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The OCC is committed to acting on the risk that climate change presents to the financial system. These risks are driven by impacts of climate change on households, communities, businesses, and governments across the United States and around the world. Banks are exposed to physical and transition risks presented by climate change, which may impact the safety and soundness of supervised institutions.
Physical risks refer to harm to people and property arising from acute, climate-related disaster events such as hurricanes, wildfires, floods, and heatwaves, as well as more gradual, chronic phenomena such as sea level rise. Banks have shown historical resilience in dealing with these events using risk mitigation tactics including insurance and working with borrowers in affected areas. However, the increased severity, frequency, and breadth of extreme weather due to climate change is likely to impact economies and borrowers in ways that deviate from historical experience (Sixth Assessment Report).
Banks will need to consider risk management process to deal with these and other, longer-term physical risk implications.
Transition risks relate to the adjustment to a low-carbon economy and include associated changes from
government policy, technology, and consumer/investor sentiment.
This risk is particularly important if the transition is disorderly and abrupt. For example, several large companies are making commitments to transition to lower carbon emissions, and they will likely influence vendors and suppliers to do the same, which may exacerbate the risk. Thus, banks are likely to see some impact from this economic transition, potentially abruptly and likely long term. There are significant challenges to understanding the timing as well as the direct and indirect implications of transition risk.
Both these risks can have an associated material impact on the financial system by damaging property,
impeding business activity, shifting the values of assets (both up and down), and affecting income.
Banks will need to consider potential corresponding climate change risks across all the existing traditional risk
areas based on the bank’s size, complexity, and business model. To address these risks, the OCC plans to
issue climate risk management principles for large banks.
These principles will build on the Basel Committee’s Task Force on Climate-Related Financial Risks (TFCR). The principles are intended to help direct the focus of institutions on the foundational questions to determine the materiality of climate risk and establishing a risk management framework. The principles will also provide a basis for development of more complex, mature, climate risk management expectations. Therefore, the principles will represent a first step toward addressing some of the challenges and providing high level supervisory expectations regarding the management of exposures to climate-related financial risks.
There are significant and complex challenges in understanding these risks. Some of the key issues include
the need for evolving climate change
• Risk management frameworks,
• Data,
• Risk measurements,
• Disclosures,
• Scenario analysis, and
• Consumer/community implications
The OCC is taking a brisk but deliberate approach to advance the development of risk management frameworks and gather relevant information to understand these challenges. The agency’s focus is on ensuring banks establish sound risk management frameworks to measure, monitor, and control risk presented by climate change. To accomplish these objectives, we have done the following:
- Appointed a Climate Change Risk Officer
- Established an internal climate risk implementation committee
- Joined the Network for Greening the Financial System (NGFS)
- Continued participation in climate related Basel initiatives
- Participated in the development of recommendations for the Financial Stability
- Oversight Council Climate Risk report
- Conducted a range of practice activity review at the largest banks
- Engaged more extensively with industry and climate groups
- Committed to publishing large bank climate risk management principles for feedback
The OCC plans to focus initially on large banks given the significance and complexity of the climate risks
they face. During 2022, the OCC plans to finalize climate risk management framework guidance for large
banks and to develop more detailed expectations by risk area. We will review the large banks’ progress
toward establishing climate risk management capabilities. We also plan to conduct additional industry
outreach. The OCC also issued a request for both academic-focused papers and policy-focused research on
climate risk in banking and finance. We will utilize the information gathered to inform our development of
further supervisory principles on climate risk. We anticipate a more in-depth discussion of climate risk and
the status of supervisory expectations in the Spring 2022 Semiannual Risk Perspective.
