November 16, 2021 - by Tess Virmani. Acting OCC Comptroller Michael Hsu has called on the boards of directors of large banks to be an agent of change in bringing climate risks into bank management discussions. In remarks delivered at OCC headquarters last week, Hsu stated that climate change poses significant risks to the financial system and further set out five key questions on climate risk (and opportunity) to guide large bank board engagement with senior management:
- What is our overall exposure to climate change?
- Which counterparties, sectors, or locales warrant our heightened attention and focus?
- How exposed are we to a carbon tax?
- How vulnerable are our data centers and other critical services to extreme weather?
- What can we do to position ourselves to seize opportunities from climate change?
Acting Comptroller Hsu’s speech comes on the heels of several climate- related announcements in the US official sector. In October, the Financial Stability Oversight Council (FSOC) released its first ever Report on Climate-Related Financial Risk. The report acknowledged climate change as an emerging threat to the financial stability of the United States and offered a set of recommendations, which included increased disclosure by companies. (See here for our coverage of the Report.) In addition, as part of the recent COP26 activities in Glasgow, Scotland, the Network for Greening the Financial System (NGFS), a group of 100 central banks and supervisors, declared a commitment to climate action. It is consistent with that commitment that the OCC announced its plan to issue high level framework guidance for large banks on climate risk management by the end of this year.
With respect to Hsu’s remarks themselves, there is ready recognition that US banks are at the beginning of an evolving process in understanding climate risks. Hsu notes that “[bank] boards should not be surprised to hear management respond, ‘We don’t know’ to some, if not all, of the questions. Indeed, precise and confident responses should be met with healthy skepticism.” It is clear that the OCC sees the integration of climate risks in bank risk assessments to be an iterative process, noting “by this time next year, management teams hopefully should be able to answer these questions with greater accuracy and confidence. The journey to get there will require large banks to build up their climate risk management and reporting capabilities.”
So what does this mean?
American Banker reported that Hsu’s remarks were “one of the most direct appeals yet by a prudential regulator on the need for bank leaders to assess climate-related risks.” Similarly, Holland and Knight wrote that “the message to the industry is clear: climate change must become a factor in banks’ decision-making processes” – noting that “[a]ssuming that the framework set forth in [Hsu’s] speech is eventually more formalized into agency guidance or even regulations, it represents a potentially substantial, even if environmentally necessary, regulatory burden.” It seems the OCC has thrown down the climate risk gauntlet – while realistic about banks’ learning curve. The OCC is also willing and planning to assist in this process with framework guidance expected by the end of this year and detailed guidance for each risk area to follow in 2022.