OCC Seeks Public Feedback on Principles for Climate-Related Financial Risk Management for Large BanksSullivan & Cromwell LLP - December 21, 2021
The general principles address the following six key aspects of managing climate-related financial risks—consisting of both physical risks and transition risks—with a focus on the OCC’s expectations of the roles and responsibilities of bank boards and management:
- Governance: Board and management should have an appropriate understanding of the bank’s climate-related financial risk exposures and their impact on risk appetite to facilitate oversight.
- Policies, Procedures and Limits: Management should incorporate climate-related risks into bank policies, procedures and limits that align with the strategy and risk appetite established by the board.
- Strategic Planning: Board and management should consider material climate-related financial risk exposures as part of the bank’s strategic planning, including the bank’s overall business strategy, risk appetite, and financial, capital and operational plans.
- Risk Management: Management should oversee the development and implementation of processes to identify, measure, monitor and control climate-related financial risk exposures within the bank’s existing risk management framework. Board and management should also incorporate climate-related risks into their internal control frameworks, including internal audit.
- Data, Risk Measurement and Reporting: To facilitate timely and sound decision-making across the bank, management should incorporate climate-related financial risk information into the bank’s internal reporting, monitoring and escalation processes.
- Scenario Analysis: Management should develop and implement climate-related scenario analysis frameworks in a manner commensurate with the bank’s size, complexity, business activity and risk profile.
The OCC recognizes that the incorporation of climate-related financial risks into various risk management frameworks and planning processes is an iterative process and that a bank’s data, risk measurement, modeling methodologies and reporting will continue to evolve over time, and suggests that management should monitor these developments and incorporate them into their climate risk management process as appropriate. The OCC plans to elaborate on these principles in subsequent guidance that will continue to distinguish roles and responsibilities of boards and management.
RISK ASSESSMENT PRINCIPLES
- credit risk (e.g., considering climate-related financial risks as part of the underwriting and ongoing monitoring of portfolios);
- liquidity risk (e.g., assessing whether climate-related financial risks could affect liquidity buffers);
- other financial risk (e.g., monitoring interest rate risk and other model inputs for greater volatility or less predictability due to climate-related financial risks);
- operational risk (e.g., considering how climate-related financial risks may adversely impact a bank’s operations, control environment, operational resilience and business continuity);
- legal and compliance risk (e.g., considering the legal and regulatory implications arising from climate-related financial risks and risk mitigation measures, including in connection with flood or disaster-related insurance and fair lending considerations); and
- other nonfinancial risk (e.g., considering climate-related reputational damage, liability or litigation).
The OCC intends to elaborate on these risk assessment principles in subsequent guidance.
REQUEST FOR FEEDBACK
- Applicability and Tailoring: The OCC is seeking feedback on whether there are additional categories of banks to which the Principles should apply and how future guidance could help banks develop climate-related financial risk management practices commensurate with their circumstances.
- Current Risk Management Practices: The OCC is seeking feedback on banks’ current climate-related financial risk management practices, including any specific tools and strategies that banks use to incorporate climate-related financial risks into their risk management frameworks; how banks determine the materiality of climate-related financial risks; any specific products, practices, and strategies banks use to hedge, transfer or mitigate climate-related financial risks; any climate-related financial products or services that banks offer to clients and the risks associated with these products and services; and how banks consider the impacts of climate-related financial risk mitigation strategies on low- to moderate-income and other disadvantaged communities.
- Data, Disclosures and Reporting: The OCC is seeking feedback on any specific climate-related data, metrics, tools and models that banks need from third parties (e.g., customers and other counterparties) to address their own climate-related financial risks; how banks currently obtain this information and whether there are any gaps and concerns; and how regulatory reporting requirements could better capture banks’ exposure to climate-related financial risks.
- Scenario Analysis: The OCC is seeking feedback on how banks use climate scenario models, analysis or tools, and related challenges and on the most salient factors for the OCC to consider when designing and executing scenario analysis.
It is likely that banking organizations will continue to receive additional regulatory guidance and requirements in 2022, including, for banking organizations that are public companies, disclosure requirements promulgated by the Securities and Exchange Commission.
Copyright © Sullivan & Cromwell LLP 2021