FSOC Staff Reports Progress on Addressing Climate-related Financial Risk
Commentary by Steven Lofchie
Financial Stability Oversight Council (FSOC or Council) staff reported progress in advancing recommendations by the Climate-related Financial Risk Advisory Committee ("CFRC") on "actions to address capacity building, disclosure, data, and assessment and mitigation of risks."
In the 2023 Progress Report, the staff noted developments since the release of the FSOC October 2021, Report on Climate-Related Financial Risk, in areas such as data and methodological enhancements, climate scenario analysis, capacity building and disclosure, data gap resolution, risk assessment and mitigation.
Among the highlights from the Progress Report:
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Data and Methodological Enhancements:
- The Office of Financial Research ("OFR") introduced the Joint Analysis Data Environment ("JADE") platform to improve data access, computing tools and analytical software for financial stability research.
- CFRC working groups are working to ensure data and analytical tools integrated into JADE, and to facilitate data sharing among member agencies.
- The Federal Insurance Office proposed data collection from insurers to assess potential disruptions in private insurance coverage in climate-vulnerable regions.
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Climate Scenario Analysis:
- CFRC's created a climate scenario analysis working group, consisting of FSOC member staff, to explored the use of scenario analysis by regulators and firms.
- CFRC Risk Assessment Working Group continues to develop a framework to identify and assess climate-related financial risks, including preliminary risk indicators for banking, insurance and financial markets.
- Individual agencies, such as OCC, FDIC and the Federal Reserve, released draft principles for climate-related financial risk management for large financial institutions.
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Policy Recommendations and Actions:
- FIO's report, "Insurance Supervision and Regulation of Climate-Related Risks," posited that there could be major disruptions in homeowners' insurance coverage due to climate change impacts.
- The Federal Reserve launched a pilot CSA exercise for six large bank holding companies.
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Priority Areas and Future Work:
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Cross-cutting issues, including data coordination and risk assessment, will remain a focus area.
- The intersection of physical risk, real estate, banking, insurance and household finances emerged as a shared area of interest and future work for the CFRC.
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CFRC reported that it will continue to function as a platform for interagency coordination and capacity building on climate-related financial risks. The staff also acknowledged the importance of real estate in strengthening resilience to climate-related risks and the potential impact on the broader financial system and real economy.
SEC Chair Gary Gensler emphasized before the FSOC meeting that the "SEC has no role as to climate risk itself. But we do have an important role in helping to ensure that public companies make full, fair, and truthful disclosure about the material risks they face." Chair Gensler explained that the SEC "proposal about climate-related disclosure [is intended] to bring consistency and comparability to such disclosures."
Commentary
The staff Progress Report lauds its own efforts at coordinating government entities to build a climate-related financial risk framework, yet seems to assume there's a magical solution to the central requirement - the need for accurate and meaningful data - upon which any framework must rest. What if the data turns out to be wholly inadequate for the stated purpose? See, e.g., FRB Publishes Details of Planned Climate Scenario Analyses at Big Banks ("The FRB states in its climate risk exercise, "Challenges [in conducting this analysis] include the forward-looking nature of climate risks and the lack or relevant historical data; complex feedback effects that are difficult to mode; and uncertain links between climate change and economic and financial outcomes.") Put differently, a significant challenge to such an analysis is that there is not an established relationship between the input (i.e., climate change) and the output (i.e., bank risk)."