utah.bank 26 CLIMATE CHANGE AND CLIMATE RISK MANAGEMENT FOR BANKS By Julia A. Gutierrez, Director of Education, Compliance Alliance Climate change and risk management have become a hot-button topic for financial institutions in recent years because of rising concerns from policymakers, international organizations, financial regulators, and many others. This push for a more environmentally friendly world is leading to changes in organizational resources and operations, investor expectations, environmental activists, and even the expectations of the current administration. With all this focus on environmental safety, it is inevitable for financial institutions to consider the impacts and learn how to manage the risk. What is Climate Change? Climate change is a change in global or regional climate patterns, specifically, a change in global or regional climate patterns from the mid-20th century through today, largely attributed to increases in atmospheric carbon dioxide levels produced by fossil fuel usage. It can be controversial, but whatever side of the fence you stand on, there are climaterelated financial risks faced by banks, and managing that risk can be critical. What Type of Risk Should Financial Institutions Consider? According to various regulatory agencies, climate change and the transition to a low-carbon economy have been identified as contributing to emerging risks facing financial institutions and the overall financial system of the United States. The agencies indicate that banks will likely be impacted by physical and transition risks associated with climate change. Physical risks are considered harmful to people and property arising from acute, climate-related events: f looding, hurricanes, heatwaves, etc. Transition risks are considered stresses to financial institutions because of shifts in policy, consumer or business sentiments, or technological changes to limit the impact of climate change. Basically, transition risk is the risk due to the transition to a more environmentally friendly process or way of conducting business and operations. Financial institutions should also consider credit risk, market risk, liquidity risk, operational risk, and reputational risk, especially as they relate to the safety and soundness of their institutions. Principles for Managing Climate-Related Risk While there isn’t currently specific regulatory guidance for achieving compliance and managing the risk related to climate, we will likely see this type of guidance in the near future. Regulatory agencies have addressed the issues, requested feedback for managing the risk, and are looking at implanting regulatory requirements for large financial institutions, including banks with over $1 billion in assets. The OCC (Office of the Comptroller of Currency), along with other regulatory agencies, has released guidance, requests for information, and a set of principles financial institutions should consider in
RkJQdWJsaXNoZXIy ODQxMjUw