Climate Change Financial Risk Act of 2021
Bill: S.1876 | Sponsor: Sen. Schatz, Brian (D-HI)
Policy area: Finance and Financial Sector

Summary:
Climate Change Financial Risk Act of 2021
This bill addresses climate change risk and its potential impact on the financial system.
The Federal Reserve Board must develop financial risk analyses relating to climate change for specified large nonbank financial companies and bank holding companies. Specifically, these entities will be evaluated every two years on whether they have the capital necessary to absorb financial losses that would arise under several different climate change risk scenarios.
The bill also establishes the Climate Risk Scenario Technical Development Group to provide recommendations to the board regarding such climate change risk scenarios, and determine the financial and economic risks of these scenarios.
The Financial Stability Oversight Council of the Department of the Treasury must establish a committee to assist it in identifying risks and responding to threats to the financial system as a result of climate change.

To require the Board of Governors of the Federal Reserve System, in 
  consultation with the heads of other relevant Federal agencies, to 
develop and conduct financial risk analyses relating to climate change, 
                        and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Climate Change Financial Risk Act of 
2021''.

SEC. 2. SENSE OF CONGRESS.

    It is the sense of Congress that--
            (1) if current trends continue, average global temperatures 
        are likely to reach 1.5 degrees Celsius above pre-industrial 
        levels between 2030 and 2050;
            (2) global temperature rise has already resulted in an 
        increased number of heavy rainstorms, coastal flooding events, 
        heat waves, wildfires, and other extreme events;
            (3) since 1980--
                    (A) the number of extreme weather events per year 
                that cost the people of the United States more than 
                $1,000,000,000 per event, accounting for inflation, has 
                increased significantly; and
                    (B) the total cost of extreme weather events in the 
                United States has exceeded $1,875,000,000,000;
            (4) as physical impacts from climate change are manifested 
        across multiple sectors of the economy of the United States--
                    (A) climate-related economic risks will continue to 
                increase;
                    (B) climate-related extreme weather events will 
                disrupt energy and transportation systems in the United 
                States, which will result in more frequent and longer-
                lasting power outages, fuel shortages, and service 
                disruptions in critical sectors across the economy of 
                the United States;
                    (C) projected increases in extreme heat conditions 
                will lead to decreases in labor productivity in 
                agriculture, construction, and other critical economic 
                sectors;
                    (D) food and livestock production will be impacted 
                in regions that experience increases in heat and 
                drought and small rural communities will struggle to 
                find the resources needed to adapt to those changes; 
                and
                    (E) sea level rise and more frequent and intense 
                extreme weather events will--
                            (i) increasingly disrupt and damage private 
                        property and critical infrastructure; and
                            (ii) drastically increase insured and 
                        uninsured losses;
            (5) advances in energy efficiency and renewable energy 
        technologies, as well as climate policies and shifting societal 
        preferences, will--
                    (A) reduce global demand for fossil fuels; and
                    (B) expose transition risks for fossil fuel 
                companies and investors, and for companies and 
                investors in other energy-intensive industries, which 
                could include trillions of dollars of stranded assets 
                around the world;
            (6) climate change poses uniquely far-reaching risks to the 
        financial services industry, including with respect to credit, 
        counterparty, and market risks, due to the number of sectors 
        and locations impacted and the potentially irreversible scale 
        of damage;
            (7) financial institutions must take a consistent approach 
        to assessing climate-related financial risks and incorporating 
        those risks into existing risk management practices, which 
        should be informed by scenario analysis;
            (8) the Board of Governors conducts annual assessments of 
        the capital adequacy and capital planning practices of the 
        largest and most complex banking organizations (referred to in 
        this section as ``stress tests'') in order to promote a safe, 
        sound, and efficient banking and financial system;
            (9) as of the date of enactment of this Act, the stress 
        tests conducted by the Board of Governors are not designed to 
        reflect the physical risks or transition risks posed by climate 
        change;
            (10) the Board of Governors--
                    (A) has the authority to take into account the 
                potentially systemic impact of climate-related risks on 
                the financial system; and
                    (B) should develop new analytical tools with longer 
                time horizons to accurately assess and manage the risks 
                described in subparagraph (A); and
            (11) the Climate-Related Market Risk Subcommittee of the 
        Commodity Futures Trading Commission has identified the 
        importance of researching ``climate-related `sub-systemic' 
        shocks to financial markets and institutions in particular 
        sectors and regions of the United States''.

SEC. 3. DEFINITIONS.

    In this Act:
            (1) Bank holding company.--The term ``bank holding 
        company'' has the meaning given the term in section 102(a) of 
        the Financial Stability Act of 2010 (12 U.S.C. 5311(a)).
            (2) Board of governors.--The term ``Board of Governors'' 
        means the Board of Governors of the Federal Reserve System.
            (3) Climate science leads.--The term ``climate science 
        leads'' means--
                    (A) the Administrator of the National Oceanic and 
                Atmospheric Administration;
                    (B) the Administrator of the Environmental 
                Protection Agency;
                    (C) the Secretary of Energy;
                    (D) the Administrator of the National Aeronautics 
                and Space Administration;
                    (E) the Director of the United States Geological 
                Survey;
                    (F) the Secretary of the Interior; and
                    (G) the head of any other Federal agency that the 
                Board of Governors determines to be appropriate.
            (4) Covered entity.--The term ``covered entity'' means--
                    (A) a nonbank financial company or bank holding 
                company that has not less than $250,000,000,000 in 
                total consolidated assets; and
                    (B) a nonbank financial company or bank holding 
                company--
                            (i) that has not less than $100,000,000,000 
                        in total consolidated assets; and
                            (ii) with respect to which the Board of 
                        Governors determines the application of 
                        subparagraph (C) of section 165(i)(1) of the 
                        Financial Stability Act of 2010 (12 U.S.C. 
                        5365(i)(1)), as added by section 6 of this Act, 
                        is appropriate--
                                    (I) to--
                                            (aa) prevent or mitigate 
                                        risks to the financial 
                                        stability of the United States; 
                                        or
                                            (bb) promote the safety and 
                                        soundness of the company; and
                                    (II) after taking into 
                                consideration--
                                            (aa) the capital structure, 
                                        riskiness, complexity, 
                                        financial activities, and size 
                                        of the company, including the 
                                        financial activities of any 
                                        subsidiary of the company; and
                                            (bb) any other risk-related 
                                        factor that the Board of 
                                        Governors determines to be 
                                        appropriate.
            (5) Nonbank financial company.--The term ``nonbank 
        financial company'' has the meaning given the term in section 
        102(a)(4)(C) of the Financial Stability Act of 2010 (12 U.S.C. 
        5311(a)(4)(C)).
            (6) Physical risks.--The term ``physical risks'' means 
        financial risks to assets, locations, operations, or value 
        chains that result from exposure to physical climate-related 
        effects, including--
                    (A) increased average global temperatures;
                    (B) increased severity and frequency of extreme 
                weather events;
                    (C) increased flooding;
                    (D) sea level rise;
                    (E) ocean acidification;
                    (F) increased severity and frequency of heat waves;
                    (G) increased frequency of wildfires;
                    (H) decreased arability of farmland; and
                    (I) decreased availability of fresh water.
            (7) Surveyed entity.--The term ``surveyed entity'' means a 
        nonbank financial company supervised by the Board of Governors, 
        or a bank holding company, that--
                    (A) has total consolidated assets of not less than 
                $10,000,000,000; and
                    (B) is not a covered entity.
            (8) Technical development group.--The term ``Technical 
        Development Group'' means the Climate Risk Scenario Technical 
        Development Group established under section 4.
            (9) Transition risks.--The term ``transition risks'' means 
        financial risks that are attributable to climate change 
        mitigation and adaptation, including efforts to reduce 
        greenhouse gas emissions and strengthen resilience to the 
        impacts of climate change, including--
                    (A) costs relating to--
                            (i) international treaties and agreements;
                            (ii) Federal, State, and local policies;
                            (iii) new technologies;
                            (iv) changing markets;
                            (v) reputational impacts relevant to 
                        changing consumer behavior; and
                            (vi) litigation; and
                    (B) a loss in the value, or the stranding, of 
                assets due to any of the costs described in clauses (i) 
                through (vi) of subparagraph (A).
            (10) Value chain.--The term ``value chain''--
                    (A) means the total lifecycle of a product or 
                service, both before and after production of the 
                product or service, as applicable; and
                    (B) may include the sourcing of materials, 
                production, and disposal with respect to the product or 
                service described in subparagraph (A).

SEC. 4. CLIMATE RISK SCENARIO TECHNICAL DEVELOPMENT GROUP.

    (a) Establishment.--The Board of Governors shall establish a 
technical advisory group to be known as the Climate Risk Scenario 
Technical Development Group.
    (b) Membership.--
            (1) Composition.--The Technical Development Group shall be 
        composed of 10 members--
                    (A) 5 of whom shall be climate scientists; and
                    (B) 5 of whom shall be economists, with expertise 
                in either the United States financial system or the 
                risks posed by climate change.
            (2) Selection.--The Board of Governors shall select the 
        members of the Technical Development Group after consultation 
        with the climate science leads.
    (c) Duties.--The Technical Development Group shall--
            (1) provide recommendations to the Board of Governors 
        regarding the development of, and updates to, the climate 
        change risk scenarios under section 5;
            (2) after the establishment of the climate change risk 
        scenarios under section 5, determine the financial and economic 
        risks resulting from those scenarios;
            (3) make any final work product and any data sets or other 
        inputs used in the development of the final work product, 
        publicly available; and
            (4) provide technical assistance to covered entities in 
        assessing physical risks or transition risks.
    (d) Inapplicability of Federal Advisory Committee Act.--The Federal 
Advisory Committee Act (5 U.S.C. App.) shall not apply with respect to 
the Technical Development Group.

SEC. 5. DEVELOPMENT AND UPDATING OF CLIMATE CHANGE RISK SCENARIOS.

    (a) In General.--
            (1) Initial development.--Not later than 1 year after the 
        date of enactment of this Act, the Board of Governors, in 
        coordination with the climate science leads, and taking into 
        consideration the recommendations of the Technical Development 
        Group, shall develop 3 separate climate change risk scenarios 
        as follows:
                    (A) One scenario that assumes an average increase 
                in global temperatures of 1.5 degrees Celsius above 
                pre-industrial levels.
                    (B) One scenario that assumes an average increase 
                in global temperatures of 2 degrees Celsius above pre-
                industrial levels.
                    (C) One scenario that--
                            (i) assumes the likely and very likely 
                        average increase in global temperatures that 
                        can be expected, taking into consideration the 
                        extent to which national policies and actions 
                        relating to climate change have been 
                        implemented, as of the date on which the 
                        scenario is developed, or on which the scenario 
                        is updated under paragraph (2), as applicable; 
                        and
                            (ii) does not take into consideration 
                        commitments for policies and actions relating 
                        to climate change that, as of the applicable 
                        date described in clause (i), have not been 
                        implemented.
            (2) Updates.--After the initial development of the climate 
        change risk scenarios under paragraph (1), the Board of 
        Governors, in coordination with the climate science leads, and 
        taking into consideration the recommendations of the Technical 
        Development Group, shall update those scenarios once every 3 
        years.
            (3) International coordination.--In developing and updating 
        the 3 scenarios required under this subsection, the Board of 
        Governors shall take into consideration analytic tools and best 
        practices developed by international banking supervisors 
        relating to climate risks and scenario analysis in an effort to 
        develop consistent and comparable data-driven scenarios.
            (4) Recommendations.--If the Technical Development Group 
        determines that the average increase in global temperatures 
        described in subparagraph (A) or (B) of paragraph (1) is no 
        longer scientifically valid, the Technical Development Group 
        may recommend that the Board of Governors, in coordination with 
        the climate science leads, update the average increase in 
        global temperatures described in the applicable subparagraph to 
        reflect the most current assessment of climate change science.
    (b) Considerations.--In developing and updating each of the 3 
scenarios required under subsection (a), the Board of Governors, in 
coordination with the climate science leads, shall account for physical 
risks and transition risks that may disrupt business operations across 
the global economy, including through--
            (1) disruptions with respect to--
                    (A) the sourcing of materials;
                    (B) production; and
                    (C) the disposal of products and services;
            (2) changes in the availability and prices of raw materials 
        and other inputs;
            (3) changes in agricultural production and with respect to 
        food security;
            (4) direct damages to fixed assets;
            (5) increases in costs associated with insured or uninsured 
        losses;
            (6) changes in asset values;
            (7) impacts on--
                    (A) aggregate demand for products and services;
                    (B) labor productivity;
                    (C) asset liquidity; and
                    (D) credit availability;
            (8) mass migration and increases in disease and mortality 
        rates;
            (9) international conflict, as such conflict relates to 
        global economic activity and output; and
            (10) changes in any other microeconomic or macroeconomic 
        condition that the Board of Governors, in coordination with the 
        climate science leads, determines to be relevant.

SEC. 6. CLIMATE-RELATED ENHANCED SUPERVISION FOR CERTAIN NONBANK 
              FINANCIAL COMPANIES AND BANK HOLDING COMPANIES.

    Section 165(i)(1) of the Financial Stability Act of 2010 (12 U.S.C. 
5365(i)(1)) is amended--
            (1) in subparagraph (B)(i), by inserting ``except as 
        provided in subparagraph (C)(ii)(I),'' before ``shall 
        provide''; and
            (2) by adding at the end the following:
                    ``(C) Biennial tests required.--
                            ``(i) Definitions.--In this subparagraph--
                                    ``(I) the term `capital 
                                distribution' has the meaning given the 
                                term in section 225.8(d)(4) of title 
                                12, Code of Federal Regulations, as in 
                                effect on the date of enactment of this 
                                subparagraph;
                                    ``(II) the term `capital policy' 
                                has the meaning given the term in 
                                section 225.8(d)(7) of title 12, Code 
                                of Federal Regulations, as in effect on 
                                the date of enactment of this 
                                subparagraph; and
                                    ``(III) the terms `climate science 
                                leads' and `covered entity' have the 
                                meanings given those terms in section 3 
                                of the Climate Change Financial Risk 
                                Act of 2021.
                            ``(ii) Tests.--
                                    ``(I) In general.--Subject to the 
                                other requirements of this clause, the 
                                Board of Governors, in coordination 
                                with the appropriate primary financial 
                                regulatory agencies and the climate 
                                science leads, shall conduct biennial 
                                analyses in which each covered entity 
                                is subject to evaluation, under an 
                                adverse set of conditions, of whether 
                                that covered entity has the capital, on 
                                a total consolidated basis, necessary 
                                to absorb financial losses that would 
                                arise under each climate change risk 
                                scenario developed under section 5 of 
                                the Climate Change Financial Risk Act 
                                of 2021.
                                    ``(II) Initial tests.--With respect 
                                to each of the first 3 analyses 
                                conducted under subclause (I)--
                                            ``(aa) the covered entity 
                                        to which such an analysis 
                                        applies shall not be subject to 
                                        any adverse consequences as a 
                                        result of the analysis; and
                                            ``(bb) the Board of 
                                        Governors shall--

                                                    ``(AA) not later 
                                                than 60 days after the 
                                                date on which the Board 
                                                of Governors completes 
                                                each such analysis, 
                                                make a summary of the 
                                                analysis publicly 
                                                available; and

                                                    ``(BB) submit a 
                                                copy of the results of 
                                                the analysis to the 
                                                Committee on Banking, 
                                                Housing, and Urban 
                                                Affairs of the Senate 
                                                and the Committee on 
                                                Financial Services of 
                                                the House of 
                                                Representatives.

                                    ``(III) Climate risk remediation 
                                plan.--
                                            ``(aa) In general.--Except 
                                        with respect to the first 
                                        analysis conducted under 
                                        subclause (I), each covered 
                                        entity shall, before being 
                                        subject to an analysis under 
                                        that subclause, submit to the 
                                        Board of Governors a 
                                        remediation plan with respect 
                                        to climate risk planning 
                                        (referred to in this subclause 
                                        as a `climate risk remediation 
                                        plan'), which shall be based on 
                                        the results of the most 
                                        recently conducted analysis of 
                                        the covered entity under that 
                                        subclause.
                                            ``(bb) Contents.--Each 
                                        climate risk remediation plan 
                                        required under item (aa) shall 
                                        include--

                                                    ``(AA) a capital 
                                                policy with respect to 
                                                climate risk planning; 
                                                and

                                                    ``(BB) qualitative 
                                                and quantitative 
                                                targets for balance 
                                                sheet and off-balance 
                                                sheet exposures, and 
                                                other business 
                                                operations, that remedy 
                                                vulnerabilities 
                                                identified in the most 
                                                recently conducted 
                                                analysis of the 
                                                applicable covered 
                                                entity under subclause 
                                                (I).

                                            ``(cc) Rejection.--Except 
                                        as provided in subclause 
                                        (II)(aa), the Board of 
                                        Governors may object to a 
                                        climate risk remediation plan 
                                        submitted by a covered entity 
                                        under item (aa) if the Board of 
                                        Governors determines that--

                                                    ``(AA) the covered 
                                                entity has not 
                                                demonstrated a 
                                                reasonable plan to 
                                                maintain capital above 
                                                each minimum regulatory 
                                                capital ratio on a pro 
                                                forma basis under the 
                                                adverse set of 
                                                conditions described in 
                                                subclause (I);

                                                    ``(BB) the climate 
                                                risk remediation plan 
                                                is otherwise not 
                                                reasonable or 
                                                appropriate;

                                                    ``(CC) the 
                                                assumptions and 
                                                analysis underlying the 
                                                climate risk 
                                                remediation plan, or 
                                                the methodologies and 
                                                practices that support 
                                                the climate risk 
                                                remediation plan, are 
                                                not reasonable or 
                                                appropriate; or

                                                    ``(DD) the climate 
                                                risk remediation plan 
                                                otherwise constitutes 
                                                an unsafe or unsound 
                                                practice.

                                            ``(dd) General distribution 
                                        limitation.--If the Board of 
                                        Governors, under item (cc), 
                                        objects to a climate risk 
                                        remediation plan submitted by a 
                                        covered entity under item (aa), 
                                        the covered entity may not make 
                                        any capital distribution, other 
                                        than a capital distribution 
                                        arising from the issuance of a 
                                        regulatory capital instrument 
                                        eligible for inclusion in the 
                                        numerator of a minimum 
                                        regulatory capital ratio.''.

SEC. 7. SUB-SYSTEMIC EXPLORATORY SURVEY.

    (a) Development of Survey.--The Board of Governors, in consultation 
with the Comptroller of the Currency and the Board of Directors of the 
Federal Deposit Insurance Corporation, shall develop an exploratory 
survey to assess--
            (1) the ability of surveyed entities, including 
        agricultural banks, community banks, and other financial 
        institutions with a significant concentration of business 
        activities in certain geographical areas or industries, to 
        withstand each climate risk scenario developed under section 5; 
        and
            (2) how surveyed entities plan to make adaptations to the 
        business models and capital planning of those entities in 
        response to the risks presented in each climate change risk 
        scenario developed under section 5.
    (b) Administration of Survey.--
            (1) Initial administration.--
                    (A) In general.--Not later than 1 year after the 
                completion of the first analysis under subparagraph (C) 
                of section 165(i)(1) of the Financial Stability Act of 
                2010 (12 U.S.C. 5365(i)(1)), as added by section 6 of 
                this Act, the Board of Governors shall administer the 
                survey developed under subsection (a) to each surveyed 
                entity.
                    (B) Assessment and report.--Not later than 18 
                months after the date on which the Board of Governors 
                completes the administration of the survey under 
                subparagraph (A), the Board of Governors shall--
                            (i) assess the responses to the survey; and
                            (ii) publicly release a report that 
                        summarizes the results of the survey, which 
                        shall include the analysis of the Board of 
                        Governors regarding whether the planned actions 
                        of the surveyed entities to which the survey 
                        was administered, in the aggregate--
                                    (I) are plausible; and
                                    (II) would be effective.
            (2) Subsequent administration.--
                    (A) In general.--After the release of the report 
                required under paragraph (1)(B)(ii), the Board of 
                Governors shall, on a biennial basis, administer to 
                each surveyed entity the survey developed under 
                subsection (a).
                    (B) Subsequent report.--Not later than 180 days 
                after the date on which each survey administered under 
                subparagraph (A) is completed, the Board of Governors 
                shall publicly release a report that summarizes the 
                results of the survey, which shall include the analysis 
                described in paragraph (1)(B)(ii).
    (c) Effect of Survey Participation.--
            (1) In general.--With respect to a surveyed entity to which 
        any survey under this section is administered--
                    (A) subject to paragraph (2), the entity shall not 
                be subject to any adverse consequence on the basis of a 
                response provided by the entity to the survey; and
                    (B) in any report released with respect to the 
                survey, the Board of Governors may not identify any 
                individual response submitted by the entity to the 
                survey.
            (2) Rule of construction.--Nothing in paragraph (1)(A) may 
        be construed to preclude the Board of Governors from pursuing 
        an enforcement action against a surveyed entity because of a 
        violation discovered by the Board of Governors during an 
        examination of the surveyed entity that is independent of a 
        survey administered under this section.

SEC. 8. FINANCIAL STABILITY OVERSIGHT COUNCIL.

    (a) In General.--The Financial Stability Oversight Council shall 
establish a committee of the Council that shall support the Council in 
identifying risks to, and in responding to emerging threats to, the 
stability of the United States financial system as a result of climate 
change.
    (b) Responsibilities.--
            (1) Committee.--The committee established under subsection 
        (a) shall, not later than 1 year after the completion of the 
        first analysis required under subparagraph (C) of section 
        165(i)(1) of the Financial Stability Act of 2010 (12 U.S.C. 
        5365(i)(1)), as added by section 6 of this Act, and in 
        consultation with the Office of Financial Research, submit to 
        Congress an assessment of the risk posed by climate change to 
        the efficiency, competitiveness, and stability of the United 
        States financial system as a whole.
            (2) Council.--For each year after the year in which the 
        assessment required under paragraph (1) is submitted, the 
        Financial Stability Oversight Council shall include in the 
        annual report required under section 112(a)(2)(N) of the 
        Financial Stability Act of 2010 (12 U.S.C. 5322(a)(2)(N)) an 
        update to that assessment.
    (c) Composition.--The committee established under subsection (a) 
shall be composed of--
            (1) the Chairman of the Board of Governors;
            (2) the Secretary of the Treasury;
            (3) the Comptroller of the Currency;
            (4) the Chairperson of the Board of Directors of the 
        Federal Deposit Insurance Corporation;
            (5) the Chairman of the Securities and Exchange Commission;
            (6) the Chairperson of the Commodity Futures Trading 
        Commission; and
            (7) any other voting or nonvoting members that the 
        Financial Stability Oversight Council determines to be 
        appropriate.
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