Financial Stability Oversight Council Report on Climate-Related Financial Risk: FSOC Identifies Climate Change as an Emerging Threat to U.S. Financial Stability and Recommends Accelerated and Coordinated Actions by U.S. Financial Regulators to Enhance the Resiliency of the Financial System to Climate-Related Risks

Sullivan & Cromwell LLP - November 2, 2021
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Summary

On October 21, 2021, the Financial Stability Oversight Council (“FSOC”) approved (with FDIC Chairman Jelena McWilliams abstaining) and issued a report entitled “Report on Climate-Related Risk.”   In the report, FSOC identifies climate change as an “emerging threat to the financial stability of the United States,” reviews existing actions by FSOC members  to incorporate climate-related financial risks into their regulatory and supervisory activities, analyzes the impediments to assessing and addressing climate-related financial risks, and discusses the use of scenario analysis for climate-related financial stability assessments.  The report concludes with over 30 recommendations for FSOC members to accelerate their current climate-related efforts and take additional, coordinated actions to enhance the resiliency of the financial system to climate-related risks.  The recommendations fall under four key areas: (1) building capacity and expanding efforts to address climate-related financial risk; (2) filling climate-related data and methodological gaps; (3) enhancing public climate-related disclosures; and (4) assessing and mitigating climate-related risks that could threaten the stability of the financial system.  

The report also announces the creation of two FSOC committees: (1) the Climate-related Financial Risk Committee (“CFRC”), a staff-level committee that will identify priorities for addressing climate-related risks to the financial system and coordinate among FSOC members; and (2) the Climate-related Financial Risk Advisory Committee (“CFRAC”), an advisory committee to be constituted of a broad array of stakeholders (e.g., climate science experts; non-governmental research institutions; academia; the financial services industry; commercial businesses; consumer, investor, environmental and labor groups; and government agencies with climate expertise), which will help FSOC gather information and analysis on climate-related risks.  The report reflects FSOC’s and its members’ commitment to identifying and addressing climate-related risks to the financial system and signals that climate-related financial risks will remain a key focus area of the U.S. financial regulators.

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