The Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation confirmed that their interagency guidance on climate-related financial risk management became effective in January 2024, applying to financial institutions with more than $100 billion in total consolidated assets. The principles, finalised in October 2023, represent the most comprehensive supervisory framework for climate risk yet introduced by US federal banking regulators, establishing clear expectations for how large banks should identify, measure, monitor, and control their exposures to both physical and transition climate-related risks.
The guidance, formally titled the 'Principles for Climate-Related Financial Risk Management', establishes supervisory expectations across six key areas: governance, policies and procedures, strategic planning, risk management, scenario analysis, and data and reporting. Institutions above the asset threshold are required to demonstrate that climate-related financial risks are integrated into their existing enterprise risk management frameworks rather than treated as a standalone compliance exercise disconnected from core business decision-making. The agencies noted that the principles are consistent with standards already applied by regulators in other major jurisdictions.
GOVERNANCE AND SCENARIO ANALYSIS IN FOCUS
On governance, the agencies expect boards of directors and senior management to have a substantive understanding of their institution's exposure to climate-related financial risks and to ensure that accountability for managing those risks is clearly assigned and embedded at appropriate levels within the organisational hierarchy. This includes integrating climate considerations into strategic planning processes, such as decisions about lending concentrations in geographies or sectors particularly exposed to physical climate hazards, and long-term business model assessments that factor in potential disruption from the energy transition.
Scenario analysis features prominently in the guidance as a tool for stress-testing the resilience of balance sheets to a range of plausible climate outcomes. Covered institutions are expected to develop capabilities to assess the impact of both physical climate risks — such as flooding, wildfires, and sea-level rise affecting collateral values and borrower performance — and transition risks arising from changes in policy, technology, or market preferences that may impair the value of carbon-intensive assets or affect the creditworthiness of borrowers in affected sectors. The agencies stopped short of mandating specific scenarios, giving institutions flexibility to develop methodologies appropriate to their individual risk profiles.
Data and reporting requirements under the guidance reflect the agencies' recognition that effective climate risk management is fundamentally constrained by the availability of reliable, granular data on physical and transition exposures. Institutions are expected to make progress in developing their data collection and analytical capabilities over time, with the agencies signalling a pragmatic stance on implementation timelines given the nascent state of climate data infrastructure across the financial system and the ongoing development of industry-wide methodologies.
IMPLICATIONS FOR LARGE BANK SUPERVISION
The effective date of January 2024 means that examiners from the OCC, the Federal Reserve, and the FDIC will incorporate climate-risk considerations into supervisory assessments of covered institutions. Banks with assets in excess of $100 billion will need to demonstrate meaningful progress in embedding the six principles into their risk management practices, even as the specific supervisory expectations in any given examination continue to be shaped by each institution's size, business model, and the maturity of its existing climate risk infrastructure. The examination process will be iterative rather than demanding full compliance from the outset.
For institutions already advanced in developing their climate risk frameworks, the guidance provides a degree of regulatory clarity that had been absent in the United States relative to jurisdictions such as the United Kingdom and the European Union, which moved earlier to establish supervisory expectations in this area. For those at an earlier stage, the guidance establishes a clear set of priorities for building the governance structures, analytical capabilities, and reporting processes that the three agencies now expect to see as a baseline across the large bank sector.