FDIC Requests Comment On Proposed Framework For Managing Climate-Related Risk – Finance and Banking

On March 30, 2022, the Federal Deposit Insurance Corporation
(“FDIC”) requested comment on draft principles “that would provide
a high-level framework for the safe and sound management of
exposures to climate-related financial risks.” These draft
principles, which are “targeted at the largest financial
institutions” (i.e., over $100 billion in total
consolidated assets), “are intended to support efforts by
financial institutions to focus on the key aspects of climate risk
management.” The principles reflect the FDIC’s view that
the “effects of climate change and the transition to a low
carbon economy present emerging economic and financial risks that
threaten the safety and soundness of financial institutions and the
stability of the financial system.”

In order to address these risks, which the FDIC recognizes
comprise both physical risk (i.e., harm to people and
property from acute climate events or chronic climate changes) and
transition risk (i.e., challenges or opportunities
associated with the transition to a low carbon economy), the FDIC
seeks comment on principles (certain of which are set forth below)
in the following broad areas:

• Governance: “A financial institution’s board and
  management should demonstrate an appropriate understanding of
  climate-related financial risk exposures and their impact on risk
  appetite to facilitate oversight.” The release emphasizes the
  board’s need to have adequate understanding and knowledge to
  assess and address the potential impact of climate-related
  risks.




• Policies, Procedures and Limits: “Management should
  incorporate climate-related risks into policies, procedures and
  limits to provide detailed guidance on the institution’s
  approach to these risks, in line with the strategy and risk
  appetite set by the board.”




• Strategic Planning: “The board and management should
  consider material climate-related financial risk exposures when
  setting the institution’s overall strategy, risk appetite and
  financial, capital and operational plans.” Among others, the
  board and management should consider potential climate-related
  impacts on low to moderate income and other disadvantaged
  households and communities, stakeholders’ expectations, and the
  institution’s reputation.




• Risk Management: “Management should oversee the
  development and implementation of processes to identify, measure,
  monitor and control climate-related financial risk exposures.”
  These could include heat maps, climate risk dashboards and scenario
  analysis.




• Data, Risk Measurement and Reporting: The release observes that
  “effective risk data aggregation and reporting
  capabilities” are important in order for boards and management
  to assess and address climate-related risk, and that this area
  “continue[s] to evolve at a rapid pace.”




• Scenario Analysis: The release recognizes the importance of
  scenario analysis (i.e., forward-looking assessments of
  the potential impacts of climate-related risks under various sets
  of assumptions and time horizons) for “identifying, measuring
  and managing climate-related risks.” The release cautions that
  climate-related scenario analysis “should be subject to
  oversight, validation, and quality control standards that would be
  commensurate to their risk.”

The FDIC stated that it “plans to elaborate” on these
principles in subsequent guidance that “would distinguish
roles and responsibilities of boards of directors (boards) and
management” and incorporate “feedback received on the
draft principles.”

The FDIC is just the latest financial regulator to weigh in on
the obligations of regulated entities in terms of addressing
climate change. Other significant statements include the Securities
and Exchange Commission’s Proposed Rules to Enhance and Standardize
Climate-Related Disclosures for Investors; the Financial
Stability Oversight Council’s Report and Recommendations on Climate-Related
Financial Risk; the Commodity Futures Trading
Commission’s Managing Climate Risk in the U.S. Financial
System; and the Office of the Comptroller of the
Currency’s Principles for Climate-Related Financial Risk
Management for Large Banks.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.