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    FSOC Report Issues Recommendations to Address Climate Risks

    October 21, 2021

    The Financial Stability Oversight Council (FSOC) released a report in response to the U.S. President's Executive Order on climate-related financial risk. The report identifies climate change as an increasing threat to financial stability and sets out 30 recommendations for financial regulators, covering the actions needed to identify and address climate risks and promote financial resilience. The report is accompanied by a factsheet and remarks from Janet L. Yellen, the Secretary of the U.S. Treasury. In a statement, the Federal Reserve Chair Jerome Powell welcomed the FSOC report and noted that FED is developing a program on scenario analysis to evaluate the potential economic and financial risks posed by different climate outcomes.

    The report reviews the work underway across FSOC members on climate risks and financial stability, highlights the data and methodological challenges associated with measurement of financial risks arising from climate change, and presents potential approaches for meeting these challenges. The report discusses the critical role of consistent, comparable, and decision-useful climate-related disclosures for investors, financial institutions, regulators, and the public in the measurement of climate-related financial risks. It outlines key issues for assessment of the effect of climate risks on financial markets and institutions, emphasizing the need for measurement tools to assess such risks and the important role that scenario analysis can play in the development and deployment of these critical assessments. Finally, it presents a set of recommendations that begin to address the challenges and needs identified throughout the report. The following are some of the key recommendations that will serve as a coordinated FSOC agenda:

    • Addressing data gaps. Keeping in mind the existing gaps in available data, FSOC members have identified work on data and methodologies as a priority. FSOC recommends that is members should identify the data needed to evaluate the climate risk exposures of regulated entities and financial markets within the context of their mandates, perform an internal inventory of the relevance of existing data, and develop a plan for procuring necessary data through data collection, data sharing arrangements, and information purchased from data providers or other sources. FSOC recommends its members to develop consistent data standards, definitions, and relevant metrics to facilitate common definitions of climate-related data terms, sharing of data, and analysis and aggregation of data. 
    • Enhancing disclosures. FSOC recommends that its members, consistent with their mandates and authorities, consider enhancing public reporting requirements for climate risks in a manner that builds on the four core elements of the Task Force on Climate-related Financial Disclosures (TCFD), to the extent consistent with the U.S. regulatory framework and the needs of U.S. regulators and market participants. FSOC members issuing requirements for climate disclosures should consider whether such disclosures should include disclosure of greenhouse gas emissions to help determine exposure to material climate-related financial risks.
    • Utilizing scenario analysis. FSOC recommends that its members use scenario analysis, where appropriate, as a tool for assessing climate risks, taking into account their supervisory and regulatory mandates and the size, complexity, and activities of regulated entities. Members should consider using common scenarios that build on existing work, including scenarios developed by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and work at the Financial Stability Board, as appropriate for the institutions and markets under consideration.
    • Reviewing need for additional prudential guidance. FSOC members, consistent with their mandate and authorities, should review existing regulations, guidance, and regulatory reporting relevant to climate risks, including credit risks, market risks, counterparty risks, and other financial and operational risks, to assess whether updates are necessary to appropriately address climate-related financial risks. Members should evaluate whether additional regulations or guidance specific to climate risks is necessary to clarify expectations for regulated or supervised institutions regarding management of climate risks, taking into account an institution’s size, complexity, risk profile, and existing enterprise risk management processes.

    The report also announces the establishment of two new climate committees: the Climate-related Financial Risk Committee (CFRC) and the Climate-related Financial Risk Advisory Committee (CFRAC). CFRC will be a staff-level committee to be formed 60 days after the Climate Report was released. The committee will identify priority areas for assessing and mitigating climate-related risks to the financial system and will serve as a coordinating body to facilitate communication across FSOC members and interested parties. CFRAC, however, will help FSOC gather information and conduct analysis of climate-related financial risks from a broad array of stakeholders.

     

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    Keywords: Americas, US, Banking, Insurance, Securities, Climate Change Risk, ESG, Disclosures, Scenario Analysis, Reporting, Stress Testing, Sustainable Finance, TCFD Recommendations, FED, FSOC

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