Following the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act established the Financial Stability Oversight Council (FSOC or Council) to identify and respond to emerging threats to U.S. financial stability. Today, the FSOC has issued its Report on Climate-Related Financial Risk.
The report includes over 30 specific recommendations to U.S. financial regulators, laying out necessary actions to identify and address climate-related risks to the financial system and promote the resilience of the financial system to those risks. While FSOC members have already begun to address climate-related risks within their respective mandates and authorities, today’s report demonstrates FSOC’s and its members’ commitment to building on and accelerating existing efforts, while ensuring robust coordination across agencies. These recommendations also ensure that climate-related financial risks will remain a key focus area going forward. The recommendations in the report will support the ongoing and urgent whole-of-government effort to address climate change, and help the financial system support an orderly, economy-wide transition toward the goal of net-zero emissions.
In this report, FSOC identifies climate change as an emerging threat to U.S. financial stability for the first time. In the United States and across the globe, climate-related impacts in the form of warming temperatures, droughts, wildfires, intensifying storms, and other climate-related events
are already imposing significant costs upon the public and the economy. The report recognizes that, as climate change continues, climate-related risks to the financial system are increasing and the economic costs from climate change are expected to grow. It also describes how the
economic and financial consequences of climate change can be a source of shocks to the financial system and threaten financial stability.
• While U.S. financial regulators have already made significant progress in identifying and responding to climate-related risks to increase the resilience of the financial system, there is a substantial amount of work yet to be done. This work will benefit from robust coordination across FSOC members, especially when it comes to expanding capacity, improving data and measurement, enhancing disclosures, assessing the scale of potential vulnerabilities, and making appropriate adjustments in regulatory and supervisory tools. The report’s recommendations will serve as a coordinated FSOC agenda, which members can implement in accordance with their respective mandates and authorities. These recommendations include:
• Building Capacity and Expanding Efforts to Address Climate-related Financial Risks. The Council recommends that its members prioritize internal investments to expand their respective capacities to define, identify, measure, monitor, assess, and report on climate-related financial risks and their effects on financial stability. This should include investments in staffing, training, expertise, data, analytic and modeling methodologies, and monitoring. The Council also recommends that its members enhance public communication of climate-related efforts, including in annual reports and any relevant risk reports they publish.
• Filling Climate-related Data and Methodological Gaps. The Council recommends that its members promptly identify and take the appropriate next steps towards ensuring that they have consistent and reliable data to assist in assessing climate-related risks. Members should perform an internal inventory of currently available data and develop plans for acquiring necessary additional data through data collection, data sharing, or data
procurement. FSOC members should also develop consistent data standards, definitions, and relevant metrics, and coordinate as they identify and fill data gaps and address data issues.
• Enhancing Public Climate-related Disclosures. The Council recommends that its members review their existing public disclosure requirements and consider updating them to promote the consistency, comparability, and decision-usefulness of information on climate-related risks and opportunities. The Council also recommends that FSOC members issuing requirements for climate-related disclosures consider whether such disclosures should include disclosure of greenhouse gas emissions, as appropriate and practicable, to help determine exposure to material climate-related financial risks. In addition, FSOC members should evaluate standardizing data formats for public climate risk disclosures to promote comparability.
Assessing and Mitigating Climate-related Risks to Financial Stability. The Council recommends that its members use scenario analysis as a tool for assessing climate-related financial risks. The Council also recommends that its members should consider using common scenarios that build on existing work, including scenarios developed by the Network of Central Banks and Supervisors for Greening the Financial System and work at the Financial Stability Board.
The Council also recommends that its members should review existing regulations, guidance, and regulatory reporting relevant to climate-related risks, including credit risks, market risks, counterparty risks, and other financial and operational risks, to assess whether updates are necessary to appropriately address climate-related financial risks. FSOC members should also evaluate whether additional regulations or guidance specific
to climate-related risks is necessary to clarify expectations for regulated or supervised institutions regarding management of climate risks, taking into account an institution’s size, complexity, risk profile, and existing enterprise risk management processes.
Fact Sheet on Climate-Related Financial Risk
https://home.treasury.gov/system/files/136/FACT-SHEET-The-Financial-Stability-Oversight-Councils-Response-to-Climate-Related-Financial-Risk.pdf
Report on Climate-Related Financial Risk – October, 2021
https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf