WASHINGTON– A new set of principles that seek to address the physical and transition risks associated with climate change has been proposed by the Federal Reserve for banking organizations of more than $100 billion in assets.
The Federal Reserve Board said the principles are aimed at providing a high-level framework for the safe and sound management of exposures to climate-related financial risks for Fed-supervised financial institutions with more than $100 billion in assets.
The principles cover six areas: governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement and reporting; and scenario analysis.
“The proposed principles are substantially similar to proposals issued by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, and the Board intends to work with those agencies to promote consistency in the supervision of large banks through final interagency guidance,” the Fed said,
The proposal is now out for 60-day comment.
Physical, Transaction Risks
“Financial institutions are likely to be affected by both the physical risks and transition risks associated with climate change …,” the Fed stated. “Physical risks refer to the harm to people and property arising from acute, climate-related events, such as hurricanes, wildfires, floods, and heatwaves, and chronic shifts in climate, including higher average temperatures, changes in precipitation patterns, sea level rise, and ocean acidification. Transition risks refer to stresses to certain institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes that would be part of a transition to a lower carbon economy.
‘Seeking to Promote Consistent Understanding’
“Weaknesses in how financial institutions identify, measure, monitor, and control potential climate-related financial risks could adversely affect financial institutions’ safety and soundness, as well as the stability of the overall financial system,” the Fed statement continued. “The board is therefore seeking comment on draft principles that would promote a consistent understanding of how climate-related financial risks can be effectively identified, measured, monitored, and controlled among the largest institutions, those with over $100 billion in total consolidated assets. Many financial institutions are considering these risks and would benefit from guidance as they develop strategies, deploy resources, and make necessary investments to manage climate-related financial risks.”
The full Fed proposal and statement can be found here.
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