The Financial Push to Manage Climate Risk

This blog was coauthored by Kathryn Rock. 

Climate change risk should be top of mind for financial institutions in the US and abroad. As noted in an previous blog, every agency is a climate agency under the Biden administration, and it appears the president is preparing to make it formal. A draft executive order entitled “Climate-Related Financial Risk” directs a team of economic and climate advisors and the Office of Management and Budget to develop a “government-wide strategy to measure, mitigate and disclose climate risks facing federal agencies.” As part of this strategy, certain regulators, including those who oversee the financial sector, will almost certainly be expected to issue requirements for enhanced climate risk management. 

Climate Risk Management Changing for Financial Institutions

With Biden pledging to cut greenhouse gas (GHG) emissions in half by 2030, the requirements may be sweeping. Specific provisions of the draft order include:

• A directive to secretary of the treasury, Janet Yellen, as head of the Financial Stability Oversight Council, to assess risks to the financial system and deliver a report within 180 days
• Instructions to the Federal Insurance Office to assess climate-related issues, with a focus on areas of the country most vulnerable to climate change
• A request that the Department of Labor revise or rescind rules from the previous administration limiting the ability of pension fund managers to vote on shareholder proposals at annual meetings, rules widely considered as a way to limit shareholder environmental, social, and governance activism
• A requirement that federal suppliers disclose GHG emissions and climate risk and set science-based targets for reduction of both

Basel Committee Reports on Climate-Related Risks

While the US gears up for a major overhaul of its oversight of climate risk, global regulators are also planning for change. Last week, the Basel Committee released two reports detailing “transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks” with the intention of identifying how climate-related financial risks arise and affect both banks and the banking system. As part of its next steps, the committee plans to identify gaps in the current Basel Framework that hinder its ability to address climate-related risk and to consider regulatory, supervisory, and disclosure-related measures to fill them.

The pressure is building, and it is only a matter of time before US and global regulators take action to ensure financial markets are adequately prepared for climate-related risks. Financial institutions that are not already doing so should begin to take stock of the extent to which climate risk is incorporated in their current risk management practices.