The guiding principles are similar to related proposals from other banking regulators, but will require further clarification through the comment process.
By Nicola Higgs, Betty M. Huber, Arthur S. Long, Pia Naib, Anne Mainwaring, and Deric Behar
On December 2, 2022, the Board of Governors of the Federal Reserve System (Federal Reserve) published proposed Principles for Climate-Related Financial Risk Management for Large Financial Institutions (the Proposal). The Proposal urges large financial institutions to consider how best to identify, measure, monitor, and control the various risks associated with climate change over a variety of time horizons. It also specifies that large financial institutions should monitor microprudential risks, including credit, market, liquidity, operational, and legal and compliance risks, as well as other financial and nonfinancial risks that could arise from climate change.
The Proposal aims to support financial institution boards of directors and management in incorporating mitigation of climate-related financial risks into their broader risk management frameworks, consistent with safe and sound practices and the Federal Reserve’s rules and guidance on sound governance.
Large financial institutions are defined as those with over $100 billion in assets that are subject to Federal Reserve supervision, including the US operations of non-US banking organizations. The Federal Reserve’s guidance is founded on the premise that climate change poses an emerging risk to the safety and soundness of financial institutions and the financial stability of the United States. Continue Reading