Understanding the New Climate Risk Principles for Financial Institutions

by Per Thastrom

The Fed, FDIC and OCC have issued their final regulatory interagency guidance on Principles for Climate-Related Financial Risk Management for Large Financial Institutions (“Principles”). The Principles makes explicit the imperative for banks to manage the financial risks of climate change. Though primarily aimed at institutions with over $100bn in total consolidated assets, the Principles can also help smaller institutions in refining their identification and management of climate-related financial risk. Similarly, non-regulated institutions will also be able to find inspiration in the guidance. 

Novel Regulatory Expectations 

Management is advised to “consider and incorporate climate-related financial risks when identifying and mitigating all types of risk” (emphasis added). The Board is also asked to consider climate-related financial risks in its strategic planning. The Principles are also explicit in the recognition of how adverse effects of climate change are likely to be disproportionally felt by low-and-moderate-income (LMI) communities. However, the Principles are limited on how to manage LMI climate-risk without violating fair lending obligations.  

The Principles cover six areas: (1) governance; (2) policies, procedures and limits; (3) strategic planning; (4) risk management; (5) data, risk measurement and reporting; and (6) scenario analysis. A summary of the guidance, per area, is presented in Figure 1 along with what we believe institutions need to be mindful of in their implementation work. 

Financial institutions can benefit from brining in external expertise with proven methodologies and track records in these areas. FI Consulting is actively helping financial institutions with their governance and planning. We have been active in the risk management, including stress testing and scenario analysis, and data space for more than 20 years. If you’re interested in learning more about how FI can help enhance your institution’s climate risk management capabilities, email us at contact@ficonsulting.com or call 571.255.6900.