Joint Press Release
October 24, 2023
Statement by Vice Chair for Supervision Michael S. Barr on Principles for Climate-Related Financial Risk Management for Large Financial Institutions
The guidance we are issuing today helps support the narrow, but important, role the Federal Reserve has in addressing the financial risks of climate change. The Federal Reserve is responsible for ensuring that the banks we supervise are monitoring and addressing their material risks, including climate-related financial risks.
These principles provide a high-level framework for the safe and sound management of exposures to climate-related financial risks, consistent with the risk management frameworks described in the agencies' existing rules and guidance. These climate principles describe how banks should identify, measure, monitor, and manage material climate-related risks and ensure their risk management frameworks appropriately incorporate these issues.
Weaknesses in how banks identify, measure, and control climate-related financial risks can result in material losses. Changes in the frequency and severity of severe weather events driven by climate change suggest that the distribution of future risks may be different than in the past. Large firms are investing in this area, and supervisors need to understand their approaches. An effective risk management framework is essential to a financial institution's safe and sound operation. The guidance makes clear that financial institutions should take a risk-based approach in assessing climate-related financial risks, taking into account the financial institution's ability to manage the risk. This guidance provides clarity to the largest firms about how they should approach climate-related financial risk management.
The guidance makes clear that the agencies neither prohibit nor discourage financial institutions from providing banking services to customers of any specific class or type, as permitted by law or regulation. Decisions regarding whether to make a loan or to open, close, or maintain an account rests with the financial institution, so long as the financial institution complies with applicable laws and regulations.
The guidance states that banks should be attentive to the impact of climate risk management efforts on low-and- moderate-income and other underserved consumers and communities. Banks should ensure that vulnerable communities are not inadvertently harmed by their efforts to mitigate climate-related financial risks.