Governance Briefing — December 2, 2022
The Federal Reserve proposed climate-related financial risk management principles for large banking organisations on December 2, 2022, outlining board responsibilities for governance, scenario analysis, and risk integration.
Executive briefing: On 2 December 2022 the Federal Reserve Board issued draft Principles for Climate-Related Financial Risk Management for Large Financial Institutions. The guidance applies to banks with over $100 billion in total consolidated assets and aligns with principles issued by the OCC and FDIC, emphasising board oversight of climate risk governance, policies, and strategic planning.
Key expectations
- Governance. Boards should assign clear responsibilities for climate risk oversight, ensure management implements risk frameworks, and include climate expertise in board training.
- Risk management. Banks must integrate climate considerations into policies, limits, and internal controls across credit, liquidity, operational, and legal risks, supported by data aggregation and reporting.
- Scenario analysis. Institutions should develop scenario analysis frameworks to evaluate the resilience of business models and inform strategic decisions.
Implications for boards
- Large banks. Directors must oversee climate risk governance integration with existing risk appetite, capital planning, and compensation frameworks.
- Foreign banking organisations. U.S. intermediate holding companies should align group climate governance with Federal Reserve expectations.
- Community reinvestment partners. Nonprofit and public stakeholders engaging large banks can leverage the principles to benchmark community resilience discussions.
Action checklist
- Update board risk committee charters to incorporate climate risk oversight and reporting cadence.
- Inventory climate risk data sources and model capabilities supporting scenario analysis and capital planning.
- Align management performance metrics and incentives with climate risk management objectives.
Sources
- Principles for Climate-Related Financial Risk Management for Large Financial Institutions
- Federal Reserve Board invites comment on proposed principles providing a high-level framework for the safe and sound management of exposures to climate-related financial risks
Zeph Tech helps large banks translate the Federal Reserve’s climate principles into governance, risk, and scenario analysis programmes with board-ready reporting.