ISDA and SIFMA Warn Against Quantifying Climate Risks

In comments on the Federal Reserve Board's ("FRB") draft "Principles for Climate-Related Financial Risk Management for Large Financial Institutions," ISDA and SIFMA (the "Associations") cautioned against prematurely incorporating climate-related financial risks into capital and liquidity adequacy assessments.

The Associations asserted that banks are still in the beginning stages of embedding climate-related financial risks into their existing risk management frameworks, and that the tools to measure and quantify climate-related financial risk, particularly long-term transition and physical risks, are only just emerging. The Associations urged the FRB to avoid implementing an overly prescriptive risk management framework that contradicts the FRB's stated intent to support a principles-based approach to the integration of climate-related risk. Further, the Associations argued that banks should have the flexibility to develop risk management frameworks tailored to their specific business models and risk profiles.

The Associations asked for additional clarity regarding the application of the draft principles to foreign banking organizations, and urged the FRB to coordinate with both domestic and international regulators to establish consistent, harmonized supervisory principles across jurisdictions.