The New York Department of Financial Services (DFS) recently issued proposed guidance (Guidance) related to climate change that applies to New York State-regulated banking organizations, New York State-licensed branches and agencies of foreign banking organizations, and New York State-regulated mortgage bankers and servicers.  The Guidance is intended to address “material financial risks related to climate change” faced by covered entities in the context of “risk assessment, risk management, and risk appetite setting.”  A covered entity’s assessment of materiality may be based on the “nature, scale, and complexity” of the covered entity’s business, and foreign banking organizations can take into account home-country regulators’ requirements as appropriate.

The Guidance underscores that covered entities should be “mindful that changes to their risk management frameworks to account for climate-related financial risks must not unduly harm or disadvantage at-risk communities,” and emphasizes several overarching themes including (1) the need to manage climate-related financial risks while ensuring fair lending to all communities; (2) the need for a proportionate approach to the management of the climate-related financial risks covered entities’ face, appropriate to each entity’s exposure to such risks.

The Guidance directs covered entities to “take a strategic approach to managing material climate-related financial risks, considering both current and forward-looking risks and identifying actions required to manage those risks in a manner proportionate to the nature, scale, and complexity of their businesses,” by implementing:

  • A corporate governance framework that (i) assesses the “potential impact of climate-related financial risks on businesses and on the environments in which they operate in the short, medium, and long term, to inform the strategy communicated to, and operationalized by, each organization’s business units and product lines”; (ii) effectively implements board and management oversight; and (iii) embeds management of such risks in the policies and procedures across all relevant business units.
  • An internal control framework that “ensure[s] sound, comprehensive, and effective identification, measurement, monitoring, and control of material climate-related financial risks.”
  • A risk management framework designed to identify, measure, monitor, and control climate-related financial risks.
  • Risk data aggregation capabilities and risk reporting practices capable of “monitoring material climate-related financial risks and producing timely information to facilitate board and senior management decision-making.”
  • A “range of climate scenarios based on assumptions regarding impact of climate-related financial risks over different time horizons to assess the resiliency of their business models and strategies, identify and measure vulnerability to relevant climate-related risk factors, including physical and transition risks, estimate exposures and potential impacts, and determine the materiality of climate-related financial risks,” which can be qualitative an/or quantitative in nature.

DFS has requested comments on the Guidance by March 21, 2023, with particular emphasis on the following questions:

  1. The Guidance does not establish a timeline for implementation.  Should a timeline for implementation be established?  If yes, what timeline and what is the reasoning supporting that timeline?
  2. Recognizing that there is a wide range of complexity in climate scenario analysis, how can smaller institutions benefit from climate scenario analysis?  What does appropriate climate scenario analysis look like for them?  Which kind of support do they need in establishing these scenarios?
  3. The Guidance does not contain a provision regarding disclosure of material financial risks from climate change for covered entities.  Should existing regulatory reporting requirements be supplemented to capture covered entities’ exposure to material financial risks from climate change and their management of such risks, and if so, what should the supplemental report look like?
  4. Are there other aspects of climate-related financial risks that the Guidance should consider?  Or are there other aspects of the Guidance that would benefit from further clarification, context, or reframing?