Principles for Climate-Related Financial Risk Management for Large Financial Institutions
The joint principles on managing climate financial risks issued by the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC) and the Federal Reserve (The Fed) introduces the first set of nonfinancial environmental principles for large financial institutions to manage risks that may stem from climate change. It pressures large banks, credit unions, and regional banks into behaving as if climate change is an existential threat to their financial interests, for which it has no underlying statutory authorization. It also arguably crosses the line from interpretive guidance into rulemaking.
The FDIC, OCC, and The Fed are primarily tasked with supervising the liquidity of savings held by federally regulated banks, ensuring adherence to sound monetary policy. This does not entail an additional expectation that such banks maintain internal policies that account for climate change risks. Such risks are external to the institutional financial decisions made under each agency’s regulatory purview. Enacting this interagency guidance creates two major problems: (1) the principles retrofit environmental policy mechanisms to financial regulators without statutory authority or expertise, (2) the principles induce market manipulation by incentivizing large institutions to set an arbitrary bar that smaller banks will likely follow or respond to.
The financial regulators’ joint climate risk principles impose unorthodox management standards on large financial institutions that traditionally manage their unique risks internally. This includes:
Pressuring the boards of financial entities to incorporate climate risk concerns in their overall approach to addressing traditional financial risks.
Spurring large finance institutions to mitigate external climate risks that may or may not be a concern.
Enabling non-expert financial regulators to micromanage environmental risks that institutions are already capable of detecting on their own.
Overemphasizing the severity and importance for large finance institutions to address climate change.
By inducing large financial institutions to adopt climate risk protocols, regulators foster an incentive for smaller entities to follow-suit, absent any official law.
The FDIC, OCC, and The Fed’s interagency guidance represents the standard-setter for climate change policy among large financial establishments. These principles threaten to upend a firm’s internal risk management protocols by imposing external environmental governance standards. Congress never enabled these regulatory entities to pursue a climate monitoring agenda. Absent any guiding law, this interagency directive has no viable foundation nor authority to encourage large institutions to address climate risks. Such proposals fall well beyond the actual financial oversight each regulator maintains, thus rendering this guidance unwarranted.
