Pub. 12 2021 Issue 4


Regulators Move Closer to Incorporating Climate-Related Risks into Oversight of Banks and Other Institutions

In the Fall 2021 issue of West Virginia Banker magazine, we discussed three issues and opportunities facing banks in the post-pandemic world, one of which was the concept of Sustainable Banking. Also called Environmental, Social, and Governance (ESG) banking, this concept sometimes is labeled “banking with a purpose.” It focuses on banking in a way that considers the economic, social, and environmental effects of the bank’s products and services.

Although banks in the United States are sometimes criticized as being slow to adopt sustainable banking when compared to their European counterparts, they recently began stepping into this realm in a big way. In the fall issue, we discussed the initiatives banks such as JPMorgan Chase, Wells Fargo, Bank of America, and Fifth Third have developed in this arena. It is clear that smaller, newer players also view sustainable banking as an opportunity. For example, Aspiration Financial is going all-in with internet websites that boldly proclaim, “You can change Climate Change,” “Leave your bank, save the planet,” and “Aspiration is 100% committed to Clean Money.” They also offer a credit card that “rewards you for erasing your carbon footprint.”

Since our last article, regulators have taken steps that signal sustainable banking is not only a potential opportunity banks may want to consider but may soon become a directive from regulators. Earlier in 2021, President Biden issued an “Executive Order on Climate-Related Financial Risk.” That order stated a global shift was currently underway from carbon-intensive energy sources and industrial processes, which according to the order, presented both “transition risks to many companies” as well as “opportunities to enhance U.S. competitiveness and economic growth.” The order highlighted what the president saw as “[t]he failure of financial institutions to appropriately and adequately account for and measure these physical and transition risks.” This failure “threatens the competitiveness of U.S. companies and markets, the life savings and pensions of U.S. workers and families, and the ability of U.S. financial institutions to serve communities.”

The order directed Treasury Secretary Janet Yellen, as Chair of the Financial Stability Oversight Council (FSOC), to consider the following actions:

  • Assessing the climate-related financial risks to the stability of the U.S. financial system.

  • Issuing a report to the president on the efforts of FSOC member agencies to integrate consideration of climate-related financial risks into their policies and programs.

  • Reporting on the necessity of any actions to enhance climate-related disclosures by regulated entities.

  • Reporting on approaches to incorporating the consideration of climate-related financial risks into their regulatory and supervisory activities.

  • Reporting on any other recommendations to mitigate climate-related financial risk, including through new or revised regulatory standards.

Secretary Yellen and FSOC have taken steps to fulfill those directives. In late Oct., FSOC issued its “Report on Climate-Related Financial Risk,” in which FSOC for the first time identified climate change as an “emerging and increasing threat to U.S. financial stability.” The report includes more than 30 recommendations to financial regulators on actions that it believes are necessary to identify and address climate-related risks to the U.S. financial system. Those include:

  • Prioritizing investments to expand members’ capacities to define, identify, measure, monitor, assess, and report on climate-related financial risks.

  • Reviewing members’ public communications about climate-related efforts, including in annual reports, and updating them to promote consistent, comparable, and useful information on climate-related risks and opportunities.

  • Issuing requirements for climate-related disclosures and considering whether those disclosures should require information related to greenhouse gas emissions.

  • Investing in staffing, training, modeling, and monitoring to address climate-related risks.

  • Ensuring that members have consistent and reliable data to assist in assessing climate-related risks, including performing internal audits of data and developing plans for acquiring any necessary additional data.

  • Developing consistent data standards, definitions, and relevant metrics as well as coordinating among members on these items.

  • Reviewing existing regulations, guidance, and regulatory reporting requirements that are relevant to climate-related risks to determine whether amendments or updates are required to appropriately address those risks.

  • Determining whether additional regulations are necessary to clarify expectations for regulated or supervised institutions regarding the management of climate-related risks.

In addition to the above recommendations to member agencies, the FSOC report announced the creation of a Climate-Related Financial Risk Committee to be formed within FSOC. The committee’s mission is to enhance coordination and consistency among FSOC members. Also, it needs to identify areas for mitigating climate-related risks and act as a coordinating body to share information; facilitate the development of common definitions, standards, and approaches; and foster communication among FSOC members. They will be aided in these missions by another new committee created within FSOC: the Climate-Related Financial Risk Advisory Committee.

The FSOC report highlighted several initiatives already underway by member agencies that focus on climate-related financial risks and stability, including the following:

  • The Securities and Exchange Commission has begun working on a rulemaking proposal on climate risk disclosures by public issuers, which rule it previously announced would be issued in late 2021 or early 2022.

  • The Federal Reserve Board has established committees to address climate-related risks.

  • The Commodity Futures Trading Commission’s Market Risk Advisory Committee has issued a report on climate-related risks and established a Climate Risk Unit to focus on the role of derivatives in understanding and addressing those risks.

  • The Federal Housing Financing Agency has requested information on climate-related risks from the public.

  • The Office of the Comptroller of the Currency has formed a Climate Risk Implementation Committee to identify climate-related risks to institutions it supervises. It will also provide recommendations on OCC’s policies to address those risks consistent with Acting Comptroller of the Currency Michael Hsu’s recent statement that “managing climate change risk is a safety and soundness issue.”

FSOC’s report and recommendations signal an important step by member agencies to fulfill the president’s Executive Order and Secretary Yellen’s statement earlier this year that FSOC will address “a whole-of-government process to assess climate risk to the U.S. financial system and federal government.” That step, for now, appears to focus on information gathering and creating uniform standards and processes. Banks should be mindful of the recommendations in FSOC’s report and consider how climate-related risks appear in their business lines, as this issue likely will receive greater attention in the short-term.

Nicholas P. Mooney II is a Member attorney in Spilman Thomas & Battle’s Charleston, West Virginia office. His primary area of practice is consumer financial services litigation in federal and state courts. He has devoted all of his time for more than 20 years to that practice area. He can be reached at (304) 340-3860 or