NYDFS Issues Climate Risk Guidance
Commentary by Steven Lofchie
The New York State Department of Financial Services issued guidance for financial institutions on the "management of material financial and operational risk from climate change."
The guidance applies to New York State-regulated banking organizations, New York State-licensed branches and agencies of foreign banking organizations and New York State-regulated mortgage bankers and mortgage servicers.
In the guidance, the NYDFS described actions that boards of directors should take to incorporate these novel and evolving risks into their existing risk management frameworks, "consistent with established risk appetites and business strategies," and established supervisory guidance. The NYDFS outlined its recommendations along three themes: (i) "physical and transition risk channels that give rise to climate-related financial risks," (ii) operational resilience to ensure an institution's safety and soundness, and (iii) compliance with all applicable consumer-protection considerations — including fair lending — as the institution adapts its risk management framework. The supervisory guidance includes recommendations on corporate governance, internal controls, risk management (including identifying, measuring, monitoring and controlling for risk) and data aggregation and reporting.
NYDFS stated that it has not established an implementation timeline, because it "recognizes that regulated organizations may need time to develop a suitable implementation strategy in the current economic and regulatory environment."
Commentary
It appears that the NYDFS is calling on banks to hire climate consultants to create detailed reports, and then have meetings at which the reports are discussed. Or, to quote the guidance:
"Regulated Organizations [must] build their capacity to assess and manage climate-related financial and operational risks, [but] they may take an iterative approach that leverages further developments in methodologies and improved data availability."
It is not at all clear what NYDFS expects, given its acknowledgement that:
- the manifestations and timing of future effects are inherently uncertain;
- the guidance does not instruct firms on the outcomes of their risk assessments or how to make credit or investment decisions to account for climate change; and
- any actions must not unduly reduce services to the communities that NYDFS views as being most likely impacted by climate changes.
On a positive note, NYDFS says it is "not setting a timeline for implementation of the Guidance expectations at this time."