range of
scenarios, including extreme but plausible scenarios. A climate-related
scenario analysis framework can also assist management in identifying
data and methodological limitations and uncertainty in climate-related
financial risk management and informing the adequacy of the
institution's climate-related financial risk management framework.
Climate-related scenario analyses should be subject to oversight,
validation, and quality control standards that would be commensurate to
the financial institution's risk. Climate-related scenario analysis
results should be clearly and regularly communicated to the board and
all relevant individuals within the financial institution, including an
appropriate level of information necessary to effectively convey the
assumptions, limitations, and uncertainty of results.
Management of Risk Areas
A risk assessment process is part of a sound risk governance
framework, and it allows management to identify emerging risks and to
develop and implement appropriate strategies to mitigate those risks.
Management should consider and incorporate climate-related financial
risks when identifying and mitigating all types of risk. These risk
assessment principles describe how climate-related financial risks can
be addressed in various risk categories.
Credit Risk. Management should consider climate-related financial
risks as part of the underwriting and ongoing monitoring of portfolios.
Effective credit risk management practices could include monitoring
climate-related credit risks through sectoral, geographic, and single-
name concentration analyses, including credit risk concentrations
stemming from physical and transition risks. As part of concentration
risk analysis, management should assess potential changes in
correlations across exposures or asset classes. Consistent with the
financial institution's risk appetite statement, management should
determine credit risk tolerances and lending limits related to these
risks.
Liquidity Risk. Consistent with sound oversight and liquidity risk
management, management should assess whether climate-related financial
risks could affect its liquidity position and, if so, incorporate those
risks into their liquidity risk management practices and liquidity
buffers.
Other Financial Risk. Management should monitor interest rate risk
and other model inputs for greater volatility or less predictability
due to climate-related financial risks. Where appropriate, management
should include corresponding measures of conservatism in their risk
measurements and controls. Management should monitor how climate-
related financial risks affect the financial institution's exposure to
risk related to changing prices. While market participants are still
researching how to measure climate-related price risk, management
should use the best measurement methodologies reasonably available to
them and refine them over time.
Operational Risk. Management should consider how climate-related
financial risk exposures may adversely impact a financial institution's
operations, control environment, and operational resilience. Sound
operational risk management includes incorporating an assessment across
all business lines and operations, including material third-party
operations, and considering climate-related impacts on business
continuity and the evolving legal and regulatory landscape.
Legal/Compliance Risk. Management should consider how climate-
related financial risks and risk mitigation measures affect the legal
and regulatory landscape in which the financial institution operates.
This consideration includes, but is not limited to, possible changes to
legal requirements for, or underwriting considerations related to,
flood or disaster-related insurance, and possible fair lending concerns
if the financial institution's risk mitigation measures
disproportionately affect communities or households on a prohibited
basis such as race or ethnicity.
Other Nonfinancial Risk. Consistent with sound oversight, the board
and management should monitor how the execution of strategic decisions
and the
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operating environment affect the financial institution's financial
condition and operational resilience as discussed in the strategic
planning section. Management should also consider the extent to which
the financial institution's activities may increase the risk of
negative financial impact from other operational risk, liability, or
litigation. Management should implement adequate measures to account
for these risks where material.
By order of the Board of Governors of the Federal Reserve
System.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2022-26648 Filed 12-7-22; 8:45 am]
BILLING CODE 6210-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.