OCC Taking Action on Climate Risk Management Principals for Large Banks

Weaknesses in a bank's identification and response to potential physical and transitional climate-related risks could adversely affect the bank's safety and soundness, and by extention, the overall financial system.  To assist banks in responding to such climate-related risks, on December 16, 2021, the Office of the Comptroller of the Currency ("OCC") issued Principles for Climate-Related Financial Risk Management for Large Banks.  "Physical risks" refer to harm to people and property arising from such events as hurricanes, wildfires, floods, heatwaves, and chrocinic shifts in climate, including changes in precipitation patterns and sea level rise. "Transition risks," on the other hand, refer to stresses to banks or sectors arising from "shifts in policy, consumer and business sentiment, or technologies associated with changes necessary to limit climate change.  While all banks may face material exposures to climate related financial risk, the OCC's guidance is aimed at banks with over $100 billion in total consolidated assets.

The OCC's has set forth six prinicples, which provide a high-level framework for the safe and sound management of exposures to climate-related financial risk.

1. Governance. To better facilitate ovrersight, banks should:

   • understand climate-related financial risk exposures and the impact on risk appetite,

   • allocate appopriate resources, assigning climate-related financial risk responsibilties throughout the organization, and

   • clearly communicate to staff climate-related impacts to the bank's risk profile. 

   The bank's board should oversee risk-taking activities and hold management accountable for adhereance.  Management is responsible for executing the overall strategic plan and should hold staff accountable for risk control.   

2. Policies Procedures, and Limits. Management should incorporate climate-related risks into its policies, procedures and limits to guide the ban's approach to risk in accordance with the strategy and risk appetite set by the bank's board.

3. Strategic Planning. Banks should consider "material climate-related risk exposures when setting the bank's overall business strategy, a risk appetite, and financial, capital, and operational plans."  Comate-related strategies should align with the bank's broader strategy, risk appetite, and risk management framework.  Banks' public statements about their climate-related strategies should be consistent with their respective internal strategies and risk appetite statements.

4. Risk Management. Banks should develop processes to identify, measure, monitor, and control climate-related financial risk exposures within the bank’s existing risk management framework, and should have a comprehensive process to identify emerging and material risks from their business activities and associated exposures. That process should include input from stakeholders across the organization with relevant expertise (e.g., business units, independent risk management, and legal). Risk should be identified through "assessment of climate-related financial risks across a range of plausible scenarios and under various time horizons."  Banks should have in place processes to measure, monitor and inform management of material climate-related financial risks, which may include exposure analysis, heat maps, climate risk dashboard and scenario analysis. 

5. Data, Risk Measurement, and Reporting. Banks should include climate-related financial risk information in their internal reporting, monitoring, and escalation processes. Relevant, accurate, and timely risk data allows management understand material and emerging climate-related financial risk exposures. Banks should monitor developments in data, risk measurement, modeling methodologies, and reporting and incorporate them into their climate risk management as warranted.

6. Scenario Analysis. Climate-related scenario analysis, which refers to "exercises used to conduct a forward-looking assessment of the potential impact on a bank of changes in the economy, financial system, or the distribution of physical hazards resulting from climate-related risks," is an important approach for identifying, measuring, and managing climate-related risks. Such exercises differ from traditional stress testing, which assesses potential impacts of transitory shocks to near-term economic and financial conditions. Implementing an effective climate-related scenario analysis framework is important framework as it provides "a comprehensive and forward-looking perspective that banks can apply alongside existing risk management practices to evaluate the resiliency of a bank’s strategy and risk management to the structural changes arising from climate-related risks."

Banks should consider incorporating climate-related financial risks when identifying and mitigating all types of risk. The OCC plans to issue subsequent guidance that would distinguish roles and responsibilities of boards of directors and management. The OCC has requested public comment through February 14, 2022.