Climate risk regulation rundown: February 2022

March 4, 2022

What happened in climate-related financial regulation last month, and what’s coming up

The US Office of the Comptroller of the Currency (OCC) concluded its public consultation on draft principles for climate-related financial risk management for large banks on February 14. The regulator received 175 comments from bank lobby groups, industry association, and environmental nonprofits, among others.

In its response letter to the OCC, the Bank Policy Institute — a lobby group representing the banking sector — welcomed the principles as helpful to both firms and supervisors, but warned against measures that would restrict firms’ lending to climate risk-sensitive exposures. Specifically, it said it would be “premature” to make banks set “quantitative limits or thresholds for climate-related financial risk” and that final guidance “should not suggest that banks mitigate credit risk by establishing and managing to prescriptive lending limits.”

The Climate Risk Consortium of the Risk Management Association (RMA), an industry group that counts Bank of America and Wells Fargo among its 25 members, also provided a comment letter. This called on the OCC to stick to a “risk-based approach” to climate issues “consistent with how banks determine materiality and manage other risks.” It further recommended that the regulator not set a specific date by which banks should be in conformance with its principles, because it may take a long time for banks to get their internal climate risk management practices up to speed.

Environmental groups pushed the OCC to be bolder with its principles. In its letter, the Sierra Club said the regulator must ensure banks work to decarbonize their portfolios, and incorporate banks’ management of climate risk into their supervisory ratings. 

Republican senators boycotted a vote on five nominees to the Federal Reserve Board in opposition to Sarah Bloom Raskin, President Biden’s choice to serve as the Fed’s top bank regulator.

The Senate Committee on Banking, Housing, and Urban Affairs was due to advance the nominations on February 15, but Chair Sherrod Brown (D-OH) called for a delay after none of the 12 Republicans on the committee showed up. 

Republicans claimed they skipped the vote because they have outstanding questions over Raskin’s work as a board member at fintech firm Reserve Trust. However, Pat Toomey (R-PA) said that “Ms. Raskin’s repeated and forceful advocacy for having the Federal Reserve allocate capital and choke off credit to disfavored industries is alone disqualifying and reason enough to vote against her.”

He was referring to Raskin’s previous statements on Fed support for the fossil fuel industry at the height of the Covid-19 crisis. Raskin is a noted climate hawk, writing in the New York Times in 2020 that climate change “threatens financial stability” and that the Fed “should build toward a stronger economy with more jobs in innovative industries — not prop up and enrich dying ones,” like fossil fuels. 

The Acting Chairman of the US Federal Deposit Insurance Corporation (FDIC), Martin Gruenberg, said addressing the financial risks of climate change is a “top priority” for the regulator in a speech on February 14.

As part of its planned efforts in this area, Gruenberg said the FDIC will seek public comment on guidance to help banks manage their climate risks, and put in place an “interdivisional, interdisciplinary working group” to tackle these. The regulator would also join the Network for Greening the Financial System, the club of climate-focused central banks and regulators

The US Federal Insurance Office (FIO) joined the Network for Greening the Financial System (NGFS), the coalition of climate-focused central banks and supervisors, on February 17.

“FIO looks forward to working with its NGFS colleagues and to contributing to the NGFS’s important work and objectives,” said Director of the Federal Insurance Office Steven Seitz. “Because climate change presents new challenges and opportunities for the U.S. economy, FIO’s work on assessing climate-related financial risks and their effects on the insurance sector is a top priority for the Treasury Department.”

The FIO said that it plans to issue a climate report before the end of the year on insurance supervision and regulation.

The Federal Advisory Committee on Insurance, which supports the FIO’s work, also launched a Climate Related Financial Risk Subcommittee on February 17 that will offer advice and recommendations on climate-related risks in the insurance sector.

A bill introduced in the California State Senate on February 17 would ban two of the US’s largest pension funds from investing in fossil fuels.

Proposed by State Senator Lena Gonzalez (D-Long Beach), SB 1173 would force the California Public Employees Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to dump their current holdings in fossil fuel companies by 2027. CalPERS and CAlSTRS have $479.6 billion and $327.7 billion in assets, respectively.

“Investing billions in the fossil fuel companies that are polluting our environment while at the same time trying to meet ambitious emissions reduction goals is contradictory and incongruous. SB 1173 will ensure we remain true to our values and honor our commitment as a State to protecting the environment and the health and future of all Californians,” said Gonzalez.

A senior official at the European Central Bank (ECB) said lenders have to step up how they incorporate climate change in their risk management.

Frank Elderson, Vice-Chair of the Supervisory Board of the ECB, in a speech on February 18 said that banks should use “the full array” of risk management tools at their disposal to manage climate risks: strategically realigning portfolios, establishing risk appetites, setting mitigation strategies, qualitatively recalibrating credit criteria, and quantifying and holding capital.

Elderson clarified that the ECB is not calling on banks to divest from carbon-intensive activities or exposures to regions sensitive to climate physical risks: “Rather, we are asking banks to fully grasp the physical and transition risks and to actively start managing them, with the aim of making their portfolios more resilient to C&E [climate and environmental] risks.”

Elderson further explained that the ECB’s annual Supervisory Review and Evaluation Process would include a check on whether banks have followed up on its climate-related requirements issued last year. The ECB has “the full set of supervisory measures” to address shortcomings, he added.

The ECB is also hiring for a Climate Change Coordinator to lead a team working on the implementation of the central bank’s climate risk roadmap by national supervisory authorities. 

Irene Heemskerk, Head of the Climate Change Centre at the ECB, said this would be a “key position to ensure that banks safely and prudently account for climate-related and environmental risks and that the supervisory framework properly addresses these risks.”

Applications close on March 10.

Lawmakers in the European Parliament have recommended tightening the European Commission’s (EC) proposed Green Bond Standard so that these instruments can only be issued by businesses that have “a credible pathway to reducing their environmental footprint and to becoming sustainable.” 

In its response to the EC’s proposal published February 18, Bas Eickhout — writing on behalf of the Parliament’s Committee on the Environment, Public Health and Food Safety and Committee on Economic and Monetary Affairs — said would-be green bond issuers would have to align their business models with a scenario that limits global warming to 1.5°C.

As proposed, the Green Bond Standard would be voluntary, although all issuers of green bonds would have to disclose how the use of proceeds aligns with the EU’s sustainable taxonomy. However, Eickhout’s opinion says the Standard should be made mandatory after a three-year phase-in period. He also recommended the EU ramp up the frequency of environmental impact reports required by green bond issuers to better gauge the effectiveness of the Standard.

The European Securities and Markets Authority (ESMA) kicked off a fact-finding mission on ESG ratings providers on February 3.

Its aim is to “develop a picture of the size, structure, resourcing, revenues and product offerings” of the various ESG ratings providers in the European Union. Stakeholders may provide responses to its questionnaire up until March 11.

On February 11, ESMA published its sustainable finance roadmap 2022-2024. As part of its work plan, the regulator said it would run a “one-off” climate stress test of investment funds to measure their resilience in line with the European Union’s plan to achieve carbon neutrality by 2050. It also said it would conduct “regular climate change stress tests or scenario analysis” of other firms under its jurisdiction.

The roadmap features initiatives to tackle ‘greenwashing’ in the investment industry, too. These include clearly defining ‘greenwashing’ to help coordinate efforts to crack down on the phenomenon across regulatory agencies, and fostering a common understanding among EU member state regulators of how to enforce sustainable finance requirements. 

The regulator also said it would shortly establish a new Consultative Working Group made up of external stakeholders to support its sustainable finance objectives.

On February 23, ESMA published a methodology for assessing climate risks for clearing houses through a new stress testing regime and launched a call for evidence to ensure a “thorough analysis” of how climate impacts could affect these entities. The regulator said a climate risk scenario may be added either as a new component in future stress tests or as a standalone exercise.

The Bank of England (BoE) started asking lenders how they would react to its global warming scenarios on February 9 as part of the second round of its inaugural climate stress test. 

For this phase of the exercise, the BoE has sent questions to the participants — which include Barclays, NatWest Group, and HSBC — intended to shed light on their “strategic responses” to the three scenarios they tested their portfolios against in the first round. An ‘Early Action’ scenario imagines a transition to a net-zero emissions economy that starts in 2021, a ‘Late Action’ scenario a transition put off until 2031, and a ‘No Additional Action’ scenario a future where no transition takes place at all, leading to runaway warming.

Banks have until March 31 to answer the questions. The BoE plans to publish results from the climate stress test in May.

On February 4, the BoE and Prudential Regulation Authority announced a ‘Climate and capital conference’ that will take place on October 19 of this year. This aims to foster debate on the “complex issues associated with adjusting the capital framework to take account of climate-related financial risks.” 

The regulators also launched a call for papers to inform policy development in this area. 

France’s Autorité de Contrôle Prudentiel et de Résolution (ACPR) published a report full of best practices on handling climate risks in the insurance industry on February 17.

The document represents the culmination of the regulator’s engagements with 21 insurance and reinsurance groups last year, which focused on different aspects of climate governance: strategy, risk management, communication, roles in awareness raising, and internal organization.

A senior official at the People’s Bank of China (PBOC) said that lenders face elevated default risks as the costs of emissions rise for carbon-intensive industries.

Vice Governor Liu Guiping, writing for PBOC’s China Finance publication on February 18, said the central bank completed the first round of stress tests for 23 major banks last year, based on a scenario that the thermal power, steel, and cement industries would have to pay for their carbon emissions. This found that if the organizations in these industries failed to undertake a low-carbon transition, their ability to repay borrowed funds would degrade.

Liu added that further tests would be run to determine banks’ exposures to other carbon-intensive sectors.

Nepal Rastra Bank published a guideline on environmental and social risk management for banks and financial institutions on February 13.

Among its recommendations, the guideline tells lenders to check if borrowers have procedures for monitoring, measuring, and disclosing their greenhouse gas emissions and for clients producing more than 25,000 metric tons of CO2 per year whether they have an emission reduction plan.

If financing projects are located in areas prone to natural disasters — like floods, hurricanes, and droughts — banks are told to identify these risks and “ascertain clients have disaster management system or business continuity plan in place” to deal with them.

The Financial Stability Board (FSB) set out its workplan for 2022 on February 17, which includes addressing the financial risks from climate change.

The global standard-setter plans to produce a progress report on its climate risk roadmap, unveiled last year, in July, and report on efforts to achieve consistent climate-related financial disclosures, climate scenario analysis, and regulatory and supervisory approaches to climate risk in October.

Klaas Knot, FSB Chair, said the group’s roadmap “aims to ensure that climate risks are properly reflected in all financial decisions.”

The Basel Committee on Banking Supervision (BCBS) ended a consultation on its principles for the effective management and supervision of climate-related financial risks on February 16. 

The 18 principles — 12 for banks, six for supervisors — aim to provide “a common baseline” for lenders that operate across borders and their watchdogs.

Groups including the Climate Safe Lending Network, the American Banking Association, and Financial Services Forum (FSF) all submitted comment letters.

The FSF — a bank lobby group made up of the largest Wall Street banks — wrote that regulators and standard setters should put in place a flexible climate risk management regime “that considers the unique characteristics of each bank and allows banks to focus on targeting material climate-related financial risks.”

The Bank for International Settlements (BIS) launched an Asian Green Bond Fund to support financing of environmental projects in Asia-Pacific. 

Announced February 25, the new fund — which is open to central banks and other other official sector investors — will buy green bonds issued by sovereign governments, financial institutions, and corporations that adhere to strict credit and sustainability standards.

Specifically, the bonds have to comply with the International Capital Market Association’s Green Bond Principles and/or the Climate Bond Standard published by the Climate Bonds Initiative.

BIS has two other green bonds funds, one US dollar-denominated vehicle launched in 2019 and a second, euro-denominated one in 2021. Together, the three green bond funds will manage around $3.5 billion.