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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION 

AND REGULATION

SR 23-9 

October 24, 2023 

TO THE OFFICER IN CHARGE OF SUPERVISION

 AT EACH FEDERAL RESERVE BANK

SUBJECT: Principles for Climate-Related Financial Risk Management for Large Financial 

Institutions

Applicability: This guidance applies to financial institutions with over $100 billion in total 

consolidated assets.

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance 

Corporation, and the Office of the Comptroller of the Currency have issued the attached 

interagency guidance, “Principles for Climate-Related Financial Risk Management for Large 

Financial Institutions” (the principles). 

The principles are intended to support efforts by financial institutions to focus on key 

aspects of climate-related financial risk management. The principles cover six areas: 

governance; policies, procedures, and limits; strategic planning; risk management; data, risk 

measurement, and reporting; and scenario analysis. The principles also describe how climaterelated financial risks can be addressed in other risk categories including credit, liquidity, other 

financial risk, operational, legal and compliance, and other nonfinancial risk. 
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Reserve Banks are asked to distribute this letter to supervised financial institutions in 

their districts, as well as to appropriate supervisory staff. In addition, questions may be sent via 

the Board’s public website.1

Michael S. Gibson

Director

Division of Supervision and Regulation

Attachments:

• Principles for Climate-Related Financial Risk Management for Large Financial 

Institutions

• Federal Register Notice 

Cross References: 

• SR letter 21-3/CA letter 21-1, “Supervisory Guidance on Board of Directors’ 

Effectiveness” 

1 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.
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_________________________________________________________________________________ 

Board of Governors of the Federal Reserve System 

Federal Deposit Insurance Corporation 

Office of the Comptroller of the Currency 

_________________________________________________________________________________ 

October 24, 2023 

Principles for Climate-Related Financial Risk Management for Large Financial Institutions 

The financial impacts that result from the economic effects of climate change and the 

transition to a lower carbon economy pose an emerging risk to the safety and soundness of financial 

institutions1 and the financial stability of the United States. Financial institutions are likely to be 

affected by both the physical risks and transition risks associated with climate change (collectively, 

climate-related financial risks). Physical risks refer to the harm to people and property arising from 

acute, climate-related events, such as hurricanes, wildfires, floods, and heatwaves, and chronic shifts 

in climate, including higher average temperatures, changes in precipitation patterns, sea level rise, 

and ocean acidification.2 Transition risks refer to stresses to institutions or sectors arising from the 

shifts in policy, consumer and business sentiment, or technologies associated with the changes that 

would be part of a transition to a lower carbon economy.3

 

Physical and transition risks associated with climate change could affect households, 

communities, businesses, and governments – damaging property, impeding business activity, 

affecting income, and altering the value of assets and liabilities. These risks may be propagated 

throughout the economy and financial system. As a result, the financial sector may experience credit 

and market risks associated with loss of income, defaults, and changes in the values of assets, 

liquidity risks associated with changing demand for liquidity, operational risks associated with 

disruptions to infrastructure or other channels, or legal risks.4

1

 In this issuance, the term “financial institution” or “institution” includes national banks, Federal savings associations, 

U.S. branches and agencies of foreign banks, state nonmember banks, state savings associations, state member banks, 

bank holding companies, savings and loan holding companies, intermediate holding companies, foreign banking 

organizations with respect to their U.S. operations, and non-bank systemically important financial institutions (SIFIs) 

supervised by the Board. 

2 The Financial Stability Oversight Council has described the impacts of physical risks as follows: “The intensity and 

frequency of extreme weather and climate-related disaster events are increasing and already imposing substantial 

economic costs. Such costs to the economy are expected to increase further as the cumulative impacts of past and 

ongoing global emissions continue to drive rising global temperatures and related climate changes, leading to increased 

climate-related risks to the financial system.” Report on Climate-Related Financial Risk, Financial Stability Oversight 

Council, page 10 (Oct. 21, 2021) (FSOC Climate Report), available at https://home.treasury.gov/system/files/261/FSOCClimate-Report.pdf. 

3 The Financial Stability Oversight Council has described the impacts of transition risks as: “...[Changing] public 

policy, adoption of new technologies, and shifting consumer and investor preferences have the potential to impact the 

allocation of capital....If these changes occur in a disorderly way owing to substantial delays in action or abrupt changes 

in policy, their impact on firms, market participants, individuals, and communities is likely to be more sudden and 

disruptive.” FSOC Climate Report, page 13. 

4 FSOC Climate Report, page 13.
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 Weaknesses in how a financial institution identifies, measures, monitors, and controls the 

physical and transition risks associated with a changing climate could adversely affect a financial 

institution’s safety and soundness. The adverse effects of climate change could also include a 

potentially disproportionate impact on the financially vulnerable, including low-and-moderateincome (LMI) and other underserved consumers and communities.5

 

 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. 

 The principles are intended to support efforts by financial institutions to focus on key aspects 

of climate-related financial risk management. The principles are designed to help financial 

institutions’ boards of directors (boards) and management make progress toward incorporating 

climate-related financial risks into risk management frameworks in a manner consistent with safe 

and sound practices. The principles are intended to explain and supplement existing risk 

management standards and guidance on the role of boards and management.6

 

Although all financial institutions, regardless of size, may have material exposures to 

climate-related financial risks, these principles are intended for the largest financial institutions, 

those with over $100 billion in total consolidated assets.7 Effective risk management practices 

should be appropriate to the size of the financial institution and the nature, scope, and risk of its 

activities. In keeping with the agencies’ risk-based approach to supervision, the agencies anticipate 

that differences in large financial institutions’ complexity of operations and business models will 

result in different approaches to addressing climate-related financial risks. Some large financial 

institutions are already developing governance structures, processes, and analytical methodologies to 

identify, measure, monitor, and control for these risks. The agencies understand that expertise in 

climate risk and the incorporation of climate-related financial risks into risk management 

frameworks remain under development in many large financial institutions and will continue to 

evolve over time. The agencies also recognize that the incorporation of material climate-related 

financial risks into various planning processes will be iterative, as measurement methodologies, 

models, and data for analyzing these risks continue to mature. The agencies encourage large 

financial institutions to take a risk-based approach in assessing the climate-related financial risks 

5 For further information, see Staff Reports, Federal Reserve Bank of New York, Understanding the Linkages between 

Climate Change and Inequality in the United States, No. 991 (Nov. 2021), available at

https://www.newyorkfed.org/research/staff_reports/sr991.html. 

6 References to the board and management throughout these principles should be understood in accordance with their 

respective roles and responsibilities and is not intended to conflict with existing guidance regarding the roles of board 

and management or advocate for a specific board structure. See, e.g., SR 21-3/CA 21-1: Supervisory Guidance on Board 

of Directors’ Effectiveness (Feb. 26, 2021), https://www.federalreserve.gov/supervisionreg/srletters/SR2103.htm; OCC 

Guidelines Establishing Heightened Standards for Certain Large Insured National Banks, Insured Federal Savings 

Associations, and Insured Federal Branches, 12 CFR part 30, appendix D.

7 The principles are intended for financial institutions with over $100 billion in total consolidated assets. With respect to 

foreign banking organizations, this includes organizations with combined United States operations of greater than $100 

billion. The principles also are intended for any branch or agency of a foreign banking organization that individually has 

total assets of greater than $100 billion. 
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associated with individual customer relationships and to take into account the financial institution’s 

ability to manage the risk. The principles neither prohibit nor discourage financial institutions from 

providing banking services to customers of any specific class or type, as permitted by law or 

regulation. The decision 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 principles are intended to promote a consistent understanding of the effective 

management of climate-related financial risks. The agencies may consider providing additional 

resources or guidance, as appropriate, to support financial institutions in prudently managing these 

risks while continuing to meet the financial services needs of their communities. 

 

General Principles 

Governance. An effective risk management framework is essential to a financial institution’s 

safe and sound operation. A financial institution’s board should understand the effects of climaterelated financial risks on the financial institution in order to oversee management’s implementation 

of the institution’s business strategy, risk management, and risk appetite. The board should oversee 

the financial institution’s risk-taking activities, hold management accountable for adhering to the 

risk management framework, and allocate appropriate resources to support climate-related financial 

risk management. The board should direct management to provide timely, accurate, and wellorganized information to permit the board to oversee the measurement and management of climaterelated financial risks to the financial institution. The board should acquire sufficient information to 

understand the implications of climate-related financial risks across various scenarios and planning 

horizons, which may include those that extend beyond the financial institution’s typical strategic 

planning horizon. If weaknesses or gaps in climate-related financial risk management are identified, 

the information provided is incomplete, or as otherwise warranted, the board should challenge 

management’s assessments and recommendations. The board and management should support the 

stature and independence of the financial institution’s risk management and internal audit functions 

and, in their respective roles, assign accountability for climate-related financial risks within existing 

organizational structures or establish new structures for climate-related financial risks. 

Management is responsible for implementing the financial institution’s policies in 

accordance with the board’s strategic direction and for executing the financial institution’s overall 

strategic plan and risk management framework. This responsibility includes assuring that there is 

sufficient expertise to execute the strategic plan and effectively managing all risks, including 

climate-related financial risks. This also includes management’s responsibility to oversee the 

development and implementation of processes to identify, measure, monitor, and control climaterelated financial risks within the financial institution’s existing risk management framework. 

Management should also hold staff accountable for controlling risks within established lines of 

authority and responsibility. Management is responsible for regularly reporting to the board on the 

level and nature of risks to the financial institution, including material climate-related financial 

risks. Management should provide the board with sufficient information for the board to understand 

the impacts of material climate-related financial risks to the financial institution’s risk profile and 

make sound, well-informed decisions. Where dedicated climate risk organizational structures are 
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established by the board, management should clearly define these units’ responsibilities and 

interaction with existing governance structures. 

Policies, Procedures, and Limits. Management should incorporate material climate-related 

financial risks into policies, procedures, and limits to provide detailed guidance on the financial 

institution’s approach to these risks in line with the strategy and risk appetite set by the board. 

Policies, procedures, and limits should be modified when necessary to reflect (i) the distinctive 

characteristics of climate-related financial risks, such as the potentially longer time horizon and 

forward-looking nature of the risks, and (ii) changes to the financial institution’s operating 

environment or activities. 

Strategic Planning. The board should consider material climate-related financial risk 

exposures when setting and monitoring the financial institution’s overall business strategy, risk 

appetite, and when overseeing management’s implementation of capital plans. As part of forwardlooking strategic planning, the board should consider and management should address the potential 

impact of material climate-related financial risk exposures on the financial institution’s financial 

condition, operations (including geographic locations), and business objectives over various time 

horizons. The board should encourage management to consider climate-related financial risk 

impacts on the financial institution’s other operational and legal risks. Additionally, the board 

should encourage management to consider the impact that the financial institution’s strategies to 

mitigate climate-related financial risks could have on LMI and other underserved communities and 

their access to financial products and services, consistent with the financial institution’s obligations 

under applicable consumer protection laws. 

Any climate-related strategies and commitments should align with and support the financial 

institution’s broader strategy, risk appetite, and risk management framework. In addition, where 

financial institutions engage in public communication of their climate-related strategies, boards and 

management should assure that any public statements about their institutions’ climate-related 

strategies and commitments are consistent with their internal strategies, risk appetite statements, and 

risk management frameworks. 

Risk Management. Climate-related financial risks can impact financial institutions through a 

range of traditional risk types. Management should oversee the development and implementation of 

processes to identify, measure, monitor, and control exposures to climate-related financial risks 

within the financial institution’s existing risk management framework. Financial institutions with 

sound risk management employ a comprehensive process to identify emerging and material risks 

related to the financial institution’s business activities. The risk identification process should include 

input from stakeholders across the organization with relevant expertise (e.g., business units, 

independent risk management, internal audit, and legal). Risk identification includes assessment of 

climate-related financial risks across a range of plausible scenarios and under various time horizons. 

As part of sound risk management, management should develop processes to measure and 

monitor material climate-related financial risks and to communicate and report the materiality of 

those risks to internal stakeholders. Material climate-related financial risk exposures should be 

clearly defined, aligned with the financial institution’s risk appetite, and supported by appropriate 

metrics (e.g., risk limits and key risk indicators) and escalation processes. Management should 
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incorporate material climate-related financial risks into the financial institution’s risk management 

system, including internal controls and internal audit. 

Tools and approaches for measuring and monitoring exposures to climate-related financial 

risks include, among others, exposure analysis, heat maps, climate risk dashboards, and scenario 

analysis. These tools can be leveraged to assess a financial institution’s exposure to both physical 

and transition risks in both the shorter and longer term. Outputs should inform the risk identification 

process and the short- and long-term financial risks to a financial institution’s business model from 

climate change. 

Data, Risk Measurement, and Reporting. Sound climate-related financial risk management 

depends on the availability of timely, accurate, consistent, complete, and relevant data. Management 

should incorporate climate-related financial risk information into the financial institution’s internal

reporting, monitoring, and escalation processes to facilitate timely and sound decision-making across 

the financial institution. Effective risk data aggregation and reporting capabilities allow 

management to capture and report climate-related financial risk exposures, segmented or stratified 

by physical and transition risks, based upon the complexity and types of exposures. Available data, 

risk measurement tools, modeling methodologies, and reporting practices continue to evolve at a 

rapid pace; management should monitor these developments and incorporate them into the 

institution’s climate-related financial risk management as warranted. 

Scenario Analysis. Climate-related scenario analysis is emerging as an important approach 

for identifying, measuring, and managing climate-related financial risks. For the purposes of these 

principles, climate-related scenario analysis refers to exercises used to conduct a forward-looking 

assessment of the potential impact on a financial institution of changes in the economy, changes in 

the financial system, or the distribution of physical hazards resulting from climate-related financial 

risks. These exercises differ from traditional stress testing exercises that typically assess the 

potential impacts of transitory shocks to near-term economic and financial conditions. An effective 

climate-related scenario analysis framework provides a comprehensive and forward-looking 

perspective that financial institutions can apply alongside existing risk management practices to 

evaluate the resiliency of a financial institution’s strategy and risk management to the structural 

changes arising from climate-related financial risks. 

Management should develop and implement climate-related scenario analysis frameworks in 

a manner commensurate to the financial institution’s size, complexity, business activity, and risk 

profile. These frameworks should include clearly defined objectives that reflect the financial 

institution’s overall climate-related financial risk management strategies. These objectives could 

include, for example, exploring the impacts of climate-related financial risks on the financial 

institution’s strategy and business model, identifying and measuring vulnerability to relevant 

climate-related financial risk factors including physical and transition risks, and estimating climaterelated exposures and potential losses across a range of scenarios, including extreme but plausible 

scenarios. A climate-related scenario analysis framework can also assist management in identifying 

data and methodological limitations and uncertainty in climate-related financial risk management 

and informing management’s assessment of the adequacy of the institution’s climate-related 

financial risk management framework. 
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Climate-related scenario analyses should be subject to management oversight, validation, and 

quality control standards that would be commensurate to the financial institution’s risk. Climaterelated scenario analysis results should be clearly and regularly communicated to the board and all 

relevant individuals within the financial institution, including an appropriate level of information 

necessary to effectively convey the assumptions, limitations, and uncertainty of results. 

Management of Risk Areas 

A risk assessment process is part of a sound risk management framework, and it allows 

management to identify emerging risks and to develop and implement appropriate strategies to 

mitigate those material risks. Management should consider and incorporate climate-related financial 

risks when identifying and mitigating all types of risk. These risk assessment principles describe 

how climate-related financial risks can be addressed in various risk categories. 

Credit Risk. Management should consider climate-related financial risks as part of the 

underwriting and ongoing monitoring of portfolios. Effective credit risk management practices 

could include monitoring climate-related credit risks through sectoral, geographic, and single-name 

concentration analyses, including credit risk concentrations stemming from physical and transition 

risks. As part of concentration risk analysis, management should assess potential changes in 

correlations across exposures or asset classes. Consistent with the financial institution’s risk appetite 

statement, management should determine credit risk tolerances and lending limits related to material 

climate-related financial risks. 

Liquidity Risk. Consistent with sound oversight and liquidity risk management, management 

should assess whether climate-related financial risks could affect its liquidity position and, if so, 

incorporate those risks into their liquidity risk management practices and liquidity buffers. 

Other Financial Risk. Management should monitor interest rate risk and other model inputs 

for greater volatility or less predictability due to climate-related financial risks. Where appropriate, 

management should account for this uncertainty in their risk measurements and controls. 

Management should monitor how climate-related financial risks affect the financial institution’s 

exposure to risk related to changing prices. While market participants are still researching how 

to measure climate-related price risk, management should use the best measurement methodologies 

reasonably available to them and refine them over time. 

Operational Risk. Management should consider how climate-related financial risk exposures 

may adversely impact a financial institution’s operations, control environment, and operational 

resilience. Sound operational risk management includes incorporating an assessment across all 

business lines and operations, including operations performed by third parties, and considering 

climate-related impacts on business continuity and the evolving legal and regulatory landscape. 

Legal and Compliance Risk. Management should consider how climate-related financial 

risks and risk mitigation measures affect the legal and regulatory landscape in which the financial 

institution operates. This should include, but is not limited to, taking into account possible changes 

to legal requirements for, or underwriting considerations related to, flood or disaster-related 

insurance, and ensuring that fair lending monitoring programs review whether and how the financial 
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institution’s risk mitigation measures potentially discriminate against consumers on a prohibited 

basis, such as race, color, or national origin. 

Other Nonfinancial Risk. Consistent with sound oversight, the board and management 

should monitor how the execution of strategic decisions and the operating environment affect the 

financial institution’s financial condition and operational resilience. Management should also 

consider the extent to which the financial institution’s activities may increase the risk of negative 

financial impact and should implement adequate measures to account for these risks where 

material.