Could OCC Appointment of Chief Climate Risk Officer Signal Climate-Related Financial Risk Examinations?

On September 12, 2022, the Office of the Comptroller of the Currency (OCC) announced the appointment of Dr. Yue (Nina) Chen as the newest Chief Climate Risk Officer. Dr. Chen takes over from Jonathan Fink, the OCC’s acting general counsel, who had been serving in a temporary capacity since March. Doctor Chen joins the OCC from the New York Department of Financial Services, where she was one of the leaders in implementing climate risk policy, having published the first set of expectations for state-led financial institutions in October 2020. 

The appointment of Doctor Chen to this role reaffirms the agency’s strong commitment to improving the oversight of what they have deemed a serious threat to financial markets—climate risk. The OCC proposed Principles for Climate-Related Financial Risk Management for Large Banks in December of 2021 but are yet to make them final. This proposal provided an initial framework for how Large Banks (over $100 billion in total consolidated assets) should look to “identify, measure, monitor, and control” climate-related risk. It also advised banks to consider climate risks related to their governance practices, risk procedures, and strategic planning, as well as enhance any existing oversight controls and reporting¹. Since the principles were released, the OCC has been requesting feedback from banks, and presumably, one of Dr. Chen’s key focus areas will be to incorporate any feedback received on the initial draft of the principles, and further develop this guidance on a more granular level, so banks are able to implement better risk management and governance practices around climate-related financial risk.

What Could This Mean?

The OCC has already been urging banks to consider climate risks in their daily operations, providing tools and approaches for measuring and monitoring their exposure such as “heat maps, climate risk dashboards, and scenario analysis.” However, Acting Comptroller Michael Hsu has recommended that banks take a slightly different approach than how they have traditionally assessed and managed risk. Hsu said, “With climate-related risks, I believe we are much more exposed to failures of imagination—not asking enough ‘what if?’ questions—than we are to failures of stringency or consistency...” ²

With the appointment of Doctor Chen to the role of Chief Climate Risk Officer, banks, particularly Large Banks targeted by the acting comptroller in the Principles³  published last year, may want to begin preparing for future OCC climate-related risk examinations by developing a framework, including:

1. Understand what data you need by assessing climate-related risks and opportunities your business is exposed to.
   To understand your risk exposure, you will want to look at both direct and indirect exposure— business operations and lending and investment activities—to understand where there could be climate risk exposure.
2. Get the data required to measure and report on these risks and opportunities. 
   Measuring and reporting climate-related financial risk exposure will require gathering several data inputs on your business operations and financing activities. These could include square footage and emissions of your office buildings, vendor data to understand financed emissions, and modelled data to capture additional physical and transition risks.
3. Establish climate scenarios to understand the impact of a climate shock to your portfolio and business operations. Climate scenario analysis should be in-depth and facilitate development of possible climate events and the associated economic and financial impacts. This exercise should also provide a feedback loop to further inform data requirements.
4. Establish reporting that provides transparency into the bank’s climate-related risks and opportunities. This reporting should address the banks direct and indirect exposure and methods for managing that exposure. Risk management methods could include leveraging your business resilience and disaster recovery playbooks, increased capitalization, or adjusted investment and lending practices.

It is likely that any examination administered by the OCC on climate-related financial risk management would be an exercise in ensuring the framework developed by the bank meets certain criteria set by the proposed Principles for Climate-Related Financial Risk Management for Large Banks. It will also be important to show there is sufficient governance in place to validate the integrity and effectiveness of that framework. Accordingly, banks should consider reviewing the guidance put out in December 2021, and also keep a close eye on any moves the OCC, or other regulatory bodies such as the SEC, make to publish finalized requirements, as it is likely to have a ripple effect on the industry. 

Authors: Eleanor Gass, Brandon Lee & Gabriella Juliana.