Federal Reserve Follows OCC and FDIC Guidance on How Banks Should Manage Climate-Related Financial Risk

On Friday, December 2, 2022, the Federal Reserve Board of Governors (FRB) joined multiple other regulators in releasing guidance outlining how financial institutions should manage and plan for potential climate-related financial risk and requesting feedback. The FRB specifically outlined how financial institutions can manage climate-related risk, as it applies to

1. Governance
2. Policies, Procedures, and Limits
3. Strategic Planning
4. Risk Management
5. Data, Risk Measurement, and Reporting
6. Scenario Analysis

This guidance largely mirrors previous guidance and requests for information from the Office of the Comptroller of the Currency (OCC) in December 2021 and the Federal Deposit Insurance Corporation (FDIC) in March of 2022. All announcements are designed to support the efforts of financial institutions with more than $100 billion in total consolidated assets to better identify and manage climate-related financial risks. The FRB is accepting comments for 60 days.

The FRB’s proposed guidance is in response to its identification of the economic effects of climate change and their risk to the safety and soundness of banking organizations.  The FRB emphasized to financial institutions and their executives how they should consider material climate-related financial risk exposures, including credit, market, liquidity, operational, and legal risks. In an effort to ensure consistency in climate risk management guidance, the FRB plans to coordinate with the OCC and the FDIC prior to finalizing any guidance. Similarities and differences between the announcements can be found in Section 2, Draft Principles, and Section 3, Management of Risk Areas, of our OCC Draft Principles Outline How Banks Should Address Climate Financial Risk alert and Section 2, Differences to OCC Announcement, of our FDIC Seeks Comments on Its Principles for Climate-Related Financial Risk Management alert.

Key Considerations

While the FRB is focusing on financial institutions with more than $100 billion in assets, all financial institutions should consider aligning their organizations to the proposed principles and make the changes necessary to ensure they are well-positioned to manage climate-related risk. Entities should consider proactively assessing their exposure based on the draft principles and review the areas of risk highlighted by the FRB as they relate to each entity’s existing risk management framework and business strategy. This includes identifying and assessing any climate-related enterprise risks not included in their current frameworks that could impact their overall business strategy, risk appetite, and capital plan.

How Guidehouse Can Help Financial Institutions and Management Teams

Guidehouse can help financial institutions and management teams assess their risk management frameworks in light of the draft principles proposed by the FRB. Guidehouse has a deep bench of financial services and climate and energy professionals with decades of public and private sector experience and a strong understanding of the climate environment in which financial institutions operate. Among other capabilities, Guidehouse can quickly review and assess your risk management framework to determine whether it is sound, identify gaps or weaknesses, and provide recommendations to ensure it aligns with the FRB’s draft principles. Guidehouse is well-equipped to make an individualized assessment of your unique circumstances and offer innovative advice and solutions for responding to potentially heightened regulatory requirements.

Special thanks to Henry Darmstadter for co-authoring this article.