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Environment, Land & Resources

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climate risk

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Federal Reserve Proposes Climate Risk Guidance for Large Financial Institutions

Posted on December 9, 2022
Posted in Environmental, Social, and Governance

The guiding principles are similar to related proposals from other banking regulators, but will require further clarification through the comment process.

By Nicola Higgs, Betty M. Huber, Arthur S. Long, Pia Naib, Anne Mainwaring, and Deric Behar

On December 2, 2022, the Board of Governors of the Federal Reserve System (Federal Reserve) published proposed Principles for Climate-Related Financial Risk Management for Large Financial Institutions (the Proposal). The Proposal urges large financial institutions[1] to consider how best to identify, measure, monitor, and control the various risks associated with climate change over a variety of time horizons. It also specifies that large financial institutions should monitor microprudential risks, including credit, market, liquidity, operational, and legal and compliance risks, as well as other financial and nonfinancial risks that could arise from climate change.

The Proposal aims to support financial institution boards of directors and management in incorporating mitigation of climate-related financial risks into their broader risk management frameworks, consistent with safe and sound practices and the Federal Reserve’s rules and guidance on sound governance.

Large financial institutions are defined as those with over $100 billion in assets that are subject to Federal Reserve supervision, including the US operations of non-US banking organizations. The Federal Reserve’s guidance is founded on the premise that climate change poses an emerging risk to the safety and soundness of financial institutions and the financial stability of the United States.

FSOC Issues Recommendations on Climate-Related Financial Risk

Posted on October 29, 2021
Posted in Environmental, Social, and Governance

A wide-ranging report encourages regulators to take a concerted approach to combat climate-related risks to the US financial system.

By Jean-Philippe Brisson, Paul A. Davies, Nicola Higgs, Malorie R. Medellin, and Deric Behar

On October 21, 2021, the Financial Stability Oversight Council (FSOC) published a lengthy report on Climate-Related Financial Risk (the Report), marking the first time that FSOC has officially identified climate change as an emerging and increasing threat to US financial stability. FSOC issued the Report pursuant to a directive in President Biden’s May 2021 Executive Order on Climate-Related Financial Risk, which tasked FSOC to assess and collaboratively address climate-related impacts on US financial system stability.

The Report is another building block in the Biden Administration’s “whole of government” approach to combating climate change and the climate-related risks that threaten the US economy. The Report comes just days after the Administration issued “A Roadmap to Build a Climate-Resilient Economy” (the Roadmap), which heralded the Report as “the first step in a robust process of US financial regulators developing the capacity and analytical tools to mitigate climate-related financial risks.” (See this Latham post for more information.)

President Biden Presents a Roadmap for Mitigating the Climate Crisis

Posted on October 20, 2021
Posted in Environmental, Social, and Governance

A new national strategy report aims to combat climate-related risks to the US financial system.

By Jean-Philippe Brisson, Paul A. Davies, Nicola Higgs, Malorie R. Medellin, and Deric Behar

On October 14, 2021, the Biden Administration issued “A Roadmap to Build a Climate-Resilient Economy” (the Roadmap), a national strategy report with tangible initiatives that build on ideas set out in the May 2021 Executive Order on Climate-Related Financial Risk. The Roadmap is an ambitious and wide-ranging reflection of the Administration’s “whole of government” approach to combating climate change and the climate-related risks that threaten the US economy.

CFTC Takes Action With New Climate Risk Unit

Posted on March 23, 2021
Posted in Environmental, Social, and Governance

The CFTC continues to demonstrate a commitment to using its regulatory mandate to combat climate change risks to the US financial system.

By Yvette D. Valdez, Douglas K. Yatter, Jean-Philippe Brisson, Paul Davies, Nicola Higgs, and Deric Behar

On March 17, 2021, the Commodity Futures Trading Commission (CFTC) announced the establishment of an interdivisional Climate Risk Unit (CRU) to assess the risks to US financial stability posed by climate change. The CRU aims to be a catalyst for change by highlighting the derivatives markets’ role in understanding, pricing, and addressing climate-related risks, as well as its role in the transition to a low-carbon economy.

The announcement was made by Acting Chairman Rostin Behnam, whose efforts to steer the CFTC’s focus toward climate-related impacts on the financial system led to the publication of a landmark report by the CFTC’s Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee in September 2020. The report, titled “Managing Climate Risk in the U.S. Financial System” (the Report), makes 53 recommendations to help mitigate climate risk to financial markets. See Latham’s discussion of the report here.

SEC Creates Enforcement Task Force to Assess ESG-Related Disclosure

Posted on March 9, 2021
Posted in Air Quality and Climate Change, Environmental, Social, and Governance

The Division of Enforcement’s new Climate and ESG Task Force will use data analysis to mine and evaluate registrant information for possible violations.

By Paul A. Davies, Paul M. Dudek, and Andra Troy*

On March 4, 2021, the US Securities and Exchange Commission (SEC) announced the creation of a Climate and ESG Task Force in the Division of Enforcement. According to the SEC, the Task Force will develop initiatives to proactively identify ESG-related misconduct in the form of gaps or misstatements of issuer disclosure by means of the Division’s resources, including the collection of tips and whistleblower complaints and the use of data mining and analysis.

CFTC Report: Climate Change Threatens Stability of US Financial System

Posted on September 14, 2020
Posted in Environmental, Social, and Governance

A watershed CFTC report highlights the dangers of climate change to the US economy, and provides a broad risk-mitigation roadmap.

By Jean-Philippe Brisson, Paul A. Davies, Nicola Higgs, Yvette D. Valdez, R. Andrew Westgate, Kristina S. Wyatt, and Deric Behar

On September 9, 2020, the US Commodity Futures Trading Commission’s (CFTC’s) Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee (MRAC) published Managing Climate Risk in the U.S. Financial System (the Report) — a first-of-its-kind publication from a US regulator focusing on the systemic threat that climate change poses to the stability of the US financial system.

The Report is the product of the collaborative effort of the CFTC and a diverse advisory panel of 34 market participants across industries and sectors, including investors; non-governmental organizations; investment banks; academic organizations; and insurance, agriculture, and oil and gas companies.

The Report calls on legislators and market regulators to overcome what it describes as “political inertia” and to take urgent and decisive action commensurate with the risks. To that end, the Report presents a broad range of concrete recommendations, designed to either directly or indirectly mitigate the risks that climate change poses to the US financial markets and long-term economic growth.

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