But the main challenge is the sheer volume of feedback the agency has received on these issues. While many investors, outside groups and Democratic lawmakers are in favor of the rules, the agency has faced intense pushback, too. The opposition likely will lead to legal challenges, which have the potential to delay implementation even after the final rule is released.
Working in the agency’s favor: a growing consensus among investors, regulators and companies around the world that climate change poses substantial financial risks that merit additional clarity.
“I don’t see that slowing down,” said Kristina Wyatt, senior vice president of global regulatory disclosure at carbon accounting company Persefoni, who previously was a senior counsel for climate and environmental, social and governance at the SEC.
Climate guidance
The three major banking regulators over the last year proposed near-identical guidance that lays out how they expect major U.S. banks—with more than $100 billion in assets—to manage their exposure to climate change (Climatewire, Dec. 5, 2022).
The proposal makes clear that the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. want the largest lenders to assess and limit their exposure to climate impacts and the clean energy transition.
That’s the case, the FDIC said, because climate change poses a “clear and significant risk to the U.S. financial system and, if unmitigated, may pose a near-term threat to safe and sound banking and financial stability.”
Each agency issued its own request for comment. While the OCC and FDIC’s comment periods ended in February and June, respectively, the Federal Reserve’s won’t wrap up until next month.
The next step for these regulators will be working through the comments and releasing a final version of the guidance to make clear future expectations.
Fed scenario analysis
The Fed also is set to do something else—kicking off its first-ever exercise meant to gauge major banks’ preparedness for the financial realities of a warming world.
Central bank officials said in September that beginning in 2023 it would require the country’s six largest banks to undergo “pilot climate scenario analysis,” which are meant to provide clarity into how the lenders are thinking about climate-fueled risks (Climatewire, Sept. 30, 2022).
Fed officials have emphasized that the exercise would not have direct consequences for the lenders, which include Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co.
Still unknown, however, are when the tests will begin and what they might entail. The Fed said the exercise would end in late 2023, but other details are still up in the air.
Some outside experts expect the Fed will design several climate scenarios, such as a future in which no meaningful steps are taken to curb global warming. The banks then would assess how their balance sheets would perform in those hypothetical situations.
CFTC
The Commodity Futures Trading Commission may also get it in on the action.
The agency, which regulates U.S. derivatives markets, said in June it plans to take a closer look at the $1 billion voluntary carbon market that allows companies to offset their planet-warming emissions by investing in green projects.
CFTC Chair Rostin Behnam has acknowledged the markets’ capacity for fraud and other abusive practices as companies race to green their operations and reputations—and in some cases purchase offsets that don’t result in the emissions reductions they advertise.
What Behnam has not said is how the agency might get involved. But the agency held a daylong event in June to gather insight from experts and it issued a formal request for public comment (Climatewire, June 3, 2022).
The comment period closed in August.
Though the CFTC hasn’t provided additional information about how it’s thinking about the issue, Phillips Policy Consulting founder Phillips, a former director at Citizens for American Progress and attorney at the FDIC, said he expects the agency would release a proposal that builds off the public input.
“The question is, are they going to just tackle the offset market, or are they going to tackle the problem of offsets themselves,” Phillips said.
Reprinted from E&E News with permission from POLITICO, LLC. Copyright 2023. E&E News provides essential news for energy and environment professionals.
