Federal Reserve Proposes Climate Risk Framework for Large Financial Institutions

The framework is essentially the same as those proposed by the OCC and FDIC and calls on large financial institutions to account for climate-related physical and transitional risks in its business strategy.

The Federal Reserve on Friday published proposed principles to manage climate-related risk for financial institutions with more than $100 billion in assets managed. The principles are similar to the principles proposed by the Office of the Comptroller of the Currency in December 2021 and the Federal Deposit Insurance Corporation in March.

The proposed guidelines aim to address physical and transitional climate risk. Physical risk refers to natural phenomena that would increase in frequency and/or intensity as a result of climate change, such as drought and storms, that could present physical risk to assets held by large financial institutions. Transitional risk refers to the financial risk of holding certain assets, given the ongoing transition away from fossil fuels.

The proposal defines the institutions to which it would apply as including state member banks, bank holding companies, savings and loan holding companies, foreign banking organizations with respect to their U.S. operations and non-bank systemically important financial institutions supervised by the Federal Reserve Board.

The principles advise that these institutions make governance changes so that board members are aware of climate risk and require management to consistently report on that risk. They also advise incorporating climate risk assessment into formal policies and procedures, making climate risk part of overall business strategy and obtaining access to relevant data.

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This proposal follows a series of executive agency proposals related to climate risk. Not only have the OCC and FDIC published similar proposals, but the SEC also proposed a rule that would require climate-related disclosure from public companies, including the companies’ direct greenhouse gas emissions and the emissions in their value chain. The SEC proposal was issued in March.

Congressional Republicans have pushed back against the SEC proposal in the form of legislation. On Friday, Republican members of the House introduced the Mandatory Materiality Requirement Act, which aims to prevent the SEC from requiring climate-related risk disclosure. A companion bill of the same name was introduced by Senate Republicans in September.

Tags: Climate Change, Climate Risk, FDIC, Federal Reserve, OCC, SEC

Australian Prime Minister Anthony Albanese has introduced legislation to establish a $10.26 billion (A$15 billion) green fund that would invest in several key areas of the country’s economy. [Source]

The proposed National Reconstruction Fund is modeled after the Clean Energy Finance Corporation, an Australian government-owned green bank that was established a decade ago “to facilitate increased flows of finance into the clean energy sector.”

The proposed fund would invest up to A$3 billion in renewable energy and low-emissions technologies, such as wind turbine components and battery and solar-panel production. Other prospective investments include up to A$1.5 billion in medical manufacturing, A$1 billion in value-adding in resources, A$1 billion for critical technologies, A$1 billion for advanced manufacturing and A$500 million for value-adding in agriculture, forestry, fisheries, food and fiber.

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The fund would also be required to generate a positive return across its investment portfolio and will not provide grants. It is intended to help attract and secure funding from private-sector investors.

The Albanese administration is seeking input on the fund and has issued a consultation paper to help define the priority areas of the Australian economy. It also said the fund will be administered by an independent board appointed by the minister for industry and science and the minister for finance. Staying “at arm’s length,” the Australian government would provide guidance on expectations and policy priorities through a legislative instrument and an investment mandate.

If Australia’s parliament passes the legislation, a board will be established to make independent investment decisions and manage the fund’s investment portfolio. The government said it will also develop co-investment plans that are expected to be released by the end of 2023.

“The National Reconstruction Fund will help Australia capture the opportunities of today and tomorrow, building on our natural and competitive strengths to create a future made in Australia,” Albanese said in a statement. “It will help create secure local jobs, boost sovereign capability and diversify our nation’s industry and economy.”