A global watchdog on Wednesday proposed that, starting in January 2026, banks publish detailed information about the impact of climate change on their business to help investors and regulators check on how the risks are being managed.
The Basel Committee of banking regulators from G20 and other economies proposed climate-related disclosures by banks to make it easier for investors to also compare climate exposures at lenders, and ensure banks hold enough capital to remain stable.
The watchdog, which writes high-level rules that its members commit to applying in national handbooks, said such disclosures could help accelerate availability of climate related data, which is evolving, with patchy coverage in some cases.
“For this reason, the committee aims to incorporate a reasonable level of flexibility into a future framework,” the watchdog said in a statement.
Based on feedback from the public consultation on the proposals, the committee would decide which disclosures should be mandatory, and which could be at the discretion of national banking regulators.
The proposals provide more detailed banking sector climate-related disclosures to supplement broader corporate disclosures agreed at the global level by the International Sustainability Standards Board.
Not all countries will apply ISSB disclosures, however, and it is unclear how Basel’s disclosures would dovetail with corporate climate disclosures the European Union has finalised.
Draft U.S. corporate climate disclosures from the Securities and Exchange Commission face heavy pushback from companies which want to ditch the inclusion of so-called Scope 3 greenhouse gas emissions produced by a company’s customers.
The proposed Basel framework includes Scope 3, as well as Scope 1, covering direct emissions from a bank, and Scope 2, or indirect emissions from purchases of energy, such as for heating or cooling premises.
“Financed emissions commonly refer to the greenhouse gas (GHG) emissions associated, in the case of banks, with loans and investments, and that are part of their Scope 3 emissions,” the watchdog said. “For banks, financed emissions are often the most significant part of their total GHG emissions.”
The committee said it recognises the challenges banks may have in obtaining data from their counterparties.
Reporting by Huw Jones, Reuters
Courtesy of Dave Kovaleski, Financial Regulation News
June 20, 2022 — The Bank Policy Institute (BPI) offered feedback on the Securities and Exchange Commission’s (SEC) proposed climate disclosure policy, expressing its concerns.
The proposal would require public companies to provide a detailed financial accounting of climate-related risks, information on indirect emissions, and numerous requirements for disclosure of risk management policies and practices.
BPI officials said that many banks already voluntarily disclose climate information, adding that an overly prescriptive approach from the SEC could undermine the goal of providing useful information to investors. Further, BPI says the proposal fails to account for the interaction with the prudential bank regulatory framework.
“Banks share the SEC’s goal of communicating material climate risks transparently to investors and managing those risks in a prudent manner. However, the proposal’s overly detailed requirements would lead to a mountain of information that would be misleading and of little use to investors. This is particularly the case given the significant limits of climate data today. It is important to ensure that the climate-related disclosures produced are useful to investors,” Lauren Anderson, BPI senior vice president and associate general counsel, said.
While investors are increasingly seeking more information on how firms will be affected by climate-related risks, BPI says climate risk data is in the early stages of development. As such, there are significant data gaps and inaccuracies. BPI adds that data challenges are even more problematic for banks as they must rely on data from their clients to produce their climate disclosures. The approach that the SEC is taking could lead to a false sense of precision regarding climate reporting and end up misleading investors. Regulators should recognize the need for a flexible framework that will allow disclosures to improve over time.
Specifically, the proposal’s Regulation S-X financial reporting requirements are largely inoperable, will not result in useful disclosure for investors, and should be removed or, at a minimum, narrowed, said BPI.
Also, they state that the Scope 3 emissions disclosure requirements are overly broad as drafted and should be narrowed to focus on registrants’ material targets or goals. Further, the risk management aspects of the proposal should be modified so that they do not front-run, and are consistent with, ongoing efforts by the federal banking regulators.
In addition, the proposal’s board and management governance provisions should be modified to be less prescriptive and not place outweighed importance on one potential risk factor that public companies must manage. Among other recommendations, BPI says the proposal’s cost-benefit analysis likely under-estimates costs by several degrees and has not demonstrated the purported benefits outweigh even the identified costs. Also, BPI says the proposal should not require third-party attestation of Scope 1 and Scope 2 GHG emissions disclosures.
The Changing Climate for Credit Unions
Climate change is one of the most important—if not the most important—challenges of the twenty-first century. Transformational change is necessary to confront and adapt to the increasingly severe impacts of climate change. Credit unions are in unique position to aid in this transformation.
EXECUTIVE SUMMARY
Credit unions are an integral part of the U.S. consumer finance system, offering an important alternative to commercial banks and nonbank financial service providers. As a result, credit unions have an essential role to play as financial system stakeholders mobilize to address climate change and the challenges it creates, and ultimately, as the United States undertakes a transition to a net-zero carbon emission economy.
This research report offers an overview of the implication of climate change for credit unions, and recommendations for more effective climate risk management. It describes the climate-related physical and transition risks facing credit unions, the potential impact of climate change on credit unions, the current state of credit union approaches to climate change, and the opportunities available for credit unions from climate adaptation finance. It also provides concrete recommended actions that individual credit unions can take to begin to measure and mitigate the impacts of climate change on their organizations and the credit union system.
Now is the time for credit unions to double down on driving equitable financial services in our most vulnerable communities. Experience shows that credit unions most responsive to member needs during or immediately after climate crises are rewarded with member growth, visibility, and loyalty. Preparing now to cushion blows with flexible financing can be critical to the long-term sustainability of the institution and community.
This report offers an overview of the implications of climate change for credit unions, the risks facing credit unions, and the opportunities available for credit unions to adapt their strategies toward advancing climate solutions. Download the report and learn more about your credit union’s role in combating climate change.
Click here to download/read the report (login required)
Courtesy of Filene Research Institute
Courtesy of Henry Meier, Esq., SVP, General Counsel, New York Credit Union Association
Of course they do, but that’s not the appropriate question that regulators should be asking themselves. The real question is, whether or not financial regulators should mandate if how and when credit unions choose to address these challenges? My answer to this question is that credit unions should be left to address climate change in a way which best reflects a given institutions resources, risk profile, and membership base.
As luck would have it, I’m not the only one who feels this way. Earlier this week the FDIC released a draft of the principles it expects bankers to consider when addressing climate change issues. Crucially the proposed guidance only applies to institutions that have $100 billion or more in assets (yes, that’s billion with a B, Dr. Evil).
In a statement accompanying the proposal, FDIC chairman Martin J. Gruenberg explains that “all financial institutions, regardless of size, complexity, or business model, are subject to climate-related financial risks. However, smaller financial institutions, especially community banks, may lack the financial resources and expertise necessary to effectively identify and measure climate-related financial risks.”
What is true for community banks is certainly true for credit unions. After all, the small handful of institutions that will be subject to the FDIC’s framework, hold more assets then the entire credit union industry. This approach is similar to one taken by NCUA board members Hood and Hampton, who have stressed that at this point, individual credit unions are best positioned to respond to climate change without prodding by regulators.
What I like so much about the FDIC’s statement is that it underscores that you don’t have to be a climate change denier to recognize that imposing specific requirements on many financial institutions at this time would impose clear burdens without resulting in any clear benefits. Simply put, we are still years away from cost effectively identifying the cost associated with climate change on a micro level and integrating these costs into specific financial products. For example, without access to the most sophisticated computer modeling, can anyone really predict how many thirty-year mortgages are not appropriately priced given the risks posed by climate change in specific geographical areas? Imagine how much Fiserv would charge for adding this on to your core processer?
And even if we had cost effective technology in place, there are some complicated legal and policy tradeoffs that have to be considered. Most importantly there is no shortage of research indicating that the effects of climate change disproportionality impacts low-income communities. What is the best way to address climate change while at the same time ensuring that low-income communities have access to cost effective housing and basic financial services and products?
Do All Financial Institutions Have A Role To Play In Combating Climate Change?
Read the entire article here.
(Nov. 12, 2021) NCUA late last week placed the tiny Pomona Postal FCU of Pomona, Calif., into conservatorship, saying the credit union’s most recent call report shows it had 717 members and $4.2 million in assets. The 57-year-old credit union had about a 51% loan-to-share ratio, according to NCUA data … Bob Gallman, president and CEO of the Louisiana Credit Union League since 2017, has announced his retirement, effective next March; he has notched more than 45 years in the credit union system … Guidance for dealing with climate change risk management “supervisory expectations” will be released this year, the acting comptroller of the currency said this week. “We expect to issue framework guidance by the end of this year, to be followed next year with detailed guidance for each risk area,” Acting Comptroller Michael J. Hsu said. “The detailed guidance will build on a range-of-practices review that will launch this week, industry and climate groups’ input, and lessons from other jurisdictions” … Providing “relevant and timely information” specifically for examiners and financial institution practitioners is the aim of a revamped notification system announced this week by the FFIEC (which, since April, has been chaired by NCUA Chairman Todd Harper). According to the Exam Council, its “FFIEC Announcements” email notifications will be distributed to the council’s email subscribers notifying them of updates to its website and “Infobases.” Each issuance, the council said, will be designated with the word “Announcement” in the header, followed by a sequential numbering order of a four-digit year and a two-digit issuance number. See the link for more or to sign up.
LINKS:
NCUA Places Pomona Postal Federal Credit Union Into Conservatorship
Acting Comptroller Discusses Climate Change Risk
FFIEC Implements New “Announcements” Communication Tool
(Nov. 5, 2021) Climate change poses “significant challenges” to the safety and soundness of financial institutions and the stability of the financial sector more broadly, the Federal Reserve said in a statement this week. The assertion was issued in the wake of a declaration issued earlier in the week by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), as part of the international conference (the “Conference of Parties 26” or COP26) held in Glasgow, Scotland, about climate change. “A sustained global response by national authorities, the international community, and the private sector can address the financial and economic implications of climate change,” the Fed statement said … A new Office of Minority and Community Development Banking to support the FDIC’s work with minority depository institutions (MDIs), community development financial institutions (CDFIs), and other “mission-driven” banks was announced this week by the agency. The FDIC said the new office “will further promote private sector investments in low- and moderate-income (LMI) communities.”
LINKS:
(Oct. 1, 2021) Other key moments of the Harper nomination hearing included:
- Harper again endorsed third-party vendor exam authority for NCUA (which would require a statutory change). “Bank regulators have authority to go into third-party vendors; NCUA does not,” Harper said in response to questions from Sen. Jon Ossoff (D-Ga.). Harper, as he has before, called lack of that authority “a blind spot” for NCUA. He told the senator NCUA is working on a white paper on the subject that Harper will provide to Ossoff if confirmed. (NASCUS supports the agency obtaining the power over technology service providers (TSPs) that provide services to federally insured credit unions — provided that any such authority requires NCUA to rely on state examinations of such service providers where such authority exists at the state level.)
- The NCUA Board chairman indicated to Sen. Tina Brown (D-Minn.) that credit unions in all communities – large and small, urban and rural – should be cognizant of risks presented by climate change. He said NCUA must consider storms and all material risks that occur as a result of climate change, including such risks as credit unions attached to a particular industry that is facing structure changes due to climate change, or credit unions in areas of high concentration of agricultural areas where crops are affected by climate change.
- A commitment by Harper for “more specialized training” of examiners working in agricultural areas to assess risks particular to those areas, in response to comments by Sen. Kevin Cramer (R-N.D.). “One of the complaints I hear from credit unions in ag lending is ‘our [NCUA] examiners, they don’t know the particular crop; they don’t know how this farm works.’ That is something certainly I would commit to you, if confirmed, to working with you to make sure that we get more specialized training for our examiners and help in our exams in that way.”
- On repeated questions about his views of a proposal that credit unions and banks report to IRS the deposits and withdrawals made by members to determine their tax liability, Harper repeatedly answered that, while he was aware of the proposal, he hadn’t looked at it in detail and indicated he couldn’t render an opinion on it. He did say there would be administrative costs – but wouldn’t characterize how big (or small) those would be. He asked if he could get back to the panel members who inquired about it after he’s had more time to study the proposal, which has been roundly criticized by credit union industry trade groups.
(April 16, 2021) Samuel Schumach was tapped as deputy director for external affairs and communications at NCUA this week by agency board Chairman Todd Harper. Schumach previously served as legislative affairs officer for the Federal Aviation Administration (FAA). Before that, he was a media spokesperson for the CFPB and had also served as press secretary for the Office of Personnel Management (OPM), the White House Office of National Drug Control Policy, and for former Senate Majority Leader Harry Reid (D-Nev.) … Two in five of new hires (42.1%) in 2020 were people of color, and gender diversity among senior executives achieved parity last year for the first time, NCUA said this week in a report outlining the agency’s hiring practices. In its Office of Minority and Women Inclusion (OMWI) annual report, NCUA also said 188 federally insured credit unions submitted Voluntary Credit Union Diversity Self-Assessments in 2020, up 59.3% from the 118 submissions in 2019 … Federal legislation to mitigate risks related to legacy contracts that use LIBOR (London Interbank Offered Rate) will be needed, Federal Reserve General Counsel Mark Van Der Weide told a congressional hearing Thursday. He said such legislation would establish a uniform national framework for replacing LIBOR in legacy contracts that do not provide for an appropriate fallback rate. Additionally, he indicated, a statute could diminish the instance of lawsuits that he said are inevitable due to the phase out of the reference rate. A witness at the same hearing from the OCC made essentially the same points. LIBOR is scheduled to be phased out at the end of this year (meaning, no new loans or contracts are supposed to be written that use the rate). Additionally, existing “legacy contracts” (or those that are in force now and using the reference rate) have until June 2023 to discontinue the reference rate … An executive order directing federal financial regulators (including NCUA) and others to combat climate-related financial risks is being prepared by President Joe Biden (D), according to press reports this week. The order would be issued in conjunction with a “climate summit” set for next week in Washington. Among other things, the order will also reportedly direct the Treasury Department to assess climate risks to the financial system and report back within 180 days.
LINKS:
Samuel Schumach Named Deputy Director for External Affairs and Communications
NCUA Releases Office of Minority and Women Inclusion Annual Report to Congress
(March 26, 2021) Two new Federal Reserve committees will focus on the impact of climate change on financial stability, Fed Board Gov. Lael Brainard said this week, as the agency finds it “increasingly clear” that climate change could have “important implications” for the central bank in carrying out its responsibilities.
Climate change and its impact on credit union regulation was a key topic at last week’s virtual National Meeting of state regulators, sponsored by NASCUS. Brainard made her remarks in a speech this week to a New York-based group focusing on addressing climate change and other issues.
Brainard said the new Supervision Climate Committee (SCC) will address the microprudential side by strengthening the agency’s ability to consider climate change risk and develop an “appropriate program to ensure the resilience of our supervised firms” to the risks posed.
The second committee – the Financial Stability Climate Committee (FSCC) – will, Brainard said, identify, assess, and address climate-related risks to financial stability through a macroprudential approach (one that considers the potential for “complex interactions across the financial system,” she said). In that regard, she added, it will complement the work of the SCC.
“Microprudential and macroprudential objectives are often aligned,” she said. “For example, consistent disclosures are important not only to enable individual financial firms to measure and manage their exposure to climate-related financial risks, but also to support financial stability more broadly by helping the market to accurately price that risk. Given the importance of consistent, comparable, and reliable disclosures to financial stability and prudential objectives, mandatory disclosures are ultimately likely to be important.”
She also said the Fed is investing in new research, data, and modeling tools to support the work of the committees. “In light of the high uncertainty inherent in estimating climate-related shocks, scenario analysis may be a helpful tool to assess the effects on the financial system under a wide range of assumptions,” Brainard said. “Climate scenario analysis identifies climate-related physical and transition risk factors facing financial firms, formulates appropriate stresses of those risk factors under different scenarios, and measures their effects on financial intermediaries and the financial system.”
LINK:
FRB Gov. Lael Brainard: “Financial Stability Implications of Climate Change”
(Feb. 12, 2021) The New York State Department of Financial Services (NYDFS) was cited, again, this week for its position on financial risk through climate change in a report issued by the San Francisco Federal Reserve Bank.
In the report — which outlined the efforts state, national and international financial regulators have taken to identify, assess and manage climate-related financial risks – the New York agency’s actions on the issue are outlined (namely, that it has asked financial institutions under its supervision to incorporate climate-related risks in its exams).
In November, the international Financial Stability Board (FSB) released a report that also noted the New York efforts in its report The Implications of Climate Change for Financial Stability. That report noted that the state advised financial institutions to integrate financial risks from climate change into their governance, risk-management and business strategy frameworks. That direction was reportedly the first time a state supervisory agency for financial institutions has taken such an approach.
New York took additional action on the issue this week, writing to banks that they may receive credit under the New York Community Reinvestment Act (NYCRA) for certain activities intended to address and mitigate the effects of climate change. The agency also provided a non-exhaustive list of activities that may qualify for CRA credit under state rules.
LINK:
SF Fed Report: Climate Change Is a Source of Financial Risk
NYDFS letter on CRA credit for climate change mitigation efforts
(Feb. 12, 2021) A continuing partnership with state supervisors “will be invaluable” to ensuring a viable dual-chartering credit union system, NCUA Board Chairman Todd Harper said in a webinar Thursday, his first public event as new leader of the agency
During the 90-minute event – billed as the “Chairman’s Webinar” – Harper outlined his priorities as chairman, which include a variety of other issues.
“My whole heart is in the NCUA, its vital work, and the mission of the credit union system,” he said. In particular, he said he looked forward to working with credit unions and other key stakeholders in responding to the economic fallout caused by pandemic, positioning the agency to meet future challenges, and strengthening NCUA’s commitment to consumer financial protection.
More specifically, regarding his priorities, he cited capital and liquidity, consumer financial protection, cybersecurity, and diversity, equity and economic inclusion. “In the months ahead, these priorities will guide the agency’s decisions,” he said. He also said credit unions, in order to compete, must be able to safely and securely use technology to deliver member services and adopt financial innovations – but emphasize security and equity in providing those services.
“We must also strengthen the agency’s consumer financial protection program to ensure that all consumers receive the same level of protection regardless of their financial provider of choice,” he said.
Referring to state regulators, the new NCUA chairman said the supervisors play an important role in ensuring safety and soundness. He said the dual chartering system is a “critical asset that helps the credit union system be dynamic and thriving.” A continuing partnership between NCUA and state regulators, as the credit union system addresses the economic fallout from the pandemic, he said, “will be invaluable.”
In other comments, Harper said:
- CUs must live up to their mission of providing access for their members to credit and savings – including members of modest means. ”NCUA must do all that it can, then, to advance economic equity and justice,” he said.
- In the aftermath of the killing of George Floyd last summer, the credit union system has an obligation to address racial justice directly and chart a better course for the nation’s future. “We especially must enhance support for minority deposit institutions, low-income credit unions and community development credit unions that are “on the front lines of serving the underserved “– as well as compliance with fair lending laws to counter discrimination in lending.
- Future challenges, such as climate change, must also be addressed (since, he said, it disproportionately affects underserved communities).
Harper also noted issues on the horizon for the agency, which include finalizing the capitalization of interest rule, developing a rule to phase in the current expected credit loss (CECL) accounting rule, and exploring the impact of additional economic stimulus approved by Congress on net worth ratios.
In comments from NCUA staff during a questions and answer period of the event, it was noted that the rollout of the new MERIT exam program is delayed until the second half of this year. The impact of the coronavirus crisis was specifically pointed to as the cause.
Also, according to NCUA Director of Examination and Insurance Myra Toeppe (in response to a question submitted by a participant), a decision on an insurance premium has not yet been reached. She said the agency would be finalizing the equity ratio for the insurance fund first, and presenting that at the NCUA Board meeting next week. “We need to get the calculation finalized and then move on from there,” she said.
LINK:
Presentation: NCUA Chairman’s Feb. 11, 2021 webinar
(Nov. 25, 2020) Physical risks posed to financial stability by climate change – even in the short term — include a sharp fall in asset prices and an increase in uncertainty, according to a new report issued this week by an international group of financial regulators.
However, the group said, another key risk to financial stability could be a disorderly transition to a low-carbon economy, brought about by an “abrupt change in (actual or expected)” public policy not anticipated by market participants, including that due to the increased materialization of physical risks, as well as technological developments.” The report — The Implications of Climate Change for Financial Stability – was released by the Financial Stability Board (FSB), a Basel, Switzerland-based organization made up of national authorities responsible for financial stability in 24 countries and jurisdictions, and others. FSB is chaired by Federal Reserve Board Vice Chair for Supervision Randal Quarles.
The report comes after the credit unions and banks in New York in October were advised by their state regulator to integrate financial risks from climate change into their governance, risk-management and business strategy frameworks, reportedly the first time a state supervisory agency for financial institutions has taken that approach.
The New York State Department of Financial Services said the guidance followed similar direction given to state-regulated insurers. October’s action, the agency indicated, would ensure that all of its regulated entities are managing climate risks. The letter was advisory only; it outlined no supervisory actions to be taken by the agency.
LINKS:
The Implications of Climate Change for Financial Stability