Special Alert | Regulatory attention on climate risk continues to grow

FRB developing a framework to consider climate change risks from both a microprudential and macroprudential perspective

Amy S. Matsuo

Amy S. Matsuo

Principal and National Leader, Regulatory Insights, KPMG US

+1 919-244-0266

In remarks at an industry conference on March 23, 2021, the Federal Reserve Board (FRB) indicated it was developing a framework to consider climate change risks from both a microprudential and macroprudential perspective. Earlier this year, the FRB formed the Supervision Climate Committee (SCC) to develop “an approprate program” to ensure the resilience of supervised firms to climate change risks. To complement the SCC, the agency has also formed the Financial Stability Climate Committee (FSCC), which will approach climate change from a macroprudential perspective, looking at climate-related risks to financial stability. It is also charged with increasing the FRB's international engagement and influence on this issue.

The macroprudential program will look at whether climate change might make the financial system more vulnerable in ways that could amplify potential climate shocks and cause broader knock-on effects that may harm households, businesses, and communities. The FRB suggested potential hurdles to this process might include: developing reliable climate forecasts; policy, behavior, and technology uncertainties related to the transition to clean energy; and potential modeling risks, such as missed correlations among exposures.

Consistent with previous remarks, scenario analysis was called out as a potentially helpful tool to assess the effects of climate change on the financial system under a wide range of assumptions, especially given the high uncertainty inherent in estimating climate-related shocks. The agency added that this analytic approach offers a structured way of uncovering the parts of the financial system where physical, transition, and other risks may have outsized effects through potential spillovers.

Other regulatory developments that might be of interest:

  • The Commodity Futures Trading Commission established the Climate Risk Unit to focus on the role of derivatives in understanding, pricing, and addressing climate-related risk and transitioning to a low-carbon economy.
  • The Securities and Exchange Commission (SEC) has taken a variety of actions including:
  • Forming a Climate and ESG Task Force in the Division of Enforcement
  • Initiating a review of its climate change disclosure rules and inviting public comment on questions to help guide the review
  • Enhancing its focus on climate-related disclosure in public company filings
  • Adding climate-related disclosures to the list of SEC’s 2021 examination priorities.

KPMG Department of Professional Practice has prepared a point-of-view on recent ESG-related developments at the SEC, including disclosure requirements as well as implications and actions for managements. The report is available here.

For continued insight on ESG-related industry and regulatory developments, please visit our new KPMG IMPACT website and subscribe to our ESG Alerts.

The most recent addition to KPMG IMPACT website, Climate action gains steam in Washington, is available directly here.

Get the latest thinking from KPMG’s Regulatory Insights