US Regulators Propose Plans to Manage Climate-related Financial Risks

The US Federal Reserve Board is inviting public comment on a proposed framework for large banking organizations to manage climate-related financial risks, as reported by Reuters on December 2. The proposed framework requires banking organizations with more than USD100bn in total assets to disclose climate-related physical risks and transition risks. Physical risk refers to the impacts of climate change on assets, stock markets, and companies, while transition risk refers to the negative impacts of switching to low-carbon energy sources. The Fed’s proposal will require large financial institutions to consider the impacts of climate change and green transition in their risk management.  

The proposed framework is aligned with proposals issued by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. It marks US policymakers’ effort to increase consistency in the supervision of the banking sector. Before the proposed framework, the Fed initiated a pilot climate scenario analysis program to test financial institutions’ resilience to climate threats. Bank of America [BAC:US], Citigroup [C:US], Goldman Sachs [GS:US], JPMorgan Chase [JPM:US], Morgan Stanley [MS:US], and Wells Fargo [WFC:US] will be participating in this pilot program and be assessed under hypothetical climate scenarios in addition to traditional bank stress tests starting in early 2023.

Sources:

https://www.reuters.com/business/sustainable-business/us-fed-proposes-framework-how-banks-manage-climate-related-financial-risk-2022-12-02/

https://www.federalreserve.gov/newsevents/pressreleases/other20221202b.htm

https://www.nytimes.com/2022/09/29/business/fed-banks-climate-change.html