The Federal Deposit Insurance Corporation (FDIC) is consulting on the statement on principles for the management of climate risk by large financial institutions, with comment period ending on June 3, 2022.
The draft principles are targeted at the largest financial institutions, those with over USD 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 and provide a high-level framework for the safe and sound management of exposures to climate-related financial risks. The draft principles will help address key questions on climate exposures and incorporate climate-related financial risks into the risk management frameworks of financial institutions. The draft principles cover aspects related to governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis. The principles stipulate the following:
- Material climate-related financial risk exposures should be clearly defined, aligned with the institution’s risk appetite, and supported by appropriate metrics (for example, risk limits and key risk indicators) and escalation processes.
- Tools and approaches for measuring and monitoring exposure to climate-related risks include, among others, exposure analysis, heat maps, climate risk dashboards, and scenario analysis. These tools can be leveraged to assess an institution’s exposure to both physical and transition risks in both the shorter and longer term.
- Since data, risk measurement, modeling methodologies, and reporting continue to evolve at a rapid pace, management should monitor these developments and incorporate them into their climate risk management as warranted.
- Management should develop and implement climate-related scenario analysis frameworks in a manner commensurate to the institution’s size, complexity, business activity, and risk profile. These frameworks should include clearly defined objectives that reflect the institution’s overall climate risk management strategies.
- Management should identify emerging risks that could be related to credit, liquidity, operational, legal and compliance, and other financial and nonfinancial risks; it should develop and implement appropriate strategies to mitigate these risks.
- 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.
FDIC plans to elaborate on these draft principles in subsequent guidance that would distinguish roles and responsibilities of boards of directors and management, incorporate the feedback received on the draft principles, and consider lessons learned and best practices from the industry and other jurisdictions. FDIC encourages financial institutions to consider climate-related financial risks in a manner that allows them to continue to prudently meet the financial services needs of their communities. This request for comment from FDIC is substantively similar to the one issued by the Office of the Comptroller of the Currency on December 16, 2021.
Keywords: Americas, US, Banking, Climate Change Risk, ESG, Sustainable Finance, Disclosures, Credit Risk, Liquidity Risk, Operational Risk, Scenario Analysis, Compliance Risk, Reporting, FDIC, Subheadline
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