October 29, 2020
SUPERINTENDENT LACEWELL ANNOUNCES DFS EXPANDS EFFORTS TO ENSURE FINANCIAL SERVICES INDUSTRY MANAGES FINANCIAL RISKS FROM CLIMATE CHANGE
Department Advises New York-Regulated Financial Institutions to Integrate Financial Risks from Climate Change into their Governance Frameworks, Risk Management Processes, and Business Strategies
Follows Similar Guidance to New York-Regulated Insurers, Ensuring That All New York-Regulated Entities Manage Climate Risks
Superintendent of Financial Services Linda A. Lacewell today announced that the Department of Financial Services (DFS) has broadened its efforts to ensure that all of the Department’s regulated entities prudently manage the financial risks from climate change.
“Climate change is happening now, and we have to take steps to manage the financial risks now,” said Superintendent Lacewell. “We want to ensure that every institution is managing its own individual risks from climate change, which is critical for the safety and soundness of the financial services industry. By working with the industry and engaging in a dialogue on this serious issue, we are creating a roadmap for a more sustainable future.”
DFS outlined its expectations related to addressing climate risks in a letter to all New York-regulated banking organizations, branches and agencies of foreign banking organizations, mortgage bankers and servicers, and limited purpose trust companies (regulated organizations), as well as New York-regulated non-depositories (other than New York regulated mortgage bankers, mortgage servicers, and limited purpose trust companies), including New York regulated money transmitters, licensed lenders, sales finance companies, premium finance agencies, and virtual currency companies (regulated non-depositories).
Today’s action follows DFS’s similar guidance to the insurance industry.
DFS was the first American state or federal regulator to set a holistic set of expectations for the insurance industry on managing the financial risks from climate change. This guidance is again the first time an American state or federal regulator has set a holistic set of expectations on climate for banking organizations, asset management functions of banks and limited purpose trust companies, and virtual currency firms.
Guidance to Regulated Organizations
DFS expects that all regulated organizations start integrating the financial risks from climate change into their governance frameworks, risk management processes, and business strategies. For example, regulated organizations should designate a board member, a committee of the board (or an equivalent function), as well as a senior management function, as accountable for the organization’s assessment and management of the financial risks from climate change. This should include an enterprise-wide risk assessment to evaluate climate change and its impacts on risk factors, such as credit risk, market risk, liquidity risk, operational risk, reputational risk, and strategy risk.
In addition, DFS expects that all regulated organizations start developing their approach to climate-related financial risk disclosure and consider engaging with the Task Force for Climate-related Financial Disclosures framework and other established initiatives when doing so.
Guidance to Regulated Non-Depositories
DFS expects that all regulated non-depositories conduct a risk assessment of the physical and transition risks of climate change, whether directly impacting them, or indirectly due to the disruptive consequences of climate change in the communities they serve and on their customers, such as business disruptions, out-migrations, loss of income and higher default rates, supply chain disruptions, and changes in investor and consumer sentiments, and start developing strategic plans, including an outline of such risks, the impact on their balance sheets, and steps to be taken to mitigate such risks.
Recent studies estimate that the Bitcoin network’s consumption of energy on an annual basis represents a carbon footprint equivalent to New Zealand’s carbon footprint, and equivalent to Venezuela’s electricity usage. As virtual currency use grows, regulated virtual currency firms should consider the type of energy source utilized to mine, store, trade, and trace virtual currencies and consider how the energy usage fits in with their sustainability goals.
A Proportionate Approach
In this process, DFS recommends that regulated organizations and regulated non-depositories take a proportionate approach that reflects their exposure to the financial risks from climate change and the nature, scale, and complexity of their businesses.
DFS is developing a strategy for integrating climate-related risks into its supervisory mandate and will engage with regulated organizations and regulated non-depositories, as well as work and coordinate with the Department’s U.S. and international counterparts, to develop effective supervisory practices, as well as guidance and best practices to mitigate the financial risks from climate change within the financial services industry.
Read a full copy of the letter on the DFS website.