On December 2, 2022, the Board of Governors of the Federal Reserve System (“Federal Reserve”) released draft principles for managing exposures to climate-related financial risks (“Climate Principles”).1 The Climate Principles generally are targeted at institutions with over $100 billion in total assets that are regulated by the Federal Reserve, including US branches and agencies of foreign banking organizations with over $100 billion in assets held at the branch or agency.2
Except for the minor points discussed below, the Climate Principles are substantially similar to principles that were proposed by the Office of the Comptroller of the Currency (“OCC”) in December 2021 and the Federal Deposit Insurance Corporation (“FDIC”) in March 2022. (Please see our earlier Legal Updates for a discussion of the substance of the OCC’s principles and FDIC’s principles.)
Most notably, the Climate Principles omit some of the commentary on climate-related financial risk that made the documents released by the other agencies sound more like newspaper articles than supervisory guidance. This may reflect refinement based on comments to the OCC’s and FDIC’s proposals.
Another key difference in the Climate Principles is that they clearly separate the oversight obligations of boards of directors from the risk management obligations of management. This is a perennial issue for the banking industry, and the use of clear and precise language should be appreciated if and when the Climate Principles are finalized.
One governor, Christopher Waller, dissented from the release of the Climate Principles, stating: “… I disagree with the premise that [climate change] poses a serious risk to the safety and soundness of large banks and the financial stability of the United States.”3 This type of dissent, while rare at the Federal Reserve, is illustrative of the charged and controversial nature of regulation of climate change in the United States.
The Federal Reserve will accept comments on the Climate Principles until February 6, 2023. We expect the Federal Reserve will coordinate with the OCC and FDIC to issue the Climate Principles as joint supervisory guidance in 2023.
1 87 Fed. Reg. 75,267 (Dec. 8, 2022), https://www.federalregister.gov/documents/2022/12/08/2022-26648/principles-for-climate-related-financial-risk-management-for-large-financial-institutions.
2 The Federal Reserve regulates state member banks, bank holding companies, savings and loan holding companies, foreign banking organizations with respect to their US operations, and non-bank systemically important financial institutions.
3 Statement by Governor Waller on principles for climate-related financial risk management for large financial institutions (Dec. 2, 2022), https://www.federalreserve.gov/newsevents/pressreleases/waller-statement-20221202.htm.