Today, the FDIC Board approved a proposed Statement of Principles for Climate-Related Financial Risk Management for Large Financial Institutions (Statement of Principles). The proposed Statement of Principles provides a high-level framework for the safe and sound management of financial institutions’ exposures to climate-related financial risks, consistent with the risk management framework described in existing FDIC rules and guidance.1 The proposed Statement of Principles will be published in the Federal Register for public comment.
The effects of climate change and the transition to reduced reliance on carbon-emitting sources of energy present emerging economic and financial risks to the safety and soundness of financial institutions and the stability of the financial system. Financial institutions are likely to be affected by both the physical risks and transition risks associated with climate change (together, climate-related financial risks). Physical risks refer to the harm to people and property arising from acute, climate-related events, such as hurricanes, wildfires, floods, and heatwaves, as well as chronic shifts in the climate, including higher average temperatures, changes in precipitation patterns, sea level rise, and ocean acidification. Transition risks refer to stresses to certain financial institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with a transition toward reduced carbon reliance.
Together, these climate-related financial risks pose a clear and significant risk to the U.S. financial system and, if improperly assessed and managed, may pose a threat to safe and sound banking and financial stability. As a result, there is an urgent need for this Statement of Principles. There will also be a need for the issuance of additional guidance that provides clear supervisory expectations regarding the application of each of the general principles contained in this statement. In the near term, guidance might focus on the FDIC’s expectations for the boards of directors and senior management of financial institutions to develop and implement sound governance frameworks that appropriately incorporate the assessment and management of climate-related financial risks.
Additionally, studies have found that the adverse effects of climate change and climate-related financial risks may have a disproportionate impact on the financially vulnerable, including low- and moderate-income (LMI) households and communities.2 As such, the manner in which financial institutions manage climate-related financial risks to address safety and soundness concerns should also seek to reduce or mitigate the impact that management of these risks may have on broader aspects of the economy, including the disproportionate impact of risk on LMI communities.
Further, all financial institutions, regardless of size, complexity, or business model, are subject to climate-related financial risks. However, smaller financial institutions, especially community banks, may lack the financial resources and expertise necessary to effectively identify and measure climate-related financial risks. To alleviate burden to smaller financial institutions, at this time, the proposed Statement of Principles would be applicable to large financial institutions with over $100 billion in total consolidated assets.3
Finally, the proposed Statement of Principles represents an initial step toward the promotion of a consistent understanding of the effective management of climate-related financial risks. The FDIC plans to elaborate on each of these principles in subsequent guidance. Future guidance will continue to be appropriately tailored to reflect differences in financial institutions’ circumstances, including size, complexity of operations, and business model. Through this and any subsequent climate-related financial risk guidance, the FDIC will continue to encourage financial institutions to prudently meet the financial services needs of their communities.
1 The FDIC has established standards for safety and soundness, as required by section 39 of the Federal Deposit Insurance Act, in Part 364 of FDIC Rules and Regulations. Available at https://www.ecfr.gov/current/title-12/chapter-III/subchapter-B/part-364 .
2 For further information, see Staff Reports, Federal Reserve Bank of New York, Understanding the Linkages between Climate Change and Inequality in the United States, No. 991 (November 2021), https://www.newyorkfed.org/research/staff_reports/sr991.html
3 Generally, effective risk management practices should be appropriate to the size of the institution and the nature, scope, and risk of its activities. See, e.g., Appendix A to Part 364. For purposes of these draft principles, the FDIC generally believes that these standards are particularly salient for the largest financial institutions, those with over $100 billion in total consolidated assets.