[Federal Register Volume 88, Number 208 (Monday, October 30, 2023)]
[Notices]
[Pages 74183-74189]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-23844]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2022-0023]

FEDERAL RESERVE SYSTEM

[Docket No. OP-1793]

FEDERAL DEPOSIT INSURANCE CORPORATION

RIN 3064-ZA32


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

AGENCY: Office of the Comptroller of the Currency (OCC), Treasury; 
Board of Governors of the Federal Reserve System (Board); and Federal 
Deposit Insurance Corporation (FDIC).

ACTION: Final interagency guidance.

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SUMMARY: The OCC, Board, and FDIC (together, the agencies) are jointly 
issuing principles that provide a high-level framework for the safe and 
sound management of exposures to climate-related financial risks 
(principles). 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. The principles are 
intended to support efforts by large financial institutions to focus on 
key aspects of climate-related financial risk management.

DATES: The final interagency guidance is available on October 30, 2023.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Tamara Culler, Director for Governance and Operational Risk 
Policy, Bank Supervision Policy, at (202) 649-6670, Russell D'Costa, 
Program Analyst, Office of Climate Risk, at (202) 649-8283, or Alison 
MacDonald, Senior Counsel, Chief Counsel's Office, at (202) 649-5490, 
Office of the Comptroller of the Currency, 400 7th Street SW, 
Washington, DC 20219. If you are deaf, hard of hearing, or have a 
speech disability, please dial 7-1-1 to access telecommunications relay 
services.
    Board: Anna Lee Hewko, Associate Director, (202) 530-6260; Morgan 
Lewis, Manager, (202) 452-2000; or Matthew McQueeney, Senior Financial 
Institution Policy Analyst II, (202) 452-2942 Division of Banking 
Supervision and Regulation; or Asad Kudiya, Assistant General Counsel, 
(202) 475-6358; Flora Ahn, Senior Special Counsel, (202) 452-2317; 
Matthew Suntag, Senior Counsel, (202) 452-3694; Katherine Di Lucido, 
Attorney, (202) 452-2352; or David Imhoff, Attorney, (202) 452-2249, 
Legal Division, Board of Governors of the Federal Reserve System, 20th 
and C Streets NW, Washington, DC 20551. For the hearing impaired and 
users of TTY-TRS, please call 711 from any telephone, anywhere in the 
United States.
    FDIC: Andrew D. Carayiannis, Chief, Policy and Risk Analytics 
Section, <a href="/cdn-cgi/l/email-protection#5130323023302838303f3f382211373538327f363e27"><span class="__cf_email__" data-cfemail="93f2f0f2e1f2eafaf2fdfdfae0d3f5f7faf0bdf4fce5">[email protected]</span></a>; Lauren K. Brown, Senior Policy Analyst, 
Exam Support Section, <a href="/cdn-cgi/l/email-protection#7814190d1a0a170f16381e1c111b561f170e"><span class="__cf_email__" data-cfemail="127e736770607d657c5274767b713c757d64">[email protected]</span></a>; Amy L. Beck, Corporate Expert, 
Sustainable Finance, <a href="/cdn-cgi/l/email-protection#4c2d212e292f270c2a28252f622b233a"><span class="__cf_email__" data-cfemail="e7868a8582848ca781838e84c9808891">[email protected]</span></a>; Capital Markets and Accounting 
Policy, Division of Risk Management Supervision, 202-898-6888; Jennifer 
M. Jones, Counsel, <a href="/cdn-cgi/l/email-protection#402a252e2e2a2f2e253300262429236e272f36"><span class="__cf_email__" data-cfemail="701a151e1e1a1f1e150330161419135e171f06">[email protected]</span></a>; Karlyn Hunter, Counsel, 
<a href="/cdn-cgi/l/email-protection#204b4148554e54455260464449430e474f56"><span class="__cf_email__" data-cfemail="eb808a839e859f8e99ab8d8f8288c58c849d">[email protected]</span></a>; Amanda Ledig, Senior Attorney, <a href="/cdn-cgi/l/email-protection#07666b62636e604761636e6429606871"><span class="__cf_email__" data-cfemail="41202d2425282601272528226f262e37">[email protected]</span></a>; 
Supervision, Legislation, and Enforcement Branch, Legal Division, 
Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, 
DC 20429.

SUPPLEMENTARY INFORMATION: 

I. Background

    On December 16, 2021, the OCC issued draft Principles for Climate-
Related Financial Risk Management for Large Banks (OCC draft 
principles) and requested feedback from the public with comments due on 
February 14, 2022.\1\ On April 4, 2022, the FDIC issued a Request for 
Comment on a Statement of Principles for Climate-Related Financial Risk 
Management for Large Financial Institutions (FDIC draft principles) 
with comments due on June 3, 2022.\2\ On December 2, 2022, the Board 
issued draft Principles for Climate-Related Financial Risk Management 
for Large Financial Institutions (Board draft principles) with comments 
due on February 6, 2023.\3\
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    \1\ OCC Bulletin 2021-62, Risk Management: Principles for 
Climate-Related Financial Risk Management for Large Banks; Request 
for Feedback, (December 16, 2021), https://occ.gov/news-issuances/bulletins/2021/bulletin-2021-62.html.
    \2\ 87 FR 19507 (April 4, 2022).
    \3\ 87 FR 75267 (December 8, 2022).
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    Financial institutions are likely to be affected by both the 
physical risks and transition risks associated with climate change 
(collectively, climate-related financial risks).\4\ Weaknesses in how 
financial institutions identify, measure, monitor, and control climate-
related financial risks could adversely affect financial institutions' 
safety and soundness. The proposed OCC draft principles, FDIC draft 
principles, and Board draft principles (collectively, draft principles) 
were substantively similar and proposed a high-level framework for the 
safe and sound management of exposures to climate-related financial 
risks, consistent with the risk management framework described in the 
agencies' existing rules and guidance. Although all financial 
institutions, regardless of size, may have material exposures to 
climate-related

[[Page 74184]]

financial risks, the draft principles were intended to support key 
climate-related financial risk management efforts by the largest 
financial institutions, those with over $100 billion in total 
consolidated assets.
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    \4\ 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. 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.
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    The agencies seek to promote consistency in their climate-related 
financial risk management guidance. Accordingly, following the issuance 
of the draft principles and collective review of comments received on 
each of the OCC draft principles, FDIC draft principles, and Board 
draft principles, the agencies are now jointly issuing final 
interagency Principles for Climate-Related Financial Risk Management 
for Large Financial Institutions (principles) that provide a high-level 
framework for the safe and sound management of exposures to climate-
related financial risks.

II. Discussion of Public Comments

    The OCC received nearly 100 unique comments on the OCC draft 
principles from individuals and organizations. Several of these letters 
were signed by or included individual feedback from multiple 
individuals or organizations (and in one case, more than 17,700 
individuals). Approximately 4,470 individuals submitted a substantially 
similar letter directly to the OCC.
    The FDIC received more than 70 unique comments on the FDIC draft 
principles from individuals and organizations. Several of the letters 
were submitted on behalf of, or signed by, numerous individuals and 
organizations.
    The Board received more than 100 unique comments on the Board draft 
principles from individuals and organizations. Several of the letters 
were submitted on behalf of, or signed by, numerous individuals or 
organizations.
    Commenters included financial services trade groups, individual 
banks, environmental groups, public interest and advocacy groups, data 
and risk model providers, governmental organizations, community groups, 
and individuals, among other respondents.
    The agencies received a wide range of comments that both supported 
and opposed the finalization of the draft principles. Many commenters 
viewed the draft principles as an important step to support large 
financial institutions in managing climate-related financial risks. 
Other commenters asserted that financial institutions already 
effectively manage climate-related financial risks or do not face 
material climate-related financial risks. Some commenters expressed a 
view that the agencies were providing special treatment to climate-
related financial risks relative to other risks. Many commenters 
indicated practices to address climate-related financial risks are 
evolving, and they supported the high-level and flexible nature of the 
draft principles, while others encouraged the agencies to take 
additional steps to address climate-related financial risks, including 
considering more detailed guidance. Most unique commenters offered 
suggestions for changes to the draft principles or requested additional 
guidance in specific areas. These comments are summarized below.
    Authority. Some commenters asserted that the draft principles 
extend beyond the agencies' authority. Other commenters raised concerns 
that the draft principles would restrict or discourage provision of 
credit to, or otherwise disproportionately impact, certain industries, 
geographies, or other groups. Some commenters asserted that the draft 
principles could better address the role that they believe financial 
institutions should play in supporting or accelerating a transition to 
a lower carbon economy.
    The agencies are responsible for ensuring the safety and soundness 
of supervised financial institutions, among other responsibilities. 
Similar to other risks faced by financial institutions, climate-related 
financial risks can affect financial institutions' safety and 
soundness. The principles are focused on ensuring that financial 
institutions understand and appropriately manage their material 
climate-related financial risks. The agencies are providing guidance to 
financial institutions through these principles on the management of 
climate-related financial risks just as the agencies provide guidance 
to financial institutions in identifying and managing other risks.
    The agencies did not incorporate suggestions for changes to the 
draft principles that extend beyond the agencies' statutory mandates 
relating to safety and soundness. For example, the agencies did not 
incorporate changes in response to suggestions that the agencies 
promote a transition to a lower carbon economy. The agencies encourage 
financial institutions to take a risk-based approach in assessing the 
climate-related financial risks associated with their 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.
    Scope. Some commenters supported draft principles that were 
intended for financial institutions with total assets over $100 
billion. Other commenters proposed that the draft principles cover 
financial institutions of all sizes. Some requested that the draft 
principles be tailored to financial institutions based on the size, 
complexity, or risk profile of the financial institution. Several 
commenters noted that the agencies should implement a phased-in 
approach for smaller financial institutions. Other commenters expressed 
concern that the draft principles could unintentionally impact smaller 
financial institutions, including community banks, noting the potential 
burden the principles could impose on these smaller financial 
institutions.
    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 principles are intended for financial institutions 
with more than $100 billion in total consolidated assets. The 
principles are intended to provide guidance to large financial 
institutions as they develop strategies, deploy resources, and build 
capacity to identify, measure, monitor, and control for climate-related 
financial risks.
    Several commenters requested clarification regarding the draft 
principles' application to foreign banking organizations and branches 
and agencies of foreign banks operating in the United States. The 
principles are intended for foreign banking 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.\5\
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    \5\ The Board is responsible for the overall supervision and 
regulation of the U.S. operations of all foreign banking 
organizations. The OCC, the FDIC, and the state banking authorities 
have supervisory authority over the national and state bank 
subsidiaries and federal and state branches and agencies of foreign 
banking organizations, respectively, in addition to the Board's 
supervisory and regulatory responsibilities over some of these 
entities.
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    Financial institutions' public climate commitments. Several 
commenters suggested that the draft principles should encourage or 
mandate financial institutions to develop plans to transition to a 
lower carbon economy, to adopt credible commitments to align their 
portfolios with net zero

[[Page 74185]]

greenhouse gas emissions by 2050, or to directly support their 
customers through such a transition. Some commenters asked the agencies 
to hold financial institutions accountable if financial institutions' 
public commitments to address climate change do not match their 
actions. Other commenters argued that the draft principles should 
recognize the aspirational nature of financial institutions' public 
commitments.
    The agencies did not incorporate suggestions for changes to the 
draft principles that extend beyond the agencies' statutory mandate 
relating to safety and soundness, including changes in response to 
suggestions that the agencies promote a transition to a lower carbon 
economy. Similar to the draft principles, the principles state that any 
financial institutions' climate-related strategies should align with 
and support the institution's broader strategy, risk appetite, and risk 
management framework. In addition, when financial institutions engage 
in public communication of their climate-related strategies, boards of 
directors and management should confirm that any public statements 
about their financial institutions' climate-related strategies and 
commitments are consistent with their internal strategies, risk 
appetite statements, and risk management frameworks. This type of 
oversight is consistent with effective governance and risk management 
and intended to help financial institutions avoid legal and compliance 
risk.
    Low-and-moderate-income (LMI) and other underserved consumers and 
communities. Many commenters asked that the agencies acknowledge the 
potential unintended consequences of financial institutions' climate 
risk management strategies on low-and-moderate-income and other 
underserved consumers and communities. Some commenters also requested 
additional clarification on how financial institutions may support 
communities that are disproportionately impacted by the effects of 
climate change, as well as additional guidance on how financial 
institutions can manage climate-related financial risks in a manner 
that minimizes adverse impacts on such consumers and communities. Some 
commenters also suggested that the principles should provide further 
guidance on how financial institutions can manage climate-related 
financial risks consistent with their obligations under fair lending 
and fair housing laws.
    The agencies recognize that both the effects of climate change and 
the actions that financial institutions may take to manage climate-
related financial risks could potentially have a disproportionate 
impact on LMI and other underserved consumers and communities. The 
agencies expect financial institutions to manage climate-related 
financial risks in a manner that will allow them to continue to 
prudently meet the financial services needs of their communities, 
including LMI and other underserved consumers and communities, and to 
ensure compliance with fair housing and fair lending laws. For example, 
the principles clarify that financial institutions should ensure that 
fair lending monitoring programs review whether and how the financial 
institution's risk mitigation measures potentially discriminate against 
consumers on a prohibited basis, such as race, color, or national 
origin.
    Governance. Many commenters supported the flexibility provided by 
the draft principles for financial institutions to incorporate climate-
related financial risks within existing organizational structures or to 
establish new structures for climate-related financial risks. Many 
commenters requested that the draft principles further distinguish 
between the responsibilities of the boards of directors and of 
management. Some commenters noted that expectations that financial 
institutions consider whether incorporation of climate-related 
financial risks into governance and risk management processes may 
warrant changes to compensation policies would be overly prescriptive.
    The agencies have made changes to the draft principles to clarify 
the role of the boards of directors in overseeing the financial 
institution's risk-taking activities and the role of management in 
executing the strategic plan and risk management framework. The 
agencies emphasize that sound compensation programs continue to be 
important to promote sound risk management and to protect the safety 
and soundness of financial institutions. As the agencies have existing 
guidelines and guidance on compensation,\6\ the principles do not 
include a specific discussion of compensation policies.
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    \6\ See 12 CFR part 30, appendix A and appendix D (OCC); 12 CFR 
part 364, appendix A (FDIC); 12 CFR part 208, appendix D-1 (Board); 
and Guidance on Sound Incentive Compensation Policies, 75 FR 36396 
(June 25, 2010).
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    Materiality of risk. Several commenters requested further 
clarification of how financial institutions should determine whether 
climate-related financial risks are material. Some commenters requested 
clarification that financial institutions have the flexibility to make 
their own materiality determinations. Some commenters provided specific 
recommendations for assessing materiality. Some commenters requested 
that the agencies distinguish materiality in the context of the draft 
principles from the concept of materiality in securities laws. Other 
commenters asserted that climate-related financial risks are rarely or 
not material to the risk profile of financial institutions.
    The principles provide that financial institutions' management 
should employ comprehensive processes for identifying climate-related 
financial risks consistent with methods used to identify other types of 
emerging and material risks. The agencies made changes to the draft 
principles to clarify that management should incorporate climate-
related financial risks into their risk management frameworks where 
those risks are material.
    Coordination. Many commenters urged the agencies to coordinate 
amongst each other and work with other U.S. and international 
regulators and federal agencies to harmonize approaches and to share 
knowledge with respect to climate-related financial risks.
    The agencies agree with commenters that interagency coordination 
plays an important role in the effective issuance of guidance on 
climate-related financial risks. Accordingly, the agencies have jointly 
issued these principles and intend to continue to coordinate with other 
U.S. regulators and international counterparts, where appropriate.
    Other comments. The agencies received a number of detailed comments 
on other aspects of the draft principles, some of which were responsive 
to specific questions posed in the draft principles. These comments 
included responses associated with supervisory approaches, time 
horizons for identifying the materiality of climate-related financial 
risks, relationships between climate-related financial risks and other 
risks, specific tools and resources used to manage and mitigate 
climate-related financial risks, approaches to scenario analysis, 
climate-related financial products offered by financial institutions, 
data- and modeling-related challenges, and reporting and disclosure 
issues. The responses also included feedback on how climate-related 
financial risks should be considered in merger and acquisition 
decisions and the challenges

[[Page 74186]]

and costs of incorporating the principles into risk management 
frameworks.\7\
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    \7\ Some commenters also asserted that the draft principles were 
legislative rules subject to Administrative Procedure Act (APA) 
notice and comment requirements and that the draft principles 
violated the agencies' rule on guidance. The principles are being 
issued as guidance and, consistent with the agencies' rule on 
guidance, they will not have the force and effect of law. They do 
not establish any specific requirements applicable to financial 
institutions. Moreover, the principles are not subject to APA notice 
and comment requirements. 5 U.S.C. 533(b) (excluding interpretive 
rules, general statements of policy, and rules of agency 
organization, procedures, or practice from the notice and comment 
requirement). That the agencies sought public comment on the draft 
principles does not mean that the principles are intended to be a 
regulation or to have the force and effect of law. Rather, the 
comment process helps the agencies improve their understanding of 
the issue, gather information on financial institutions' risk 
management practices, or seek ways to achieve supervisory objectives 
most effectively and with the least burden on financial 
institutions.
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    Comments received on the draft principles were considered in the 
development of the principles and will assist the agencies as they 
consider whether and how to provide additional guidance in the future.

III. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521) (PRA) 
states that no agency may conduct or sponsor, nor is the respondent 
required to respond to, an information collection unless it displays a 
currently valid Office of Management and Budget (OMB) control number.
    The principles do not revise any existing, or create any new, 
information collections pursuant to the PRA. Rather, any reporting, 
recordkeeping, or disclosure activities mentioned in the principles are 
usual and customary and should occur in the normal course of business 
as defined in the PRA.\8\ Consequently, no submissions will be made to 
the OMB for review.
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    \8\ 5 CFR 1320.3(b)(2).
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IV. Principles for Climate-Related Financial Risk 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 institutions \9\ 
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.\10\ 
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.\11\
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    \9\ 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.
    \10\ 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/FSOC-Climate-Report.pdf.
    \11\ 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.
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    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.\12\
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    \12\ 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-moderate-income (LMI) and 
other underserved consumers and communities.\13\
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    \13\ 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.
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    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.\14\
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    \14\ 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.
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    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.\15\ 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

[[Page 74187]]

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 
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.
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    \15\ 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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    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 climate-related 
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 well-organized information to permit the board to oversee 
the measurement and management of climate-related 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 climate-related 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 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 forward-looking 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

[[Page 74188]]

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 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 
climate-related 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.
    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. Climate-related 
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 
tomeasureclimate-related price risk, management should use the 
bestmeasurement 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

[[Page 74189]]

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 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.

Michael J. Hsu,
Acting Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System.
Ann E. Misback,
Secretary of the Board.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on October 24, 2023.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2023-23844 Filed 10-27-23; 8:45 am]
BILLING CODE 6210-01-P; 4810-33-P; 6714-01-P


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