[Federal Register Volume 87, Number 235 (Thursday, December 8, 2022)]
[Notices]
[Pages 75267-75271]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26648]


-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

[Docket No. OP-1793]


Principles for Climate-Related Financial Risk Management for 
Large Financial Institutions

AGENCY: The Board of Governors of the Federal Reserve System (Board).

ACTION: Notice and request for comment.

-----------------------------------------------------------------------

SUMMARY: The Board is requesting comment on draft principles that would 
provide a high-level framework for the safe and sound management of 
exposures to climate-related financial risks for Board-supervised 
financial institutions with over $100 billion in assets. Although all 
financial institutions, regardless of size, may have material exposures 
to climate-related financial risks, these principles are intended for 
the largest financial institutions, i.e., those with over $100 billion 
in total consolidated assets. The draft principles are intended to 
support efforts by large financial institutions to focus on key aspects 
of climate-related financial risk management.

DATES: Comments on the draft principles must be received on or before 
February 6, 2023.

ADDRESSES: Interested parties are encouraged to submit written 
comments. When submitting comments, please consider submitting your 
comments by email or fax because paper mail in the Washington, DC area 
and at the Board may be subject to delay. You may submit comments, 
identified by Docket No. OP-1793, by any of the following methods:
     Agency Website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    In general, all public comments will be made available on the 
Board's website at www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, and will not be modified to remove 
confidential, contact or any identifiable information. Public comments 
may also be viewed electronically or in paper in Room M-4365A, 2001 C 
St. NW, Washington, DC 20551, between 9:00 a.m. and 5:00 p.m. during 
federal business weekdays.

FOR FURTHER INFORMATION CONTACT: Anna Lee Hewko, Associate Director, 
(202) 530-6260; Morgan Lewis, Manager, (202) 452-2000; Matthew 
McQueeney, Senior Financial Institution Policy Analyst II, (202) 452-
2942 Katie Budd, Senior Financial Institution Policy Analyst I, (202) 
452-2365; Susan Ali, Senior Financial Institution Policy Analyst I, 
(202) 452-3023; Division of Banking Supervision and Regulation; or Asad 
Kudiya, Assistant General Counsel, (202) 475-6358; Kelley O'Mara, 
Senior Counsel (202) 973-7497; Matthew Suntag, Senior Counsel, (202) 
452-3694; or David Imhoff, Attorney, (202) 452-2249, Legal Division. 
Board of Governors of the Federal Reserve System, 20th and C Streets 
NW, Washington, DC 20551. For the hearing impaired and users of TTY-
TRS, please call 711 from any telephone, anywhere in the United States.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The Board is requesting comment on draft principles that would 
provide a high-level framework for the safe and sound management of 
exposures to climate-related financial risks for financial institutions 
with over $100 billion in assets. The financial impacts that result 
from the economic effects of climate change and the transition to a 
lower carbon economy pose an emerging risk to the safety and soundness 
of financial institutions \1\ and the financial stability of the United 
States. Financial institutions are likely to be affected by both the 
physical risks and transition risks associated with climate change 
(collectively, ``climate-related financial risks''). Physical risks 
refer to the harm to people and property arising from acute, climate-
related events, such as hurricanes, wildfires, floods, and heatwaves, 
and chronic shifts in climate, including higher average temperatures, 
changes in precipitation patterns, sea level rise, and ocean 
acidification.\2\ Transition risks refer to stresses to certain 
institutions or sectors arising from the shifts in policy, consumer and 
business sentiment, or technologies associated with the changes that 
would be part of a transition to a lower carbon economy.\3\
---------------------------------------------------------------------------

    \1\ In this issuance, the term ``financial institution'' or 
``institution'' includes state member banks, bank holding companies, 
savings and loan holding companies, foreign banking organizations 
with respect to their U.S. operations, and non-bank systemically 
important financial institutions (SIFIs) supervised by the Board.
    \2\ The Financial Stability Oversight Council has described the 
impacts of physical risks as follows: ``The intensity and frequency 
of extreme weather and climate-related disaster events are 
increasing and already imposing substantial economic costs. Such 
costs to the economy are expected to increase further as the 
cumulative impacts of past and ongoing global emissions continue to 
drive rising global temperatures and related climate changes, 
leading to increased climate-related risks to the financial 
system.'' Report on Climate-Related Financial Risk, Financial 
Stability Oversight Council, page 10 (Oct. 21, 2021) (``FSOC Climate 
Report''), available at https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf.
    \3\ The Financial Stability Oversight Council has described the 
impacts of transition risks as: ``. . . [Changing] public policy, 
adoption of new technologies, and shifting consumer and investor 
preferences have the potential to impact the allocation of capital . 
. . . If these changes occur in a disorderly way owing to 
substantial delays in action or abrupt changes in policy, their 
impact on firms, market participants, individuals, and communities 
is likely to be more sudden and disruptive.'' FSOC Climate Report, 
page 13.
---------------------------------------------------------------------------

    Weaknesses in how financial institutions identify, measure, 
monitor, and control potential climate-related financial risks could 
adversely affect financial institutions' safety and soundness, as well 
as the stability of the overall financial system. The Board is 
therefore seeking comment on draft principles that would promote a 
consistent understanding of how climate-related financial risks can be 
effectively identified, measured, monitored, and controlled among the 
largest institutions, those with over $100 billion in total 
consolidated assets. Many financial institutions are considering these 
risks and would benefit from guidance as they develop strategies, 
deploy resources, and make necessary investments to manage climate-
related financial risks.
    The draft principles would provide a high-level framework for the 
safe and

[[Page 75268]]

sound management of exposures to climate-related financial risks, 
consistent with the risk management frameworks described in the Board's 
existing rules and guidance. The draft principles are intended to 
support financial institutions' efforts to incorporate climate-related 
financial risks into financial institutions' risk management frameworks 
in a manner consistent with safe and sound practices.
    The Board developed the proposed guidance in consultation with the 
Office of the Comptroller of the Currency (OCC) and Federal Deposit 
Insurance Corporation (FDIC). The OCC and FDIC requested comment on 
similar draft principles in December 2021 and March 2022, respectively. 
The agencies seek to promote consistency in their climate risk 
management guidance and to clearly articulate risk-based principles on 
climate-related financial risks for large financial institutions. 
Accordingly, after reviewing comments received on the proposed 
guidance, the Board intends to coordinate with the OCC and FDIC in 
issuing any final guidance.

II. Request for Comment

    The Board welcomes comments on all aspects of the draft principles, 
including on the following questions.
    Question 1: In what ways, if any, could the draft principles be 
revised to better address challenges a financial institution may face 
in managing climate-related financial risks?
    Question 2: Are there areas where the draft principles should be 
more or less specific given the current data availability and 
understanding of climate-related financial risks? What other aspects of 
climate-related financial risk management, if any, should the Board 
consider?
    Question 3: What challenges, if any, could financial institutions 
face in incorporating these draft principles into their risk management 
frameworks?

III. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521) (PRA) 
states that no agency may conduct or sponsor, nor is the respondent 
required to respond to, an information collection unless it displays a 
current valid Office of Management and Budget (OMB) control number.
    These draft principles would not revise any existing, or create any 
new, information collections pursuant to the PRA. Consequently, no 
submissions will be made to the OMB for review.

IV. Proposed Principles

    The financial impacts that result from the economic effects of 
climate change and the transition to a lower carbon economy pose an 
emerging risk to the safety and soundness of financial institutions \4\ 
and the financial stability of the United States. Financial 
institutions are likely to be affected by both the physical risks and 
transition risks associated with climate change (collectively referred 
to as ``climate-related financial risks''). Physical risks refer to the 
harm to people and property arising from acute, climate-related events, 
such as hurricanes, wildfires, floods, and heatwaves, and chronic 
shifts in climate, including higher average temperatures, changes in 
precipitation patterns, sea level rise, and ocean acidification. 
Transition risks refer to stresses to institutions or sectors arising 
from the shifts in policy, consumer and business sentiment, or 
technologies associated with the changes that would be part of a 
transition to a lower carbon economy.
---------------------------------------------------------------------------

    \4\ In this issuance, the term ``financial institution'' or 
``institution'' includes state member banks, bank holding companies, 
savings and loan holding companies, intermediate holding companies, 
foreign banking organizations with respect to their U.S. operations, 
and non-bank systemically important financial institutions (SIFIs) 
supervised by the Board.
---------------------------------------------------------------------------

    Physical and transition risks associated with climate change could 
affect households, communities, businesses, and governments--damaging 
property, impeding business activity, affecting income, and altering 
the value of assets and liabilities. These risks may be propagated 
throughout the economy and financial system. As a result, the financial 
sector may experience credit and market risks associated with loss of 
income, defaults and changes in the values of assets, liquidity risks 
associated with changing demand for liquidity, operational risks 
associated with disruptions to infrastructure or other channels, or 
legal risks.\5\
---------------------------------------------------------------------------

    \5\ FSOC Climate Report, page 13.
---------------------------------------------------------------------------

    Weaknesses in how a financial institution identifies, measures, 
monitors, and controls the physical and transition risks associated 
with a changing climate could adversely affect a financial 
institution's safety and soundness. The adverse effects of climate 
change could also include a potentially disproportionate impact on the 
financially vulnerable, including low- to moderate-income (LMI) and 
other disadvantaged households and communities.\6\
---------------------------------------------------------------------------

    \6\ For further information, see Staff Reports, Federal Reserve 
Bank of New York, Understanding the Linkages between Climate Change 
and Inequality in the United States, No. 991 (Nov. 2021), available 
at https://www.newyorkfed.org/research/staff_reports/sr991.html.
---------------------------------------------------------------------------

    These draft principles provide a high-level framework for the safe 
and sound management of exposures to climate-related financial risks, 
consistent with the existing risk management frameworks described in 
the Board's existing rules and guidance.
    The principles are intended to support efforts by financial 
institutions to focus on key aspects of climate-related financial risk 
management. The principles are designed to help financial institutions' 
boards of directors and management make progress toward incorporating 
climate-related financial risks into financial institutions' risk 
management frameworks in a manner consistent with safe and sound 
practices. The principles are intended to supplement existing risk 
management standards and guidance on the role of boards and 
management.\7\
---------------------------------------------------------------------------

    \7\ References to the board and senior management throughout 
these principles should be understood in accordance with their 
respective roles and responsibilities, and is not intended to 
conflict with existing guidance from the Board regarding the roles 
of board and senior management or advocate for a specific board 
structure. See, e.g., SR 21-3/CA 21-1: Supervisory Guidance on Board 
of Directors' Effectiveness (Feb. 26, 2021) https://www.federalreserve.gov/supervisionreg/srletters/SR2103.htm.
---------------------------------------------------------------------------

    Although all financial institutions, regardless of size, may have 
material exposures to climate-related financial risks, these principles 
are intended for the largest financial institutions, those with over 
$100 billion in total consolidated assets.\8\ Effective risk management 
practices should be appropriate to the size of the financial 
institution and the nature, scope, and risk of its activities. In 
keeping with the Board's risk-based approach to supervision, the Board 
anticipates that differences in financial institutions' complexity of 
operations and business models will result in different approaches to 
addressing climate-related financial risks. Some large financial 
institutions are developing the governance structures, processes, and 
analytical methodologies to identify, measure, monitor, and control for 
these risks. The Board understands that expertise in climate risk and 
the incorporation of climate-related financial risks into risk 
management frameworks remains under development in many financial 
institutions and will continue to evolve over time. The Board also 
recognizes that the incorporation of

[[Page 75269]]

material climate-related financial risks into various planning 
processes will be iterative, as measurement methodologies, models, and 
data for analyzing these risks continue to mature.
---------------------------------------------------------------------------

    \8\ The Board will consider the total consolidated assets of a 
branch or agency itself for branches and agencies of foreign banking 
organizations subject to Board supervision.
---------------------------------------------------------------------------

    Through this and any subsequent climate-related financial risk 
guidance, the Board will continue to encourage financial institutions 
to manage climate-related financial risks in a manner that will allow 
them to continue to prudently meet the financial services needs of 
their communities. The Board encourages financial institutions to take 
a risk-based approach in assessing the climate-related financial risks 
associated with individual customer relationships and to take into 
consideration the financial institution's ability to manage the risk.

General Principles

    Governance. An effective risk governance framework is essential to 
a financial institution's safe and sound operation. A financial 
institution's board of directors (board) should understand the effects 
of climate-related financial risks on the financial institution in 
order to oversee management's implementation of the institution's 
business strategy, risk profile, and risk appetite. The board should 
oversee the financial institution's risk-taking activities and hold 
management accountable for adhering to the risk governance framework. A 
financial institution's board should acquire sufficient information to 
understand the implications of climate-related financial risks across 
various scenarios and planning horizons, which may include those that 
extend beyond the institution's typical strategic planning horizon. 
Sound governance by the board should include allocating appropriate 
resources to support climate-related financial risk management and 
clearly communicating to management the information the board needs to 
oversee the measurement and management of climate-related financial 
risks to the financial institution. The board should assign 
accountability for climate-related financial risks within existing 
organizational structures or establish new structures for climate-
related financial risks.
    The board should oversee the financial institution's risk-taking 
activities and hold management accountable for adhering to the risk 
governance framework. The board should consider whether the 
incorporation of climate-related financial risks into the financial 
institution's overall business strategy and risk management frameworks 
may warrant changes to its compensation policies, taking into account 
that compensation policies should be aligned with the business, risk 
strategy, objectives, values, and long-term interests of the financial 
institution.
    Management is responsible for implementing the financial 
institution's policies in accordance with the board's strategic 
direction and for executing the financial institution's overall 
strategic plan and risk governance framework. This responsibility 
includes assuring that there is sufficient expertise to execute the 
strategic plan and effectively managing all risks, including climate-
related financial risks. This also includes management's responsibility 
to oversee the development and implementation of processes to identify, 
measure, monitor, and control climate-related financial risks within 
the financial institution's existing risk management framework. 
Management should also hold staff accountable for controlling risks 
within established lines of authority and responsibility. Management is 
responsible for regularly reporting to the board on the level and 
nature of risks to the financial institution, including climate-related 
financial risks. Management should provide the board with sufficient 
information for the board to understand the impacts of climate-related 
financial risks to the financial institution's risk profile and make 
sound, well-informed decisions. Where dedicated climate risk 
organizational structures are established by the board, management 
should clearly define these units' responsibilities and interaction 
with existing governance structures.
    Policies, Procedures, and Limits. Management should incorporate 
climate-related financial risks into policies, procedures, and limits 
to provide detailed guidance on the financial institution's approach to 
these risks in line with the strategy and risk appetite set by the 
board. Policies, procedures, and limits should be modified when 
necessary to reflect (i) the distinctive characteristics of climate-
related financial risks, such as the potentially longer time horizon 
and forward-looking nature of the risks, and (ii) changes to the 
financial institution's operating environment or activities.
    Strategic Planning. The board and management should consider 
material climate-related financial risk exposures when setting the 
financial institution's overall business strategy, risk appetite, and 
capital plan. As part of forward-looking strategic planning, the board 
and management should address the potential impact of climate-related 
financial risk exposures on the financial institution's financial 
condition, operations (including geographic locations), and business 
objectives over various time horizons. The board and management should 
also consider climate-related financial risk impacts on the financial 
institution's other operational and legal risks, and stakeholders, 
including low-to-moderate income and other disadvantaged households and 
communities. This consideration should also include assessing physical 
harm or access to the financial institution's products and services.
    Any climate-related strategies and commitments should align with 
and support the financial institution's broader strategy, risk 
appetite, and risk management framework. In addition, where financial 
institutions engage in public communication of their climate-related 
strategies, boards and management should assure that any public 
statements about their institutions' climate-related strategies and 
commitments are consistent with their internal strategies and risk 
appetite statements.
    Risk Management. Climate-related financial risks can impact 
financial institutions through a range of traditional risk types. 
Management should oversee the development and implementation of 
processes to identify, measure, monitor, and control climate-related 
financial risk exposures within the financial institution's existing 
risk management framework. Financial institutions with sound risk 
management practices employ a comprehensive process to identify 
emerging and material risks related to the financial institution's 
business activities. The risk identification process should include 
input from stakeholders across the organization with relevant expertise 
(e.g., business units, independent risk management, internal audit, and 
legal). Risk identification includes assessment of climate-related 
financial risks across a range of plausible scenarios and under various 
time horizons.
    As part of sound risk management, management should develop 
processes to measure and monitor material climate-related financial 
risks and to communicate and report the materiality of those risks to 
internal stakeholders. Material climate-related financial risk 
exposures should be clearly defined, aligned with the financial 
institution's risk appetite, and supported by appropriate metrics 
(e.g., risk limits and key risk indicators) and escalation processes. 
Management should incorporate climate-related financial

[[Page 75270]]

risks into the financial institution's risk management system, 
including internal controls and internal audit.
    Tools and approaches for measuring and monitoring exposure to 
climate-related financial risks include, among others, exposure 
analysis, heat maps, climate risk dashboards, and scenario analysis. 
These tools can be leveraged to assess a financial institution's 
exposure to both physical and transition risks in both the shorter and 
longer term. Outputs should inform the risk identification process and 
the short- and long-term financial risks to a financial institution's 
business model from climate change.
    Data, Risk Measurement, and Reporting. Sound climate-related 
financial risk management depends on the availability of timely, 
accurate, consistent, complete, and relevant data. Management should 
incorporate climate-related financial risk information into the 
financial institution's internal reporting, monitoring, and escalation 
processes to facilitate timely and sound decision-making across the 
financial institution. Effective risk data aggregation and reporting 
capabilities allow management to capture and report material and 
emerging climate-related financial risk exposures, segmented or 
stratified by physical and transition risks, based upon the complexity 
and types of exposures. Data, risk measurement, modeling methodologies, 
and reporting continue to evolve at a rapid pace; management should 
monitor these developments and incorporate them into the institution's 
climate-related financial risk management as warranted.
    Scenario Analysis. Climate-related scenario analysis is emerging as 
an important approach for identifying, measuring, and managing climate-
related financial risks. For the purposes of these draft principles, 
climate-related scenario analysis refers to exercises used to conduct a 
forward-looking assessment of the potential impact on a financial 
institution of changes in the economy, changes in the financial system, 
or the distribution of physical hazards resulting from climate-related 
financial risks. These exercises differ from traditional stress testing 
exercises that typically assess the potential impacts of transitory 
shocks to near-term economic and financial conditions. An effective 
climate-related scenario analysis framework provides a comprehensive 
and forward-looking perspective that financial institutions can apply 
alongside existing risk management practices to evaluate the resiliency 
of a financial institution's strategy and risk management to the 
structural changes arising from climate-related financial risks.
    Management should develop and implement climate-related scenario 
analysis frameworks in a manner commensurate to the financial 
institution's size, complexity, business activity, and risk profile. 
These frameworks should include clearly defined objectives that reflect 
the financial institution's overall climate-related financial risk 
management strategies. These objectives could include, for example, 
exploring the impacts of climate-related financial risks on the 
financial institution's strategy and business model, identifying and 
measuring vulnerability to relevant climate-related financial risk 
factors including physical and transition risks, and estimating 
climate-related exposures and potential losses across a range of 
scenarios, including extreme but plausible scenarios. A climate-related 
scenario analysis framework can also assist management in identifying 
data and methodological limitations and uncertainty in climate-related 
financial risk management and informing the adequacy of the 
institution's climate-related financial risk management framework.
    Climate-related scenario analyses should be subject to oversight, 
validation, and quality control standards that would be commensurate to 
the financial institution's risk. Climate-related scenario analysis 
results should be clearly and regularly communicated to the board and 
all relevant individuals within the financial institution, including an 
appropriate level of information necessary to effectively convey the 
assumptions, limitations, and uncertainty of results.

Management of Risk Areas

    A risk assessment process is part of a sound risk governance 
framework, and it allows management to identify emerging risks and to 
develop and implement appropriate strategies to mitigate those risks. 
Management should consider and incorporate climate-related financial 
risks when identifying and mitigating all types of risk. These risk 
assessment principles describe how climate-related financial risks can 
be addressed in various risk categories.
    Credit Risk. Management should consider climate-related financial 
risks as part of the underwriting and ongoing monitoring of portfolios. 
Effective credit risk management practices could include monitoring 
climate-related credit risks through sectoral, geographic, and single-
name concentration analyses, including credit risk concentrations 
stemming from physical and transition risks. As part of concentration 
risk analysis, management should assess potential changes in 
correlations across exposures or asset classes. Consistent with the 
financial institution's risk appetite statement, management should 
determine credit risk tolerances and lending limits related to these 
risks.
    Liquidity Risk. Consistent with sound oversight and liquidity risk 
management, management should assess whether climate-related financial 
risks could affect its liquidity position and, if so, incorporate those 
risks into their liquidity risk management practices and liquidity 
buffers.
    Other Financial Risk. Management should monitor interest rate risk 
and other model inputs for greater volatility or less predictability 
due to climate-related financial risks. Where appropriate, management 
should include corresponding measures of conservatism in their risk 
measurements and controls. Management should monitor how climate-
related financial risks affect the financial institution's exposure to 
risk related to changing prices. While market participants are still 
researching how to measure climate-related price risk, management 
should use the best measurement methodologies reasonably available to 
them and refine them over time.
    Operational Risk. Management should consider how climate-related 
financial risk exposures may adversely impact a financial institution's 
operations, control environment, and operational resilience. Sound 
operational risk management includes incorporating an assessment across 
all business lines and operations, including material third-party 
operations, and considering climate-related impacts on business 
continuity and the evolving legal and regulatory landscape.
    Legal/Compliance Risk. Management should consider how climate-
related financial risks and risk mitigation measures affect the legal 
and regulatory landscape in which the financial institution operates. 
This consideration includes, but is not limited to, possible changes to 
legal requirements for, or underwriting considerations related to, 
flood or disaster-related insurance, and possible fair lending concerns 
if the financial institution's risk mitigation measures 
disproportionately affect communities or households on a prohibited 
basis such as race or ethnicity.
    Other Nonfinancial Risk. Consistent with sound oversight, the board 
and management should monitor how the execution of strategic decisions 
and the

[[Page 75271]]

operating environment affect the financial institution's financial 
condition and operational resilience as discussed in the strategic 
planning section. Management should also consider the extent to which 
the financial institution's activities may increase the risk of 
negative financial impact from other operational risk, liability, or 
litigation. Management should implement adequate measures to account 
for these risks where material.

    By order of the Board of Governors of the Federal Reserve 
System.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2022-26648 Filed 12-7-22; 8:45 am]
BILLING CODE 6210-01-P