Bank industry lobbyists are urging the Office of the Comptroller of the Currency to proceed with caution on climate risk disclosure rules for the largest U.S. financial institutions.
The OCC, an independent bureau within the Treasury Department that charters and regulates banks, in December issued a draft framework for entities with more than $100 billion in assets, outlining principles on incorporating financial institutions' lending exposure to climate risk into their governance and strategic planning.
Investors and financial market reform groups say the OCC has an opportunity to incentivize banks to report on emissions data in a standardized format, as well as catch up to regulators from other countries that have moved to mandatory reporting. Bank lobbyists say voluntary disclosure is working and that mandates would be unnecessarily burdensome.
“Many banks are already engaged in voluntary reporting efforts through the Task Force on Climate-Related Financial Disclosures (TCFD), as well as other industry-led reporting frameworks,” said Lauren Anderson, senior vice president and associate general counsel at the Bank Policy Institute, an industry advocacy organization formed in 2018 by the merger of the Financial Services Roundtable and the Clearing House Association.
The debate over financial institutions’ capabilities to manage exposure to physical and transition risks from climate change comes as the OCC considers how far to go with guidance on identifying and managing related risks, a concern for asset managers and companies focused on environmental, social and governance issues — and for Democrats.
The OCC and other U.S. financial regulators have faced major pushback from Republicans, who contend climate change is a social issue rather than a material one and the government should not determine fossil fuel companies' financial fate. Those concerns partly contributed to the decision by the Biden administration to pull the nomination of Saule Omarova to lead the OCC.
As part of the framework, the OCC asked the financial community for feedback to shape guidance on climate risk. It refrained from commenting on whether additional requirements could come from the process, though it's possible the agency could expand supervisory actions it can issue under its authority if banks do not adequately manage their climate risk.
The agency added that future guidance would come out this year and it would “appropriately tailor” any supervisory expectations related to climate risk to reflect the differences among the banks.
The Bank Policy Institute and the American Bankers Association, which also advocates for the industry, separately called on the OCC in letters this week to keep final guidance open-ended and avoid overburdening large banks with regulations on how to handle climate risk.
In response to the OCC’s question on how existing reporting requirements could be adjusted to accommodate banks’ exposure to climate-related financial risks, the Bank Policy Institute's Anderson said, “We do not believe that a new type of regulatory or other external reporting specifically directed at climate-related financial risk by banks is appropriate or necessary at this point in time."
More than 200 U.S. financial services companies publicly support TCFD recommendations, a framework for more effective climate-related disclosures created by the Financial Stability Board, an international body that monitors the global financial system. Some 15 of those firms are banks, including the country's four biggest banks: Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co.
Bank of America in 2015 said it would divest from coal projects, while Citi, JPMorgan and Wells Fargo have taken steps to reduce exposure to coal in their portfolios. Citi last month set 2030 targets to significantly cut its financed emissions for certain portfolios, meaning it will likely have to slim down its financial support for fossil fuels.
The four banks, along with their peers, have not fully exited the business of providing financial support for coal or other fossil fuels such as oil and gas.
The ABA and the Bank Policy Institute both said flexibility is necessary because there is a lot of variability in potential outcomes from climate change based on policy decisions, and banks’ assessment of climate-related financial risk remains less sophisticated than other tools to manage other types of risks.
“The OCC’s supervisory expectations should be calibrated to the usefulness of strategic planning over a given time period and recognize that substantial uncertainty exists with respect to the impacts of climate-related financial risk over medium- and longer-term time horizons," the Bank Policy Institute's Anderson added.
Financial institutions are also dealing with the absence of market data and standardized reporting on climate risk, said Alison Touhey, senior regulatory adviser for financial institutions policy and regulatory affairs at the ABA. The data deficiencies add to the organization’s belief that the OCC and other financial regulators should focus on helping large banks expand their capabilities and ensuring their analysis matches their businesses’ risk profile.
“Over the near term, attaching regulatory consequences to climate-related risk exposures would be premature,” Touhey said in a letter Monday to the OCC. “Additional regulation based on today’s capabilities could potentially result in a misallocation of resources.”
ESG investors and advocates largely disagree with the banking industry’s assertion that it is too early or unnecessary to hold banks accountable on climate risk. Instead, they say the framework should serve as a starting point for the OCC to be more instructive on what information and data banks should provide.
“Climate risk is an existential threat and, as recently stated by the thoughtful and comprehensive October 2021 Financial Stability Oversight Council Report on Climate-related Financial Risk, is one that poses an emerging and increasing threat to U.S. financial stability,” said Ceres, a leading nonprofit association for impact investors.
Last month, Ceres issued sweeping recommendations to the OCC and other financial regulators to address climate-related risks on banks and financial institutions. The organization, which works with over 200 investors who collectively manage over $49 trillion in assets, emphasized that the agency should incorporate climate risk into its existing authorities, such as issuance of an exam manual dedicated to climate risks and a review of a targeted group of banks that have significant exposure to climate risk.
“Ceres recommends that existing regulatory reporting requirements for banks be expanded to require the use of the TCFD framework to ensure that public disclosure of climate relevant information is comparable across banks of varying asset size, location, and business model,” it said in its comment letter.
Financial regulators including the European Central Bank, the Banque de France, the Australian Prudential Regulation Authority and the Monetary Authority of Singapore have implemented regulations on climate risk management, while eight nations and jurisdictions including the E.U., Japan and Brazil have aligned their official reporting requirements with the TCFD recommendations.
Better Markets, a left-leaning advocacy group, said that while banks should have some leeway on what data they collect, they should not have free rein on which metrics they can share with regulators.
In the group’s comment letter, the OCC’s guidance should point financial institutions toward TCFD or other internationally recognized frameworks on climate risk to develop best practices.That would help address the gaps in data collection, risk assessment and risk management that banks, regulators and industry observers have sounded the alarm on.
"Just because some banks are voluntarily utilizing international recommendations does not mean there is no need to include the promotion of their use in the principles. In fact, it is even more reason to do so," Phillip Basil, director of banking policy at Better Markets, told the agency.