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Keeping you in-the-know on environmental, social and governance developments

Acting Comptroller of the Currency Michael J. Hsu issued commentary Monday intended to “help board members promote and accelerate improvements in climate risk management practices at their banks.” Hsu offered five questions that he suggests bank Board members ask their senior management teams to prepare for financial risks posed by climate change, as well as finding new opportunities.

Hsu’s questions are:

  1. What is our overall exposure to climate change?
  2. Which counterparts, sectors, or locales warrant our heightened attention and focus?
  3. How exposed are we to a carbon tax?
  4. How vulnerable are our data centers and other critical services to extreme weather?
  5. What can we do to position ourselves to seize opportunities from climate change?

These are good questions and can be applied beyond banks. Hsu also provides some great commentary and insight, such as:

… precise and confident responses should be met with healthy skepticism. Honest responses should prompt additional questions, rich dialogue, discussions about next steps, and management team commitments for action at future board meetings.

Boards will naturally want to know how material the exposure is, as that will inform the magnitude of needed adjustments or other actions. You will ask, ‘Is our exposure manageable?’ In contrast to most exposure-related questions, the answer here cannot be meaningfully summed up in a single number.

… banks can and should engage in what I call ‘small s’ scenario testing— that is, asking more granular ‘what if?’ questions that directly affect parts of a bank’s portfolio. For banks with strong risk management capabilities, this is bread-and-butter stuff. 

Identifying those borrowers and sectors most likely to see deterioration in their ability to repay or in their collateral values under potential physical and transition risk scenarios is a critical first step to prudently managing climate risk.

He also flagged that more information is on the way from OCC: “We expect to issue framework guidance by the end of this year, to be followed next year with detailed guidance for each risk area.”

A new Moody’s report complements Hsu’s questions by offering surprising statistics on physical risks (property and asset loss exposure) from climate change across a number of industries. In addition, as Dave Lynn blogged on, the SEC issued a second round of comment letters “focusing mostly on asking for additional information and analysis, rather than requesting specific disclosures in the future, or seeking amendments to prior periodic reports.” Which is generally aligned with Hsu’s questions as well.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile