Federal Reserve proposes climate principles for large banks

On Friday the Board of Governors of the Federal Reserve System (the Fed) proposed its Principles for Climate-Related Financial Risk Management for Large Financial Institutions. 

The principles, drafted in consultation with the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC), would provide consistent guidance to large banks for managing financial risks related to climate change and are similar to principles drafted by the OCC and FDIC. 

A board memo about the principles provided examples of climate related risks, including the following: 

“Technological innovations in the production, storage, and transport of energy could decrease the value of assets dependent on older technologies, resulting in mark-to-market losses on a banking organization’s trading portfolios or reduced cash flow of certain borrowers.”

Such risks put consumers’ retirements and other investments at risk. Banks that continue to finance fossil projects may suffer significant losses as the world moves away from carbon energy and the value of those projects plummets. The Intergovernmental Panel on Climate Change (IPCC)’s report in April 2022 projected up to $4 trillion in stranded fossil fuel assets as the world works to address climate change. Which means continued financing of fossil fuel projects is bad for bank profitability and shareholder value. These risks should be accounted for.

U.S. PIRG and other advocates delivered a petition in October signed by 60,888 people, urging the Fed to require big banks to take climate change seriously by issuing climate principles.

Mike Litt, PIRG’s consumer campaign director, joins coalition partners calling on the Fed to issue climate principles.Photo by Yazan Aboushi | TPIN

The Fed’s proposed climate principles are long overdue and should be finalized swiftly. A 60-day public comment period will begin after the proposals are published in the Federal Register.