- Source: fdic.gov
Treliant understands environmental, social, and governance (ESG) issues. If your financial services institution needs assistance with assessing your institutions’ readiness to manage climate-related risks, we can help.
The FDIC is requesting comments on draft principles that would assist financial institutions in managing climate-related risks. The effect of climate change and a migration to a low carbon economy can have overreaching implications including physical and transition risks.
Physical risks generally refer to the harm to people and property from climate-related events. Transition risks refer to stresses from the shifts in policy, consumer and business sentiment, or technologies associated with the changes necessary to limit climate change.
The FDIC is recognizing the need for risk management guidelines that can be implemented consistently and in turn are outlining the following six general principles in an effort to do just that. The General Principles are: 1) Governance, 2) Policies, Procedures, and Limits, 3) Strategic Planning, 4) Risk Management, 5) Data, Risk Measurement, and Reporting, and finally, 6) Scenario Analysis. The FDIC is signaling that scenario analysis is an important approach and will be an expected component in future exams.
The request for comment also identifies the following risk areas where climate-related risk should be added, if not already addressed: 1) Credit Risk, 2) Liquidity Risk, 3) Interest Rate Risk, 4) Operational Risk and 5) Legal/Compliance Risk. Strong risk assessments will continue to be a key element.
ESG has become an important topic of late and all banks, especially large financial institutions, should begin reviewing their risk management governance, strategies and assessments to ensure climate-risk is adequately being addressed.