CSBS Issue Talking Points

Climate Risk Management

CSBS Position

In recent years, extreme weather events and societal transition to reduced carbon emissions caused multiple state and federal regulators to consider the impact of climate risk on the financial sector. Both state and federal regulators continue to educate themselves and their constituents on the subject to better understand climate risk and determine an appropriate action plan.

Summary

Climate-related financial risk falls under two categories: physical risk and transition risk. Physical risk exists when damage to property or assets is caused by an increase in the frequency and severity of weather events and long- term shifts in climate patterns. Transition risk arises from the potential for loss resulting from a shift toward a lower-carbon economy which can be driven by policy, technology advancements, and consumer sentiment. Climate risk management is a primary focus for many leaders across the financial services industry. In May 2021, President Biden issued an executive order directing financial regulators to analyze, assess and mitigate the risk climate change poses to the financial system. The Federal Reserve created two committees to identify and assess financial risks from climate change and develop an appropriate program to ensure the resilience of supervised institutions. Additionally, New York Department of Financial Services and Washington State Department of Financial Services have released guidance to their institutions outlining the different impacts of climate-related financial risk and the potential steps towards integration of climate into their risk management processes. On Oct. 21, 2021, the Financial Stability Oversight Council (FSOC) released a Report on Climate-Related Financial Risks. This report details current efforts of FSOC members to incorporate climate-related financial risks into their regulatory and supervisory activities and identifies areas where additional action may be needed. The recommendations in the report cover a wide range of topics, including education and awareness, reporting and disclosures, and data access and availability. Notably, the report recommends that financial regulatory agencies consider how they may incorporate climate-related financial risks into their supervisory programs. State regulators must remain involved in the development of policies addressing climate-related financial risks to promote the needs and perspectives of financial institutions and the communities they serve across the country. Federal regulators and policymakers have communicated considerable interest in developing an economic strategy to advance climate resilience in financial services and will move forward with or without the states. Why It Matters to State Regulators

Talking Points

• Climate risk is an emerging area of focus for many leaders across the financial sector. • State regulators continue to educate and enhance their familiarity with climate-related financial risk to fully assess the severity of the issue. • State regulators will continue robust coordination with their federal counterparts to appropriately address climate-related financial risk and ensure a more efficient and effective state regulatory system.

SME Contact: Camille Polson, Senior Analyst, Policy Development: 202-407-7165 or cpolson@csbs.org

Date Updated: October 2021

FOR STATE REGULATOR USE ONLY