Pub. 12 2021 Issue 4

wvbankers.org 22 West Virginia Banker Regulators Move Closer to Incorporating Climate-Related Risks into Oversight of Banks and Other Institutions By Nicholas P. Mooney II, Spilman Thomas & Battle, PLLC I n the Fall 2021 issue of West Virginia Banker magazine, we discussed three issues and opportunities facing banks in the post-pandemic world, one of which was the concept of Sustainable Banking. Also called Environmental, Social, and Governance (ESG) banking, this concept sometimes is labeled “banking with a purpose.” It focuses on banking in a way that considers the economic, social, and environmental effects of the bank’s products and services. Although banks in the United States are sometimes criticized as being slow to adopt sustainable banking when compared to their European counterparts, they recently began stepping into this realm in a big way. In the fall issue, we discussed the initiatives banks such as JPMorgan Chase, Wells Fargo, Bank of America, and Fifth Third have developed in this arena. It is clear that smaller, newer players also view sustainable banking as an opportunity. For example, Aspiration Financial is going all-in with internet websites that boldly proclaim, “You can change Climate Change,” “Leave your bank, save the planet,” and “Aspiration is 100% committed to Clean Money.” They also offer a credit card that “rewards you for erasing your carbon footprint.” Since our last article, regulators have taken steps that signal sustainable banking is not only a potential opportunity banks may want to consider but may soon become a directive from regulators. Earlier in 2021, President Biden issued an “Executive Order on Climate-Related Financial Risk.” That order stated a global shift was currently underway from carbon-intensive energy sources and industrial processes, which according to the order, presented both “transition risks to many companies” as well as “opportunities to enhance U.S. competitiveness and economic growth.” The order highlighted what the president saw as “[t]he failure of financial institutions to appropriately and adequately account for and measure these physical and transition risks.” This failure “threatens the competitiveness of U.S. companies and markets, the life savings and pensions of U.S. workers and families, and the ability of U.S. financial institutions to serve communities.” The order directed Treasury Secretary Janet Yellen, as Chair of the Financial Stability Oversight Council (FSOC), to consider the following actions: • Assessing the climate-related financial risks to the stability of the U.S. financial system. • Issuing a report to the president on the efforts of FSOC member agencies to integrate consideration of climate- related financial risks into their policies and programs. • Reporting on the necessity of any actions to enhance climate-related disclosures by regulated entities. • Reporting on approaches to incorporating the consideration of climate-related financial risks into their regulatory and supervisory activities. • Reporting on any other recommendations to mitigate climate-related financial risk, including through new or revised regulatory standards. Secretary Yellen and FSOC have taken steps to fulfill those directives. In late Oct., FSOC issued its “Report on Climate- Related Financial Risk,” in which FSOC for the first time identified climate change as an “emerging and increasing threat to U.S. financial stability.” The report includes more than 30 recommendations to financial regulators on actions that it believes are necessary to identify and address climate- related risks to the U.S. financial system. Those include: • Prioritizing investments to expand members’ capacities to define, identify, measure, monitor, assess, and report on climate-related financial risks. • Reviewing members’ public communications about climate- related efforts, including in annual reports, and updating them to promote consistent, comparable, and useful information on climate-related risks and opportunities.