FDIC Requests Comment on Proposed Principals for Climate-Related Financial Risk Management

On March 30, 2022, the Federal Deposit Insurance Corporation (“FDIC”) issued a request for public comment on the draft principles it created that would make up the framework for “the safe and sound management of exposures to climate-related financial risks.” The FDIC is specifically concerned about risks to the “safety and soundness of financial institutions and the stability of the financial system” stemming from climate change and “the transition to a low carbon economy.”

Draft Principals

A. Governance

A financial institution’s board and management personnel must demonstrate an understanding of the climate-related risk exposures to their institution and evidence their ability to:

• Engage in sound governance practices, including:

  • Oversight of the financial institution;

  • Allocating resources toward assessment and response to these risk exposures;

  • Informing staff of the climate-related impacts on their institution;

  • Deciding whether risk response procedures will be implemented into the existing organizational structure or new structures will be established;

  • Assigning risk responsibilities to committees and institution employees within the structure selected for response;

  • Establishing, implementing, and maintaining procedures for the institution’s strategy and risk appetite; and

  • Establishing, implementing, and maintaining regular reporting procedures between management and board members regarding “the level and nature of risks to the institution.”

B. Policies, Procedures, and Limits

Management should incorporate policies, procedures, and limitations relating to climate-related risk in accordance with the strategy and risk appetite set by the board.

C. Strategic Planning

In establishing the institution’s strategic plans relating to preparation or response to climate-related risk, the board and management should consider

• business strategy,

• risk appetite,

• financial capital,

• operational plans,

• the institution’s financial condition and operations (including geographic locations and varying time horizons),

• stakeholder expectations,

• the institution’s reputation; and

• low-to-moderate income consumers and disadvantaged households and communities

D. Risk Management

Management should ensure that their maintenance of the institution’s existing risk management framework takes special consideration toward climate-related risks and should establish a comprehensive process—which requires similar considerations to those given in the strategic planning process—for detecting, assessing, and responding to these risks.

E. Data, Risk Measurement, and Reporting

To maintain sound risk management, climate-related financial risks should be included in the institution’s internal reporting, monitoring, and escalation processes.  

F. Scenario Analysis

Institutions should establish and implement climate-related scenario analysis to ensure that the institution can identify, measure, and manage climate-related risks in an efficient and routine manner.

Request for Comment

The FDIC has requested public comment on the following questions:

A. Applicability Question

• What additional factors, for example asset size, location, and business model, should inform financial institutions’ adoption of these principles?

B. Tailoring Question

• How could future guidance assist a financial institution in developing its climate-related financial risk management practices commensurate to its size, complexity, risk profile, and scope of operations?

C. General

• What challenges do financial institutions face in incorporating these draft principles into their risk management systems? How should the FDIC further engage with financial institutions to understand those challenges?

• Would regulations or guidelines prescribing particular risk management practices be helpful to financial institutions as they adjust to doing business in a changing climate?

D.      Current Risk Management Practices

• What specific tools or strategies have financial institutions used to successfully incorporate climate-related financial risks into their risk management frameworks?

• How do financial institutions determine when climate related financial risks are material and warrant greater than routine attention by the board and management?

• What time horizon do financial institutions consider relevant when identifying and assessing the materiality of climate-related financial risks?

• What, if any, specific products, practices, and strategies—for example, insurance or derivatives contracts or other capital market instruments—do financial institutions use to hedge, transfer, or mitigate climate-related financial risks?

• What, if any, climate related financial products or services— for example, ‘‘green bonds,’’ derivatives, dedicated investment funds, or other instruments that take climate-related considerations into account—do financial institutions offer to clients and customers? What risks, if any, do these products or services pose?

• How do financial institutions currently consider the impacts of climate-related financial risk mitigation strategies and financial products on households and communities, specifically LMI and other disadvantaged communities? Should the agencies modify existing regulations and guidance, such as those associated with the Community Reinvestment Act, to address the impact climate-related financial risks may have on LMI and other disadvantaged communities?

E.       Data, Disclosures, and Reporting

• What, if any, specific climate-related data, metrics, tools and models from borrowers and other counterparties do financial institutions need to identify, measure, monitor, and control their own climate-related financial risks? How do financial institutions currently obtain this information? What gaps and other concerns are there with respect to these data, metrics, tools or models?

• How could existing regulatory reporting requirements be augmented to better capture financial institutions’ exposure to climate-related financial risks?

F. Scenario Analysis

• Scenario analysis is an important component of climate risk management that requires assumptions about plausible future states of the world. How do financial institutions use climate scenario models, analysis, or tools and what challenges do they face?

• What factors are most salient for the FDIC to consider when designing and executing scenario analysis exercises?