We submitted comments to the Office of the Comptroller of the Currency (OCC) on their Principles for Climate-Related Financial Risk Management for Large Banks on February 14th. Our comments commend the OCC’s draft principles for comprehensively integrating climate risk considerations across the activities of large US banks. We also draw attention to several key challenges and tensions that the principles surface.
Climate-related financial risk assessment can impact social and economic equity
Incorporating climate concerns into bank risk management is important, but can also lead to inequitable social and economic impacts. The potential for adverse impacts arises from the simple fact that managing climate-related financial risk is not the same thing as building community-level resilience to climate change. Climate-related financial risk management protects business costs, revenue streams, and investments from the adverse impacts of climate change. Community-level risk management focuses instead on building the resilience and adaptation capacity of households and infrastructure to those same climate impacts.
When it comes to physical climate hazards like hurricanes or wildfires, strategies for managing financial and community-level risks can end up in conflict. Put simply, protecting money can mean making money harder to get.
For instance, if a bank decides that mitigating its climate risk means reduced lending in a region that faces a growing risk of wildfires, the people who live there could find it harder to do things like get a loan for home improvements that reduce wildfire risk. Market-driven responses — such as increasing the cost to borrow money or denying insurance coverage — can send important “risk signals'' that help steer economic decisions. For low- and middle-income consumers or communities already facing chronic disinvestment, however, these risk signals can have disproportionate impacts.
Conducting climate risk assessments is necessary to build a more resilient economy, but could potentially contribute to negative consumer impacts in highly exposed geographies — particularly for already marginalized communities. Solving this problem will be challenging, and while the OCC is not the sole agency responsible for tackling fundamental questions of equitable climate adaptation, we think that any financial regulator should foreground these concerns as they begin to address climate-related financial risks.
A lack of existing expertise means relying on private climate-service providers
Our comments also discuss important challenges associated with integrating insights drawn from climate science into banks’ current governance and risk management functions. Bank governing boards and executive teams tend to come from legacy industries and broadly lack experience in climate risk. The absence of existing in-house expertise leads many financial actors to rely on consultants and private climate-service providers as firms build capacity.
We are concerned that without better oversight and transparency, climate-related financial risk assessment from opaque private firms could make banks’ decision-making less robust. This could happen through several channels. Because many climate-service providers use proprietary black-box analytical methods, it is often impossible for outside experts to tell if the information received by banks is robust or unbiased. Similarly, the lack of transparency around scientific inputs also means that banks have no obvious way of assessing whether private climate-service providers are updating their modeling to keep pace with new data from academic researchers and public agencies.
Although we appreciate that aspects of banks’ climate-related financial risk management necessarily involve confidential information, we believe there is no reason why the climate science inputs into financial models should be private — especially because most of the underlying science is already public.
Why the OCC should care about private climate-service provision
Our concerns about climate analytics might seem technical, but without a transparent, common baseline for enabling climate science to inform financial sector needs, there is a real risk that financial institutions like banks will either feel paralyzed by uncertainty or make strategic decisions based on a false sense of precision. Given the impact that these decisions can have on the overall economy, policymakers, practitioners, and community members have an interest in knowing how these risk assessments are being undertaken and how they inform bank activity.
We think regulators like the OCC can contribute to solutions by expanding public data, improving free analysis tools, and partnering with climate experts to develop decision-making frameworks. As agencies across the government focus on climate-related financial risk, we encourage cross-agency collaboration on oversight mechanisms, standard development, and guidance for best practices. We thank the OCC for their work on this topic, and look forward to further guidance from the agency.