#United States #Boston #Ceres #climate risk #financial regulators

Federal Financial Regulators Tackle Climate Risk

In a pivotal move for climate risk management, a newly released scorecard by Ceres has shed light on the substantial progress made by ten federal financial regulators in the United States over the last 18 months. The scorecard highlights that despite the achieved actions, there remains a significant gap in addressing the ongoing and escalating financial risks posed by climate change.

The 2024 Climate Risk Scorecard has evaluated the efforts of regulators from various institutions, including the Federal Reserve (the Fed), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and others. While the findings demonstrate that these entities have undertaken substantial initiatives to assess and incorporate climate risk into their regulatory frameworks, experts warn that the increasing frequency and severity of extreme weather events necessitates an even more robust response.

Key Findings of the Scorecard

According to the recent report, the following significant developments were noted:

1. New Guidance on Risk Management: The Federal Reserve, OCC, and FDIC have issued interagency guidance entitled "Principles for Climate-Related Financial Risk Management for Large Financial Institutions." This guidance aims to help major institutions adopt necessary practices in managing climate-related risks.

2. Community Reinvestment Act (CRA) Updates: For the first time in two decades, significant changes were made to the Community Reinvestment Act regulations. These updates now include provisions for climate resiliency and disaster preparedness, marking an essential evolution in regulatory frameworks.

3. Mandatory Climate Disclosures: The U.S. Securities and Exchange Commission (SEC) has finalized a groundbreaking rule that mandates all publicly listed corporations to disclose their climate-related financial risks. This move not only enhances transparency but is also seen as a critical step towards encouraging corporations to adopt sustainable practices.

4. Framework for Net Zero Financing: In an effort to promote sustainable investments, the U.S. Treasury released the "Principles for Net Zero Financing and Investment" in September 2023. This document, developed in collaboration with multiple federal agencies, encourages entities to align their financial practices with climate goals.

5. Guidance for Mortgage Entities: The Federal Housing Finance Agency (FHFA) has published guidelines aimed at managing climate risks specifically for Fannie Mae, Freddie Mac, and the Home Loan Banks. This initiative provides clarity on how these entities can mitigate climate-related threats in the housing market.

Areas for Improvement

Despite the noteworthy progress, the scorecard underscores that U.S. regulators face extensive challenges ahead. The following areas require immediate attention:

• - Enhanced Climate Disclosures: Regulators must build on the recent improvements by accelerating efforts to enhance climate-related disclosures across all sectors to ensure transparency and accountability in risk management.
• - Broader Scenario Analysis: More robust scenario analysis incorporating climate risks will be vital to preparing for potential financial impacts linked to severe weather and climate events.
• - Vulnerable Communities: Special focus should be placed on assessing how climate risks affect financially vulnerable populations, ensuring that financial models account for those historically impacted by environmental changes.

Conclusion

The recent scorecard from Ceres reflects a commitment among U.S. financial regulators to address the systemic risks presented by climate change. However, with the stakes higher than ever due to worsening weather conditions, it is essential for these regulators to not only maintain their momentum but also to intensify their efforts to safeguard the financial sector against climate-related challenges. Without urgent and expansive action, the risks associated with climate change remain an acute threat to the economy and society as a whole.