Banking Regulators Issue Guidance for Climate-Related Financial Risk Management

On October 30, 2023, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve jointly issued guidance designed to provide a high-level framework for the safe and sound management of exposures to climate-related financial risks (the "Principles"). The Principles are intended to support efforts by large financial institutions to focus on key aspects of climate-related financial risk management, and are targeted at financial institutions with over $100 billion in total consolidated assets.

Rather than creating new risk management requirements, these Principles are designed to 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 three agencies' existing rules and guidance. The Principles provide general guidance across five areas of corporate activity: (1) Governance; (2) Policies, Procedures, and Limits; (3) Strategic Planning; (4) Data, Risk Measurement, and Reporting; and (5) Scenario Analysis. In addition, the Principles provide specific guidance and risk considerations for six risk areas: (1) credit risk; (2) liquidity risk; (3) other financial risk, like interest rate risk; (4) operational risk; (5) legal and compliance risk; and (6) other nonfinancial risk areas.

The majority of the guidance outlined in the Principles is targeted towards the management of large financial institutions. However, the Principles task boards of directors with certain responsibilities, including overseeing the creation of climate-related risk management frameworks, understanding the implications of climate-related financial risks across various scenarios and planning horizons, and allocating appropriate resources to support climate-related financial risk management, among other responsibilities.