Final Principles for Climate-Related Financial Risk Management
Interagency guidance for large banks to identify, measure, monitor, and control climate-related financial risks
Regulatory Insights
- Interagency Coordination: Under safety and soundness authority, the FRB, OCC, and FDIC issue final climate-related financial risk management principles for banks over $100B.
- Risk-Based Approach: Encourages a risk-based approach that:
- Is related to customer relationships and the ability of the financial institution to manage such risks.
- ‘Neither prohibits nor discourages providing banking services to customers of any specific class or type, as permitted by law or regulation.’
- Complements (does not replace) the risk management framework described in the agencies’ existing rules and guidance.
- Final Modifications: Final principles are very much in keeping with agency drafts with modifications in response to comments, including:
- Clarification on the applicability to large FBOs.
- Clarification on the role of boards of directors and management.
- Removal of a reference in the FRB’s proposal to compensation practices.
- Principles & Cross-Risk Areas: Expectations that:
- Climate risk governance and management will evolve/mature across such areas as limits, planning, measurement, and analysis.
- Span across risk areas (including credit, liquidity, operational, legal and compliance, and other financial and nonfinancial risks).
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October 2023
The Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, federal banking agencies or agencies) release final interagency guidance outlining principles for climate-related (physical and transition risks) financial risk management for large financial institutions.
In issuing the guidance, the agencies denote their authority relative to the safe and sound management of exposures to climate-related financial risks, ‘consistent with the risk management framework described in the agencies’ existing rules and guidance’. They add the final principles “neither prohibit nor discourage financial institutions from providing banking services to customers of any specific class or type, as permitted by law or regulation.”
In final form, the interagency guidance is substantively similar to the drafts previously released by each of the federal banking agencies (each agency individually released a draft though all drafts were substantively similar to one another - see previous KPMG Regulatory Alert, here). Some modifications were made in response to comments provided, including:
- Clarification on the applicability to large foreign banking organizations (FBOs).
- Clarification on the role of boards of directors and management.
- Removal of a reference in the FRB’s proposal to compensation practices.
The agencies recognize that all financial institutions, regardless of size, may have material exposures to climate-related financial risks. The principles, however, are issued specifically to large financial institutions with over $100 billion in total assets (including FBOs with combined U.S. operations of greater than $100 billion and any branch or agency of a FBO that individually has total assets of greater than $100 billion).
The integration of climate-related risks into risk management is expected to evolve over time and adapt to new developments and methodologies; risk management practices are expected to be scaled to the size, complexity, and risk profile of the financial institution. “The principles are intended to provide guidance to large financial institutions as they develop strategies, deploy resources, and build capacity to identify, measure, monitor, and control for climate-related financial risks.”
The guidance includes six (6) general principles for climate risk management and discussion of the management of climate risk in six (6) specific risk areas.
General Principles for Climate Risk Management.
Principle | Description |
|---|---|
1. Governance | Board responsibilities:
Management responsibilities: Implement policies at the board’s strategic direction and execute the strategic plan and risk management framework.
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2. Policies, Procedures, and Limits |
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3. Strategic Planning |
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4. Risk Management |
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5. Data, Risk Measurement, and Reporting |
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6. Scenario Analysis |
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Management of Risk Areas.
Risk Area | Description |
|---|---|
Credit Risk |
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Liquidity Risk |
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Other Financial Risks |
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Operational Risk |
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Legal and Compliance Risk |
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Other Nonfinancial Risks |
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Final Principles for Climate-Related Financial Risk Management
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