On December 16, 2021, the Office of the Comptroller of the Currency (“OCC”) released draft principles for climate-related financial risk management for large banks. Feedback must be submitted by February 14, 2022.
The OCC is looking for feedback on all aspects of the draft principles. Noting the emerging risks to banks and the financial system due to impending climate change, the OCC recognized both physical risks and transition risks to banks, particularly large banks (with over $100 billion in total consolidated assets).
Physical risks encompass harm to people and property from climate-related events such as hurricanes, wildfires, floods, and shifts in climate including higher temperatures, changes in precipitation patterns, sea level rise, and ocean acidification. Transition risks are those caused by shifts in policy, consumer and business sentiment, and technologies in conjunction with necessary measures to limit climate change.
The draft principles are intended to provide a framework for safe and sound management of exposures to climate-related financial risks. The OCC plans to expand on the principles in subsequent guidance, incorporating feedback received and further distinguishing roles and responsibilities of boards of directors and management.
General principles include:
- The inclusion of climate-related financial risk exposures and impact within a risk governance framework;
- Incorporation of climate-related risks into policies, procedures, and limits;
- Consideration of material climate-related financial risk exposures while setting a bank’s overall business strategy, risk appetite, and financial, capital and operational plans;
- Development and implementation of processes to identify, measure, monitor and control climate-related financial risk exposures; and
- Incorporation of climate-related financial risk information into a bank’s internal reporting, monitoring, and escalation processes to facilitate timely and sound decision making.
In subsequent guidance, the OCC plans to elaborate on the consideration of climate-related financial risks in the management of the following risk areas: Credit risk, liquidity risk, operational risk, legal/compliance risk, other financial risks (such as model inputs) and non-financial risks (such as execution of strategic decisions and the operating environment).
The OCC requests feedback on all aspects of the principles, including specific questions it sets forth on the applicability of the principles, how they should be tailored, challenges banks may face in incorporating the principles, current risk management practices, and data, disclosures, and reporting that may be needed to identify, measure, monitor and control climate-related financial risks.
Those interested in submitting feedback should refer to OCC Bulletin 2021-62 for instructions.