Climate-Related Financial Risk (Docket NCUA-2023-0045)

June 26, 2023

Melane Conyers-Ausbrooks
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428

Re: NASCUS Comments on Climate-Related Financial Risk (Docket NCUA-2023-0045).

Dear Ms. Conyers-Ausbrooks:

The National Association of State Credit Union Supervisors (NASCUS)[1] submits the following in response to the National Credit Union Administration’s (NCUA’s) Request for Information (RFI) on Climate-Related Financial Risk.[2]NCUA’s RFI seeks input on current and future climate and natural disaster risks to the credit union system and the National Credit Union Share Insurance Fund (SIF) and recommendations on the development of potential regulatory or supervisory guidance or requirements for credit union management of climate-related financial risks. We commend NCUA for approaching these important issues thoughtfully by issuing an RFI rather than moving directly to a proposed rulemaking.

NASCUS and our members understand changing climate conditions, severe weather events, and changing public sentiments will continue to affect credit unions and impact the communities they serve. We appreciate issues related to climate present risks to credit unions and the SIF and agree those risks should be evaluated and mitigated as appropriate. In many respects, these issues do not represent novel challenges: credit unions have long managed weather-related risks to collateral and disruptions to operations, as well as the effects that shifting economic realities can have on communities and industries (collectively, the “Physical” and “Transition” risks[3]). We recognize however that worldwide regulatory and supervisory bodies are reevaluating the framework with which these risks have traditionally been managed and the prisms through which they have been viewed.

NCUA can play a pivotal role in helping the credit union system refine and mature its climate-risk assessment capabilities and climate-risk mitigation strategies. As NCUA aptly documented in the RFI and its study of credit union exposure to climate-related risk, climate-related challenges are increasing in both frequency and intensity.4 

However, NCUA must also consider the uncertainty of future climate-related public policy developments, trends related to consumer preference, fidelity to financial inclusion of communities with limited access to financial services, and the limiting nature of credit union common bond requirements. For these reasons, NCUA should proceed with guidance designed to educate rather than regulate and designed for maximum flexibility. Preferably, whatever guidance is developed approaches climate risk as an element of existing risk mitigation frameworks.

Maximum Flexibility

The exact relationship between exposure of any specific credit union to extreme weather events and shifting public policy will be very fact specific to that credit union, its products and services, its community, and its field of membership. As but one example, a credit union serving a modestly sized community prone to extreme weather events may have limited opportunity to mitigate the direct balance sheet risks presented by climate events, but a greater ability to build operational resiliency. This hypothetical credit union is positioned differently from a hypothetical credit union operating in the same community, but with a diverse geographic/membership base presenting different opportunities for mitigation.

In addition, the communities affected by climate risk themselves may have limited opportunities and access for financial services. As a matter of policy, we should tread cautiously so as not to inadvertently deprive entire communities of access to the financial services sector.

Another important consideration is the potential for NCUA directives related to climate risk conflicting with state laws that seek to ensure access to financial services for certain industries/customers. In those cases, potential requirements to mitigate climate risk or transition credit union services away from certain industries could be in direct conflict with state laws forbidding state-chartered financial institutions from taking climate risk into consideration in making service decisions with their member/customer base. In other cases, state law is moving proactively to mitigate climate-related risks and imposing state-specific mitigation standards and strategies. Again, the burden of conflicting/divergent federal guidance would fall on state credit unions and state regulators.

Evolving Standards

Another challenge faced by regulators in developing guidance, principles, or standards, and by industry addressing climate-related risk within a more prescriptive framework is the lack of standardized metrics, nomenclature, policy, and procedures. The resulting lack of consensus across these areas complicates the process of risk assessment and risk mitigation. Particularly for a credit union operating across different jurisdictions, exposed to different weather-related events, or serving multiple climate-sensitive industries, conforming an enterprise-wide policy to an inflexible framework creates severe impediments to effective risk management.

Conclusion

As we noted in the opening of our letter, credit unions and regulators have experience managing the Physical Risks related to extreme weather events. Generally, addressing climate-related disruption can, in a broad sense, be incorporated within existing regulatory and supervisory frameworks. Additional guidance should provide as much flexibility as possible to ensure the greatest adaptability and customization by credit unions. In our view, the most effective near-term efforts from NCUA should be focused on enhancing and maturing climate-related knowledge among credit union stakeholders. These efforts would certainly include workshops and educational events and providing examples of best practices.

In addition, NCUA could work with state regulators and third parties to promote innovation in products and services for credit unions to help their members with the members’ transition to more climate sustainable practices and equipment. Whether a farming community, industrial town, or community prone to extreme weather, credit unions are of their communities. Ensuring a path to service in those communities is maintained should be of the highest priority.

Sincerely,
Brian Knight
President and CEO

[1]NASCUS is the professional association of the nation’s forty-six state and territorial credit union regulatory agencies that charter and supervise over 1900 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State-chartered credit unions hold over half of the $2.2 trillion assets in the credit union system and are proud to represent nearly half of the 134 million members.

[2] “Climate-Related Financial Risk” 88 No. 79 Fed. Reg. 25028 (April 25, 2023).

[3] Id. at 25092.

[4] See “Estimating Credit Union Exposure to Climate-Related Physical Risks.”