Climate change risk management in regulators’ crosshairs

Regulators are gearing up to ask questions about how financial institutions are managing climate change risk. While NCUA to date has not published any specifics on the subject, there are plenty of documents from other regulators that can serve as tea leaves on what may be coming in the months ahead this topic.

Federal regulators are signaling concerns about how climate-related risks are managed by financial institutions in part because of an Executive Order issued by the White House on May 20, 2021, Executive Order on Climate-Related Financial Risk (Order). The Order beings by noting that climate change presents a physical risk to assets, publicly traded securities and other investments in the economy (physical risk). Meanwhile, as the world shifts from carbon-intensive sources of energy, that can create opportunity but a failure to appropriately anticipate the risks from such a transition can threaten pensions, savings and US competitiveness (transition risk). The Order sets forth a policy of advancing “clear, intelligible, comparable and accurate disclosure of climate-related financial risk.” Section 3, “Assessment of Climate-Related Financial Risk by Financial Regulators” in part tasks Secretary of Treasury Janet Yellen, as the head of the Financial Stability Oversight Council (FSOC), with coordinating with other FSOC members, which includes NCUA and the CFPB, to work on several things:

• Assess climate related financial risk to the stability of the Federal government and the US financial system.
• Facilitate sharing climate-related financial risk data among FSOC member agencies.

 

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