Vice Chairman of the Federal Reserve deals with climate-related financial risks – finance and banking

United States: Federal Reserve Vice Chairman addresses climate-related financial risks

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Highlights

  • Federal Reserve Board (FRB) vice chairman for oversight, Randal K. Quarles, who is also chairman of the Financial Stability Board (FSB), gave a speech at the Venice International Climate Conference on July 11, 2021, where he addressed two “Fundamental Components “The FSB’s recently published Climate Roadmap: Disclosures and Data.
  • In addition, on July 7, 2021, the FSB published its Roadmap for Addressing Climate-Related Financial Risks, which supports the international coordination of climate-related financial risks in a variety of ways.
  • Quarles’ comments on the Climate Roadmap are another very strong indicator that national financial regulators in the US and around the world are assessing the impact of climate change on the financial services industry, as well as the role of regulators in ensuring institutions and industries are exposed to climate-related risks correctly disclose.

Federal Reserve Board (FRB) vice chairman for oversight, Randal K. Quarles, who is also chairman of the Financial Stability Board (FSB), gave a speech at the Venice International Climate Conference on July 11, 2021, where he addressed two “Fundamental Components “The FSB’s recently published Climate Roadmap: Disclosures and Data.

The FSB is an international body that oversees the global financial system and makes recommendations. On July 7, 2021, the FSB published its roadmap for managing climate-related financial risks (the Climate Roadmap). The climate roadmap supports international coordination of climate-related financial risks in a number of ways, such as:

  • Promotion of relevant initiatives in standardization bodies, the Network for Greening the Financial System (NGFS) and other international organizations
  • Presentation of relevant ongoing and planned international work in one place, which should help identify gaps that need to be closed by further work, limit overlaps and promote synergies
  • outline how the FSB can serve as a forum to discuss cross-sectoral and systemic issues and to agree on how to proceed
  • Contribute to broader international policy reflection by facilitating communication with the G20, G7 and the 26th United Nations Climate Change Conference (COP26)

As part of the FRB and FSB’s efforts to improve decision-making, transparency, and cross-border consistency, the FSB-sponsored Task Force on Climate-Related Financial Disclosures (TCFD) has “led to greater recognition of importance”. climate-related financial risk and comparable and reliable disclosure, “said Vice-Chair Quarles. The TCFD has identified four key elements that should guide any disclosure framework: governance, strategy, risk management, and metrics and targets.

Quarles, reflecting the consensus that a uniform global base standard for climate-related disclosures is required, stated: “Globally consistent and comparable corporate-level disclosures by non-financial companies, banks, insurance companies and asset managers are becoming increasingly important to market participants and tax authorities as a means of delivery of information necessary to assess and manage risk. ”Additional trends Quarles identified include“ an important baseline that focuses on the one-sided materiality – or financial risk, climate change could have on a particular company – Focused on the TCFD recommendations [the FSB’s] Members already use the TCFD recommendations as a basis for their own requirements or guidelines. “In order to achieve greater cross-border consistency, international organizations are expected to develop additional international standards for climate-related reporting.

Quarles noted that, in addition to disclosures, “international initiatives are needed to improve data quality and fill data gaps, and ultimately create a foundation of comprehensive, consistent and comparable data for the global monitoring and assessment of climate-related financial risks.” Quarles’ comments reflect the climate roadmap’s focus on “building a foundation of comprehensive, consistent and comparable data for monitoring climate-related financial risks around the world.” To help industry and financial regulators better understand financial risks, Quarles noted that “better information is needed about the underlying physical risks, including the types of extreme weather events that most threaten the balance sheets of households, businesses and financial institutions.” . “

Quarles also noted that data gathered through increased climate-related financial reporting requirements will allow national regulators to more closely monitor regulatory risk. According to Quarles, “the FSB is studying how to assess the extent to which climate-related risks could be transferred or amplified by different financial sectors, including the interdependence of banks and insurance companies.”

Insights and considerations

Quarles’ comments on the Climate Roadmap are another very clear indicator that national financial regulators in the US and around the world are assessing the impact of climate change on the financial services industry, as well as the role of regulators in at least ensuring that institutions and industries are climate-related Disclose risks correctly. At the individual institution level, the basic components of Quarles in terms of disclosure and data have already been implemented. More and more large financial institutions are offering deposit and loan products that target green businesses and programs. Institutions find that it is not enough just to market their traditional banking products and services as environmentally friendly, but that they also need to have the data – and in many cases an independent review – to verify that the environmentally friendly banking products are in fact the requirements meet the climate targets for which the products were marketed.

In addition to the technical data and verification, the institutes are also examining a possible regulatory review of their climate-related products and services. For decades, institutions have been aware of the risk of potentially fraudulent products in the area of ​​consumer financial services. With the increase in environmentally friendly products being marketed to institutional investors, many of which have essential ingredients that are climate sensitive, increased attention is being paid to the potential for fraudulent marketing materials targeting non-consumer customers. While many large institutional investors, funds, private equity groups, etc., in general, would not assume that they need to be protected from fraudulent marketing practices, in the area of ​​climate change – where institutional clients make their deposits with financial institutions based on specific representations of climate-friendly products , and these customers make statements to their own constituents about their climate-related efforts – there is at least some risk of increased scrutiny of a financial institution’s marketing practices for allegations of potentially misleading statements and disclosures.

The climate roadmap and the speech by Deputy Chairman Quarles are further indications that financial institutions should integrate the risks of climate change into their overall operational strategy in a risk-conscious manner, but also globally.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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