With recent actions by the Biden Administration, regulators from the United States and abroad and the financial services (FS) industry highlighting climate risk as a high priority, it is clear that the bar for regulatory expectations and industry best practices is rapidly rising. In order to not fall behind—as well as address increasing client and investor demands for climate-friendly options—financial institutions should have a well-coordinated, enterprise-wide response.
The first few months of the Biden Administration have seen an acceleration of government and regulatory action on climate risk, in part with the President’s appointment of the first-ever Special Presidential Envoy for Climate and an early Executive Order (EO) directing climate actions across his cabinet. In addition, the Treasury Department, Federal Reserve (Fed) and Securities and Exchange Commission (SEC) have announced or appointed senior advisors to focus on climate and other environmental, social and governance (ESG) matters. These announcements are likely just the start of the federal agencies’ renewed climate initiatives, which, according to recent comments from agency leadership, could include new disclosure requirements and climate stress tests.
The conversation around climate risk and the need for action by the FS industry is by no means new, but it is becoming abundantly clear that, if they have not done so already, financial institutions should begin executing on their plans to integrate climate risk into their core business strategy. There is no consensus approach as yet, and some FS firms are waiting for concrete requirements from regulators before they act. But firms may soon find it to be a competitive imperative to incorporate climate risks into products and services, such as temperature-goal-aligned portfolios, and to disclose their own carbon footprints and reduction goals. In addition, although the federal regulators have not yet reached the stage of consulting on potential new requirements, they are likely to ramp up enforcement of existing rules and follow precedents set by regulators in the UK, EU and certain US states to further raise the bar for US financial institutions. These expectations may very well align with actions firms would be wise to take for their own benefit, such as integrating climate risk into their modeling infrastructure in anticipation of scenario analysis exercises.
This Regulatory Brief outlines key actions taken over the last several months and provides our perspective on how financial institutions should be responding and preparing for the future.
A publication of PwC's financial services regulatory practice