October 27, 2021 - “This is the starting gun going off for the U.S. regulatory system.” Those are the words of an FSOC senior administration official in response to the FSOC Report on Climate-related Financial Risk (the Report) released last week. It is well known that the Biden administration has made climate change a priority and regulatory action across many federal agencies is expected. The Biden administration has made it clear they are taking a “whole-of-government approach to put climate change at the center of [U.S.] domestic, national security, and foreign policy”. The FSOC Report, prepared in response to President Biden’s Executive Order on Climate-related Financial Risk, is the first of its kind from the US government and states that climate change is an emerging threat to the U.S. economy. The 35 recommendations set forth in the Report will direct the course of travel for all FSOC member-agencies. (Click here for Fact Sheet.)  Of particular interest to the corporate loan market and its participants is how this Report will influence SEC action (see here for related reporting) and action by the prudential banking regulators. Below we take a brief look at what awaits the banking sector.

Before this Report was released, the Fed and OCC have already taken steps to address climate-related financial risks. This year, both agencies have joined the Network for Greening the Financial System (NGFS) – a group of 90 central banks and supervisory authorities and 14 observers. In addition, the OCC formed the Climate Risk Implementation Committee to identify weather- and climate-related financial risks to OCC-supervised institutions and provide recommendations to senior OCC leadership on the integration of these risks into OCC policy supervision and research. In another first, the OCC appointed its first Climate Change Risk Officer. The Fed has established two dedicated committees – the Supervision Climate Committee and a Financial Stability Climate Committee – to delve into climate-related financial risks.  More recently, Fed Governor Lael Brainard said the Fed is developing scenario analysis tools to model the economic risks of climate change and assess the resilience of the entire financial system. Related supervisory guidance could be forthcoming, reported CNBC. While these moves demonstrate the importance of climate-related financial risks to this administration (and the agencies under its watch), the Report now offers some guidance on the direction of travel. The Report supports the use of the Task Force for Climate-related Financial Disclosure (TCFD) framework for disclosure and emphasizes international collaboration. The Report also focuses on increased disclosure from all FSOC agencies to “promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to take climate-related financial risks into account in their investment and lending decisions.” (Davis Polk summarizes the implications for the banking sector here.)

What has been the response of the banking community? Acceptance. BPI issued a statement welcoming the report while the American Banker reported that the Report “is not the regulatory nightmare that some bankers had feared”. It is early days, but FSOC has thrown down the gauntlet for member agencies – this is a definite space to watch.