‘Key shortcomings’ in Fed’s climate risk principles
NGO Ceres calls for US Federal Reserve to target smaller banks in its draft principles for climate-related financial risk management.
Sustainability non-profit organisation Ceres has identified “key shortcomings” in the US Federal Reserve’s proposed principles addressing climate risk in financial services.
The proposed principles address both the physical risks and transition risks associated with climate change and would cover six areas: governance; policies, procedures and limits; strategic planning; risk management; data, risk measurement and reporting; and scenario analysis. The period for comment on the proposed principles closed on 6 February.
Ceres called attention to the proposed principles only targeting banks with over $100bn in assets, recommending that banks with $50bn or more in assets would be a preferable starting point. This echoed the Federal Reserve’s own observation that “all banks face climate-related financial risks, regardless of asset size or business model”.
According to Kelsey Condon, manager for bank financial regulation at Ceres: “The [proposed Fed principles] also fall short in ensuring that banks’ climate risk management strategies do not harm financially vulnerable communities disproportionately by, for instance, making financing more difficult or expensive to obtain.”
The policy presented by the Federal Reserve was contrasted with that put forward by the New York Department of Financial Services. New York’s proposal addresses material financial risks from climate change and will apply to all banks regardless of size.
The [proposed Fed principles] also fall short in ensuring that banks’ climate risk management strategies do not harm financially vulnerable communities.
Fed’s climate scenario analysis
In January this year, the Federal Reserve also confirmed it was conducting a pilot climate scenario analysis. The intention of this exercise is for the Fed to gain better understanding of large banking organisations’ climate risk-management practices and challenges, and to increase the ability of both large banking organisations and supervisors to identify, measure, monitor and manage climate-related financial risks.
The banks participating in this pilot exercise are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.
However, according to Ceres, the detail on how the exercise will be run by the Federal Reserve “leaves much to be desired”. Criticism from the NGO was levelled at physical and transition risk being modelled separately, which may allow for better identification of each risk, but may not capture the possibility of interactions between such risks.
The pilot only takes place over a 10-year horizon for transition risk, with Ceres arguing for an assessment that runs over a longer period of time, as well as one that more fully incorporates the possibility of a delayed or disorderly climate transition.
Financial regulation and oversight related to climate-related risks has become a hot topic of debate in the US. Last year, the proposed ESG disclosure rule from the Securities and Exchange Commission – the Enhancement and Standardisation of Climate-Related Disclosures for Investors – was opposed by 23 state financial officers who argued that the SEC is not a “climate regulator”.
