Federal regulators approve final principles for climate-related financial risk management for large financial institutions

On Tuesday, three major federal financial regulators — the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) — announced their interagency guidance on principles for climate-related risk management for large financial institutions. This is the first intervention from U.S. regulators intended to protect the financial system from climate-related risks.

• Read the final principles: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20231024b.htm

The principles provide guidance for how large banks should manage the climate-related risks in order to protect the stability of the broader financial system. The principles include crucial guidance on net-zero commitments and climate scenario analysis, two critical components for the effective management of physical and transition risks posed by climate change. The new guidance comes just one month after the U.S. Department of the Treasury published its own principles for financial institutions’ net-zero transition plans, which was the first time a major U.S. government agency provided any guidance to the financial sector on the development and implementation of net-zero transition plans.

Advocacy groups including the Sierra Club applauded the principles for finally recognizing that climate change poses a threat to financial stability, and that the financial risks associated with climate change could impact households, communities, and businesses throughout the economy, with a potential disproportionate impact on low-and-moderate-income communities. Advocacy groups also celebrated the principles for acknowledging the risk of greenwashing by financial institutions, by stating that any public statements about climate commitments must be consistent with internal strategies.

Now, advocacy groups say regulators should turn their focus on providing more detailed guidance on the essential elements of credible net-zero transition plans. This guidance must provide clear direction on how banks are expected to align their energy financing activities with their public climate commitments.

“The climate crisis presents risks not only to individual financial institutions, but it poses a systemic risk to the entire financial system that demands action now. With these new principles, federal banking regulators are finally laying the groundwork for a regulatory system that protects our economy from growing climate financial risks,” said Adele Shraiman, Senior Campaign Strategist for Fossil-Free Finance at the Sierra Club. “For too long, Wall Street banks have not faced clear climate-related regulation and supervision, and have taken advantage by making vague climate commitments without credible plans and actions to back them up. U.S. regulators must swiftly implement these principles and go further to ensure that big banks are accountable for the financial stability risks they’re exacerbating by financing fossil fuel expansion and the climate pollution driving this growing crisis.”

COMMENT LETTERS

The final principles come after various interagency comment periods held from 2022 to 2023. During that time, the Sierra Club signed onto a coalition comment letter led by Public Citizen and signed by 68 organizations submitted to the Federal Reserve, and a comment letter led by Public Citizen submitted to the OCC. Sierra Club supporters also submitted comments to the Federal Reserve.

The coalition, which also included the Americans for Financial Reform Education Fund, Greenpeace, and World Wildlife Fund, called for the Federal Reserve to improve the guidance by clarifying what it means for large financial institutions to align net-zero transition plans with internal strategies; making clear that financial institutions committed to net zero must implement credible internal strategies; and adopting a consistent approach to overseeing alignment of climate commitments in line with science-based recommendations.

Read more about the principles for climate-related financial risk management in this Sierra Club blog: Major US Financial Regulators Move to Protect Financial System From Climate Risk