[Federal Register Volume 88, Number 208 (Monday, October 30, 2023)]
[Notices]
[Pages 74183-74189]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-23844]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket ID OCC-2022-0023]
FEDERAL RESERVE SYSTEM
[Docket No. OP-1793]
FEDERAL DEPOSIT INSURANCE CORPORATION
RIN 3064-ZA32
Principles for Climate-Related Financial Risk Management for
Large Financial Institutions
AGENCY: Office of the Comptroller of the Currency (OCC), Treasury;
Board of Governors of the Federal Reserve System (Board); and Federal
Deposit Insurance Corporation (FDIC).
ACTION: Final interagency guidance.
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SUMMARY: The OCC, Board, and FDIC (together, the agencies) are jointly
issuing principles that provide a high-level framework for the safe and
sound management of exposures to climate-related financial risks
(principles). 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. The principles are
intended to support efforts by large financial institutions to focus on
key aspects of climate-related financial risk management.
DATES: The final interagency guidance is available on October 30, 2023.
FOR FURTHER INFORMATION CONTACT:
OCC: Tamara Culler, Director for Governance and Operational Risk
Policy, Bank Supervision Policy, at (202) 649-6670, Russell D'Costa,
Program Analyst, Office of Climate Risk, at (202) 649-8283, or Alison
MacDonald, Senior Counsel, Chief Counsel's Office, at (202) 649-5490,
Office of the Comptroller of the Currency, 400 7th Street SW,
Washington, DC 20219. If you are deaf, hard of hearing, or have a
speech disability, please dial 7-1-1 to access telecommunications relay
services.
Board: Anna Lee Hewko, Associate Director, (202) 530-6260; Morgan
Lewis, Manager, (202) 452-2000; or Matthew McQueeney, Senior Financial
Institution Policy Analyst II, (202) 452-2942 Division of Banking
Supervision and Regulation; or Asad Kudiya, Assistant General Counsel,
(202) 475-6358; Flora Ahn, Senior Special Counsel, (202) 452-2317;
Matthew Suntag, Senior Counsel, (202) 452-3694; Katherine Di Lucido,
Attorney, (202) 452-2352; 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.
FDIC: Andrew D. Carayiannis, Chief, Policy and Risk Analytics
Section, [email protected]; Lauren K. Brown, Senior Policy Analyst,
Exam Support Section, [email protected]; Amy L. Beck, Corporate Expert,
Sustainable Finance, [email protected]; Capital Markets and Accounting
Policy, Division of Risk Management Supervision, 202-898-6888; Jennifer
M. Jones, Counsel, [email protected]; Karlyn Hunter, Counsel,
[email protected]; Amanda Ledig, Senior Attorney, [email protected];
Supervision, Legislation, and Enforcement Branch, Legal Division,
Federal Deposit Insurance Corporation, 550 17th Street NW, Washington,
DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
On December 16, 2021, the OCC issued draft Principles for Climate-
Related Financial Risk Management for Large Banks (OCC draft
principles) and requested feedback from the public with comments due on
February 14, 2022.\1\ On April 4, 2022, the FDIC issued a Request for
Comment on a Statement of Principles for Climate-Related Financial Risk
Management for Large Financial Institutions (FDIC draft principles)
with comments due on June 3, 2022.\2\ On December 2, 2022, the Board
issued draft Principles for Climate-Related Financial Risk Management
for Large Financial Institutions (Board draft principles) with comments
due on February 6, 2023.\3\
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\1\ OCC Bulletin 2021-62, Risk Management: Principles for
Climate-Related Financial Risk Management for Large Banks; Request
for Feedback, (December 16, 2021), https://occ.gov/news-issuances/bulletins/2021/bulletin-2021-62.html.
\2\ 87 FR 19507 (April 4, 2022).
\3\ 87 FR 75267 (December 8, 2022).
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Financial institutions are likely to be affected by both the
physical risks and transition risks associated with climate change
(collectively, climate-related financial risks).\4\ Weaknesses in how
financial institutions identify, measure, monitor, and control climate-
related financial risks could adversely affect financial institutions'
safety and soundness. The proposed OCC draft principles, FDIC draft
principles, and Board draft principles (collectively, draft principles)
were substantively similar and proposed a high-level framework for the
safe and sound management of exposures to climate-related financial
risks, consistent with the risk management framework described in the
agencies' existing rules and guidance. Although all financial
institutions, regardless of size, may have material exposures to
climate-related
[[Page 74184]]
financial risks, the draft principles were intended to support key
climate-related financial risk management efforts by the largest
financial institutions, those with over $100 billion in total
consolidated assets.
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\4\ 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.
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The agencies seek to promote consistency in their climate-related
financial risk management guidance. Accordingly, following the issuance
of the draft principles and collective review of comments received on
each of the OCC draft principles, FDIC draft principles, and Board
draft principles, the agencies are now jointly issuing final
interagency Principles for Climate-Related Financial Risk Management
for Large Financial Institutions (principles) that provide a high-level
framework for the safe and sound management of exposures to climate-
related financial risks.
II. Discussion of Public Comments
The OCC received nearly 100 unique comments on the OCC draft
principles from individuals and organizations. Several of these letters
were signed by or included individual feedback from multiple
individuals or organizations (and in one case, more than 17,700
individuals). Approximately 4,470 individuals submitted a substantially
similar letter directly to the OCC.
The FDIC received more than 70 unique comments on the FDIC draft
principles from individuals and organizations. Several of the letters
were submitted on behalf of, or signed by, numerous individuals and
organizations.
The Board received more than 100 unique comments on the Board draft
principles from individuals and organizations. Several of the letters
were submitted on behalf of, or signed by, numerous individuals or
organizations.
Commenters included financial services trade groups, individual
banks, environmental groups, public interest and advocacy groups, data
and risk model providers, governmental organizations, community groups,
and individuals, among other respondents.
The agencies received a wide range of comments that both supported
and opposed the finalization of the draft principles. Many commenters
viewed the draft principles as an important step to support large
financial institutions in managing climate-related financial risks.
Other commenters asserted that financial institutions already
effectively manage climate-related financial risks or do not face
material climate-related financial risks. Some commenters expressed a
view that the agencies were providing special treatment to climate-
related financial risks relative to other risks. Many commenters
indicated practices to address climate-related financial risks are
evolving, and they supported the high-level and flexible nature of the
draft principles, while others encouraged the agencies to take
additional steps to address climate-related financial risks, including
considering more detailed guidance. Most unique commenters offered
suggestions for changes to the draft principles or requested additional
guidance in specific areas. These comments are summarized below.
Authority. Some commenters asserted that the draft principles
extend beyond the agencies' authority. Other commenters raised concerns
that the draft principles would restrict or discourage provision of
credit to, or otherwise disproportionately impact, certain industries,
geographies, or other groups. Some commenters asserted that the draft
principles could better address the role that they believe financial
institutions should play in supporting or accelerating a transition to
a lower carbon economy.
The agencies are responsible for ensuring the safety and soundness
of supervised financial institutions, among other responsibilities.
Similar to other risks faced by financial institutions, climate-related
financial risks can affect financial institutions' safety and
soundness. The principles are focused on ensuring that financial
institutions understand and appropriately manage their material
climate-related financial risks. The agencies are providing guidance to
financial institutions through these principles on the management of
climate-related financial risks just as the agencies provide guidance
to financial institutions in identifying and managing other risks.
The agencies did not incorporate suggestions for changes to the
draft principles that extend beyond the agencies' statutory mandates
relating to safety and soundness. For example, the agencies did not
incorporate changes in response to suggestions that the agencies
promote a transition to a lower carbon economy. The agencies encourage
financial institutions to take a risk-based approach in assessing the
climate-related financial risks associated with their customer
relationships and to take into account the financial institution's
ability to manage the risk. The principles neither prohibit nor
discourage financial institutions from providing banking services to
customers of any specific class or type, as permitted by law or
regulation. The decision regarding whether to make a loan or to open,
close, or maintain an account rests with the financial institution, so
long as the financial institution complies with applicable laws and
regulations.
Scope. Some commenters supported draft principles that were
intended for financial institutions with total assets over $100
billion. Other commenters proposed that the draft principles cover
financial institutions of all sizes. Some requested that the draft
principles be tailored to financial institutions based on the size,
complexity, or risk profile of the financial institution. Several
commenters noted that the agencies should implement a phased-in
approach for smaller financial institutions. Other commenters expressed
concern that the draft principles could unintentionally impact smaller
financial institutions, including community banks, noting the potential
burden the principles could impose on these smaller financial
institutions.
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 agencies' risk-based approach to
supervision, the principles are intended for financial institutions
with more than $100 billion in total consolidated assets. The
principles are intended to provide guidance to large financial
institutions as they develop strategies, deploy resources, and build
capacity to identify, measure, monitor, and control for climate-related
financial risks.
Several commenters requested clarification regarding the draft
principles' application to foreign banking organizations and branches
and agencies of foreign banks operating in the United States. The
principles are intended for foreign banking organizations with combined
United States operations of greater than $100 billion. The principles
also are intended for any branch or agency of a foreign banking
organization that individually has total assets of greater than $100
billion.\5\
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\5\ The Board is responsible for the overall supervision and
regulation of the U.S. operations of all foreign banking
organizations. The OCC, the FDIC, and the state banking authorities
have supervisory authority over the national and state bank
subsidiaries and federal and state branches and agencies of foreign
banking organizations, respectively, in addition to the Board's
supervisory and regulatory responsibilities over some of these
entities.
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Financial institutions' public climate commitments. Several
commenters suggested that the draft principles should encourage or
mandate financial institutions to develop plans to transition to a
lower carbon economy, to adopt credible commitments to align their
portfolios with net zero
[[Page 74185]]
greenhouse gas emissions by 2050, or to directly support their
customers through such a transition. Some commenters asked the agencies
to hold financial institutions accountable if financial institutions'
public commitments to address climate change do not match their
actions. Other commenters argued that the draft principles should
recognize the aspirational nature of financial institutions' public
commitments.
The agencies did not incorporate suggestions for changes to the
draft principles that extend beyond the agencies' statutory mandate
relating to safety and soundness, including changes in response to
suggestions that the agencies promote a transition to a lower carbon
economy. Similar to the draft principles, the principles state that any
financial institutions' climate-related strategies should align with
and support the institution's broader strategy, risk appetite, and risk
management framework. In addition, when financial institutions engage
in public communication of their climate-related strategies, boards of
directors and management should confirm that any public statements
about their financial institutions' climate-related strategies and
commitments are consistent with their internal strategies, risk
appetite statements, and risk management frameworks. This type of
oversight is consistent with effective governance and risk management
and intended to help financial institutions avoid legal and compliance
risk.
Low-and-moderate-income (LMI) and other underserved consumers and
communities. Many commenters asked that the agencies acknowledge the
potential unintended consequences of financial institutions' climate
risk management strategies on low-and-moderate-income and other
underserved consumers and communities. Some commenters also requested
additional clarification on how financial institutions may support
communities that are disproportionately impacted by the effects of
climate change, as well as additional guidance on how financial
institutions can manage climate-related financial risks in a manner
that minimizes adverse impacts on such consumers and communities. Some
commenters also suggested that the principles should provide further
guidance on how financial institutions can manage climate-related
financial risks consistent with their obligations under fair lending
and fair housing laws.
The agencies recognize that both the effects of climate change and
the actions that financial institutions may take to manage climate-
related financial risks could potentially have a disproportionate
impact on LMI and other underserved consumers and communities. The
agencies expect 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,
including LMI and other underserved consumers and communities, and to
ensure compliance with fair housing and fair lending laws. For example,
the principles clarify that financial institutions should ensure that
fair lending monitoring programs review whether and how the financial
institution's risk mitigation measures potentially discriminate against
consumers on a prohibited basis, such as race, color, or national
origin.
Governance. Many commenters supported the flexibility provided by
the draft principles for financial institutions to incorporate climate-
related financial risks within existing organizational structures or to
establish new structures for climate-related financial risks. Many
commenters requested that the draft principles further distinguish
between the responsibilities of the boards of directors and of
management. Some commenters noted that expectations that financial
institutions consider whether incorporation of climate-related
financial risks into governance and risk management processes may
warrant changes to compensation policies would be overly prescriptive.
The agencies have made changes to the draft principles to clarify
the role of the boards of directors in overseeing the financial
institution's risk-taking activities and the role of management in
executing the strategic plan and risk management framework. The
agencies emphasize that sound compensation programs continue to be
important to promote sound risk management and to protect the safety
and soundness of financial institutions. As the agencies have existing
guidelines and guidance on compensation,\6\ the principles do not
include a specific discussion of compensation policies.
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\6\ See 12 CFR part 30, appendix A and appendix D (OCC); 12 CFR
part 364, appendix A (FDIC); 12 CFR part 208, appendix D-1 (Board);
and Guidance on Sound Incentive Compensation Policies, 75 FR 36396
(June 25, 2010).
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Materiality of risk. Several commenters requested further
clarification of how financial institutions should determine whether
climate-related financial risks are material. Some commenters requested
clarification that financial institutions have the flexibility to make
their own materiality determinations. Some commenters provided specific
recommendations for assessing materiality. Some commenters requested
that the agencies distinguish materiality in the context of the draft
principles from the concept of materiality in securities laws. Other
commenters asserted that climate-related financial risks are rarely or
not material to the risk profile of financial institutions.
The principles provide that financial institutions' management
should employ comprehensive processes for identifying climate-related
financial risks consistent with methods used to identify other types of
emerging and material risks. The agencies made changes to the draft
principles to clarify that management should incorporate climate-
related financial risks into their risk management frameworks where
those risks are material.
Coordination. Many commenters urged the agencies to coordinate
amongst each other and work with other U.S. and international
regulators and federal agencies to harmonize approaches and to share
knowledge with respect to climate-related financial risks.
The agencies agree with commenters that interagency coordination
plays an important role in the effective issuance of guidance on
climate-related financial risks. Accordingly, the agencies have jointly
issued these principles and intend to continue to coordinate with other
U.S. regulators and international counterparts, where appropriate.
Other comments. The agencies received a number of detailed comments
on other aspects of the draft principles, some of which were responsive
to specific questions posed in the draft principles. These comments
included responses associated with supervisory approaches, time
horizons for identifying the materiality of climate-related financial
risks, relationships between climate-related financial risks and other
risks, specific tools and resources used to manage and mitigate
climate-related financial risks, approaches to scenario analysis,
climate-related financial products offered by financial institutions,
data- and modeling-related challenges, and reporting and disclosure
issues. The responses also included feedback on how climate-related
financial risks should be considered in merger and acquisition
decisions and the challenges
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and costs of incorporating the principles into risk management
frameworks.\7\
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\7\ Some commenters also asserted that the draft principles were
legislative rules subject to Administrative Procedure Act (APA)
notice and comment requirements and that the draft principles
violated the agencies' rule on guidance. The principles are being
issued as guidance and, consistent with the agencies' rule on
guidance, they will not have the force and effect of law. They do
not establish any specific requirements applicable to financial
institutions. Moreover, the principles are not subject to APA notice
and comment requirements. 5 U.S.C. 533(b) (excluding interpretive
rules, general statements of policy, and rules of agency
organization, procedures, or practice from the notice and comment
requirement). That the agencies sought public comment on the draft
principles does not mean that the principles are intended to be a
regulation or to have the force and effect of law. Rather, the
comment process helps the agencies improve their understanding of
the issue, gather information on financial institutions' risk
management practices, or seek ways to achieve supervisory objectives
most effectively and with the least burden on financial
institutions.
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Comments received on the draft principles were considered in the
development of the principles and will assist the agencies as they
consider whether and how to provide additional guidance in the future.
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
currently valid Office of Management and Budget (OMB) control number.
The principles do not revise any existing, or create any new,
information collections pursuant to the PRA. Rather, any reporting,
recordkeeping, or disclosure activities mentioned in the principles are
usual and customary and should occur in the normal course of business
as defined in the PRA.\8\ Consequently, no submissions will be made to
the OMB for review.
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\8\ 5 CFR 1320.3(b)(2).
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IV. Principles for Climate-Related Financial Risk for Large Financial
Institutions
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 \9\
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.\10\
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.\11\
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\9\ In this issuance, the term ``financial institution'' or
``institution'' includes national banks, Federal savings
associations, U.S. branches and agencies of foreign banks, state
nonmember banks, state savings associations, 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.
\10\ 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.
\11\ 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.
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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.\12\
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\12\ FSOC Climate Report, page 13.
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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-and-moderate-income (LMI) and
other underserved consumers and communities.\13\
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\13\ 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.
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These principles provide a high-level framework for the safe and
sound management of exposures to climate-related financial risks,
consistent with the risk management frameworks described in the
agencies' 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 (boards) and management make progress toward
incorporating climate-related financial risks into risk management
frameworks in a manner consistent with safe and sound practices. The
principles are intended to explain and supplement existing risk
management standards and guidance on the role of boards and
management.\14\
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\14\ References to the board and management throughout these
principles should be understood in accordance with their respective
roles and responsibilities and is not intended to conflict with
existing guidance regarding the roles of board and 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; OCC Guidelines Establishing Heightened Standards for
Certain Large Insured National Banks, Insured Federal Savings
Associations, and Insured Federal Branches, 12 CFR part 30, appendix
D.
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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.\15\ 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 agencies' risk-based approach to supervision, the
agencies anticipate that differences in large financial institutions'
complexity of operations and business models will result in different
approaches to addressing climate-related financial risks. Some large
financial institutions are already
[[Page 74187]]
developing governance structures, processes, and analytical
methodologies to identify, measure, monitor, and control for these
risks. The agencies understand that expertise in climate risk and the
incorporation of climate-related financial risks into risk management
frameworks remain under development in many large financial
institutions and will continue to evolve over time. The agencies also
recognize that the incorporation of 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. The agencies encourage large financial institutions to take a
risk-based approach in assessing the climate-related financial risks
associated with individual customer relationships and to take into
account the financial institution's ability to manage the risk. The
principles neither prohibit nor discourage financial institutions from
providing banking services to customers of any specific class or type,
as permitted by law or regulation. The decision regarding whether to
make a loan or to open, close, or maintain an account rests with the
financial institution, so long as the financial institution complies
with applicable laws and regulations.
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\15\ The principles are intended for financial institutions with
over $100 billion in total consolidated assets. With respect to
foreign banking organizations, this includes organizations with
combined United States operations of greater than $100 billion. The
principles also are intended for any branch or agency of a foreign
banking organization that individually has total assets of greater
than $100 billion.
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The principles are intended to promote a consistent understanding
of the effective management of climate-related financial risks. The
agencies may consider providing additional resources or guidance, as
appropriate, to support financial institutions in prudently managing
these risks while continuing to meet the financial services needs of
their communities.
General Principles
Governance. An effective risk management framework is essential to
a financial institution's safe and sound operation. A financial
institution's 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 management, and risk appetite. The board should oversee the
financial institution's risk-taking activities, hold management
accountable for adhering to the risk management framework, and allocate
appropriate resources to support climate-related financial risk
management. The board should direct management to provide timely,
accurate, and well-organized information to permit the board to oversee
the measurement and management of climate-related financial risks to
the financial institution. The 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 financial institution's typical strategic
planning horizon. If weaknesses or gaps in climate-related financial
risk management are identified, the information provided is incomplete,
or as otherwise warranted, the board should challenge management's
assessments and recommendations. The board and management should
support the stature and independence of the financial institution's
risk management and internal audit functions and, in their respective
roles, assign accountability for climate-related financial risks within
existing organizational structures or establish new structures for
climate-related financial risks.
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 management 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 material
climate-related financial risks. Management should provide the board
with sufficient information for the board to understand the impacts of
material 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
material 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 should consider material climate-
related financial risk exposures when setting and monitoring the
financial institution's overall business strategy, risk appetite, and
when overseeing management's implementation of capital plans. As part
of forward-looking strategic planning, the board should consider and
management should address the potential impact of material 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 should
encourage management to consider climate-related financial risk impacts
on the financial institution's other operational and legal risks.
Additionally, the board should encourage management to consider the
impact that the financial institution's strategies to mitigate climate-
related financial risks could have on LMI and other underserved
communities and their access to financial products and services,
consistent with the financial institution's obligations under
applicable consumer protection laws.
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, risk
appetite statements, and risk management frameworks.
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 exposures to
climate-related financial risks within the financial institution's
existing risk management framework. Financial institutions with sound
risk management employ a comprehensive process to identify emerging and
material risks related to the financial institution's business
activities. The risk identification process should include
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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 material climate-related financial risks
into the financial institution's risk management system, including
internal controls and internal audit.
Tools and approaches for measuring and monitoring exposures 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 climate-related
financial risk exposures, segmented or stratified by physical and
transition risks, based upon the complexity and types of exposures.
Available data, risk measurement tools, modeling methodologies, and
reporting practices 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 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 management's assessment of the
adequacy of the institution's climate-related financial risk management
framework.
Climate-related scenario analyses should be subject to management
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 management
framework, and it allows management to identify emerging risks and to
develop and implement appropriate strategies to mitigate those material
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 material
climate-related financial 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 account for this uncertainty 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
tomeasureclimate-related price risk, management should use the
bestmeasurement 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
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assessment across all business lines and operations, including
operations performed by third parties, and considering climate-related
impacts on business continuity and the evolving legal and regulatory
landscape.
Legal and 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 should include, but is not limited to, taking into account
possible changes to legal requirements for, or underwriting
considerations related to, flood or disaster-related insurance, and
ensuring that fair lending monitoring programs review whether and how
the financial institution's risk mitigation measures potentially
discriminate against consumers on a prohibited basis, such as race,
color, or national origin.
Other Nonfinancial Risk. Consistent with sound oversight, the board
and management should monitor how the execution of strategic decisions
and the operating environment affect the financial institution's
financial condition and operational resilience. Management should also
consider the extent to which the financial institution's activities may
increase the risk of negative financial impact and should implement
adequate measures to account for these risks where material.
Michael J. Hsu,
Acting Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on October 24, 2023.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2023-23844 Filed 10-27-23; 8:45 am]
BILLING CODE 6210-01-P; 4810-33-P; 6714-01-P