Climate Risk Scorecard
Significant Progress
Some Progress
No Progress
Not Applicable
About the FHFA
Significant Progress
Reasoning
The FHFA has affirmed climate as a risk to the financial system. Since last year’s scorecard, Director Sandra Thompson and Chair of the Climate Change and ESG Steering Committee Daniel Coates have made additional public remarks acknowledging the systemic nature of climate-related financial risk:
Director Thompson testimony before the House Committee on Financial Services on ensuring that regulated entities identify and manage emerging climate-related risks (July 2022)
Director Thompson remarks at the National Association of Federally-Insured Credit Unions’ 2022 Congressional Caucus regarding identification of communities who are most at risk from climate-related risk (September 2022)
Chair Coates keynote at the Climate Adaptation Forum (September 2022)
Chair Coates remarks on NAFCU segment regarding climate-related financial risks faced by the housing finance market (September 2022)
Chair Coates remarks at the FHFA Econ Summit, which focused on climate risk in the housing industry (November 2022)
Director Thompson statement at Financial Literacy and Education Commission public meeting regarding the Climate Resilience Group’s report and research (November 2022)
Chair Coates remarks on agency initiatives to address climate risk at the Risk Management Association’s Climate Risk Consortia (December 2022)
Chair Coates remarks at Ceres webinar on federal financial regulator progress on climate-related financial risk (December 2022)
Additionally, the FHFA included in its 2023 Annual Performance Plan identifying options for incorporating climate change into regulated entity governance as a strategic objective. The agency’s 2022 Performance and Accountability Report also included climate risk as a key management challenge and priority.
Next Steps
Continue to publicly acknowledge the systemic nature of climate-related financial risk in agency speeches and publications.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
We assessed the extent to which the agency has publicly affirmed the systemic nature of the climate crisis individually in official agency communications (outside of the FSOC report).
Significant Progress
Reasoning
As discussed in last year’s scorecard, the FHFA established the Climate Change and ESG Steering Committee, which works to ensure that the regulated entities are accounting for climate-related risk and oversees the regulated entities’ work related to ESG and reporting. The steering committee consists of eight agency-wide working groups staffed with experts from across the agency, and Daniel Coates was appointed as chair and executive sponsor. The FHFA also formed an additional working group within its Climate Change and ESG Steering Committee in 2023 that will focus on measuring GHG emissions. The working groups coordinate the agency’s climate-related activities and work with regulated entities, members of FSOC’s Climate-Related Financial Risk Advisory Committee (CFRAC), and other stakeholders.
Staff members from these working groups were also assigned to work with CFRAC; the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), which includes workstreams related to scenario analysis, taskforce capacity building, and supervision; and the Office of Financial Research’s Climate Data and Analytics Hub (Climate Hub) pilot. The staff assigned to the Climate Hub participate with the pilot’s user acceptance testing, which will provide FHFA increased access to climate data and analytics. The FHFA also joined the Financial Literacy and Education Commission in July 2022 and announced its membership in FEMA’s Mitigation Framework Leadership Group in May 2023.
From conversations with the FHFA, Ceres also understands that the Climate Change and ESG Steering Committee is continuing outreach to assess external vendors for climate risk data and analytics, including climate models and catastrophe models. In August 2022, the FHFA hired a geographer and acquired GIS software to support climate data analysis and research. Fannie Mae is also using the climate risk analytics firm Jupiter to assess physical risk for its residential mortgage portfolio.
In December 2022, an internal, agency-wide climate and ESG newsletter was established, and is released monthly with information on news, current events, educational training resources accessible to staff, and upcoming external climate programs. FHFA also informed Ceres that five staff members will participate in the Climate and Environmental Risk Online Course held May 11 to June 29 by the Bank for International Settlements and the Network for Greening the Financial System.
Additionally, following FHFA’s guidance, both Fannie and Freddie created board-level committees overseeing development and implementation of climate risk management strategy, as well as management-level committees responsible for climate risk oversight, escalation, and decision-making.
Next Steps
Continue work within the Climate Change and ESG Steering Committee’s eight working groups, NGFS, CFRAC, FLEC, and other interagency climate risk working groups.
Continue internal education on climate-related financial risks, including through trainings, best practices, and examiner resources.
Continue supporting expansion of the GSEs’ internal climate risk management capacity.
Support expansion of the FHLBanks’ internal climate risk management capacity.
Establish and publicly announce an internal plan for how the FHFA will address climate-related financial risk to its regulated entities, including goals and priorities.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
We assessed the extent to which the agency has expanded and established sustainable, well-resourced capacity “to define, identify, measure, monitor, assess, and report on climate-related financial risks and their effects on financial stability.” (FSOC 1.3).
This includes investments in staffing, appointing senior staff, forming internal working groups and/or committees, staff training, investments in technological and analytical capabilities, and financial resources provided to staff working on these issues.
Significant Progress
Reasoning
A report by the FHFA’s Office of Inspector General found that the FHFA had begun the process of identifying climate-related risks to its supervised entities but recommended further action to implement these plans and integrate consideration of these risks into its policies, including developing methodologies, timelines, and milestones for each Climate Change and ESG Steering Committee working group.
In its 2023 Annual Performance Plan, the FHFA listed six strategies to achieve its objective of incorporating climate risk into regulated entity governance: (1) convene meetings to share information on the Climate Change and ESG Steering Committee and working groups’ progress, (2) conduct research on climate risks to the housing finance system, (3) build on FHFA and regulated entity experiences with natural disaster responses, especially impacts on vulnerable communities, (4) assess Fannie Mae and Freddie Mac’s (GSEs) processes and structures to determine climate-related risks and opportunities, (5) assess responses to FHLBank horizonal survey on climate risks and efforts to address those risks, and (6) improve data collection, analysis, and disclosure. The Annual Performance Plan further noted that the agency will develop an internal climate research agenda and oversee GSEs’ development of a climate research agenda.
The FHFA’s 2022 Performance and Accountability Report also included climate risk as a key management priority, noting its intention to provide training to examination staff and issue climate risk examination guidance for evaluating the incorporation of climate risk into GSEs and FHLBanks decision-making. The FHFA further stated that it will seek opportunities to provide greater incentives for investments in climate resiliency and energy efficiency through its regulated entities. Similarly, the FHFA’s 2022 Annual Report to Congress includes a section on agency progress pertaining to climate risk and ESG.
The FHFA also has a designated webpage for its Climate Change and ESG Steering Committee. The webpage provides updates reflecting the committee’s work, including interagency groups joined, climate events hosted, statements and remarks by FHFA leadership, agency documents on climate risk, and steps taken by regulated entities.
Next Steps
Continue updating its Climate Change and ESG website with completed and ongoing climate risk-related activities, including those recommended in this section.
Explicitly describe in its Strategic Plan how climate will be integrated into standard risk-based supervision and expectations, and outline objectives and an approximate timeline.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
We assessed the extent to which the agencies have made information and data available to the public.
“[I]nclude descriptions of their activities related to climate-related financial risks in their annual reports and consider incorporating climate-related financial risks in relevant risk reports that they publish, as appropriate ... [and] within the context of each member’s mandate and authority.” (FSOC 1.4).
“[M]ake climate-related data for which they are the custodians freely available to the public, as appropriate and subject to any applicable data confidentiality requirements.” (FSOC 1.5).
Significant Progress
Reasoning
As noted in last year’s scorecard, in 2021 the FHFA updated the multifamily loan purchase caps for the GSEs, allowing loans to finance energy or water efficiency improvements with affordable units at or below 60% of area median income to be classified as mission-driven. That same year, Freddie Mac also published a white paper assessing the disparate impacts of natural disasters to low- to moderate-income (LMI) renters, and the FHFA included a summary of stakeholder recommendations in its climate RFI synopsis on priority actions to address risks to vulnerable communities.
In June 2022 Fannie Mae released a three-year Equitable Housing Finance Plan, which includes a climate analytics pilot with quarterly targets and outcomes to empower communities with data on their risk of facing climate-related events. Fannie Mae expects these analytics to inform an approach to mitigate climate risks, working with the Army Corps of Engineers, in these communities by using predictive modeling to assess the risk of climate events such as flooding, wildfires, and heat waves. The effort initially targets Memphis and Baltimore communities that are most likely to experience climate risks with communities of color and will directly engage with local officials to determine areas of geographic risk and overlay underserved communities. Fannie Mae expects to outline lessons learned from community engagement and expand the pilot to additional LMI communities and communities of color in 2023 and 2024.
Freddie Mac likewise released a three-year Equitable Housing Finance Plan in June 2022, which seeks to incentivize climate resiliency property improvements within multifamily properties in areas vulnerable to climate risk. The plan includes several initiatives to accomplish these goals, including: sustainability and climate impact financial education; capability tools; how to assess properties for resiliency; and product development. In its April 2023 plan update, Freddie Mac described additional tactics to integrate climate risk into its efforts, such as updating term sheets to include rehab loan eligibility, evaluating green financing tools’ ability to decarbonize, identifying and developing resiliency standards, and implementing those resiliency standards.
In January 2023, Freddie Mac also updated its Duty to Serve Underserved Markets Plan to incorporate climate risk and resiliency for underserved markets and vulnerable populations. This will include researching state programs and policies, developing a framework for securitizing energy-efficiency single-family mortgages to encourage lenders, automating capture of energy-efficiency data, updating lender applications and training, and purchasing GreenCHOICE Mortgages to support financing for energy-burdened LMI borrowers.
As part of its Climate Change and ESG Steering Committee, the FHFA established the Consumer Protection Working Group on which the deputy director of FHFA’s Division of Housing Mission and Goals is a voting member. In July 2022, this working group developed an internal framework for evaluating climate-related policy and programmatic changes on consumers, including on historically underserved communities.
In its 2023 Annual Performance Plan, the FHFA stated that it would build on its own and its regulated entities’ experiences with natural disaster responses, especially impacts on vulnerable communities, with particular consideration of the effects of climate change on vulnerable communities. Similarly, the FHFA’s 2022 Fall Econ Summit on Climate Risk included a panel focused on academic research of the climate impacts to vulnerable communities. Further, the FHFA presented four research papers in 2023 that will enhance the agency’s understanding of the climate-related financial risk impacts on vulnerable communities.
The FHFA has also informed Ceres that it is an active participant in the Financial Literacy and Education Commission (FLEC), which the agency joined in July 2022. At the FLEC’s November 2022 public meeting, Director Thompson stated that the FHFA would like to participate in the FLEC’s report and research on climate vulnerable communities, noting the importance of efforts to help those most financially impacted by natural disasters.
Next Steps
Increase interagency coordination on assessing risk to financially vulnerable communities, provide updates, and publish findings, such as advances made with the FLEC Climate Resiliency Group.
Summarize and document the various streams of work underway related to financially vulnerable communities.
Consider the policy implications of climate-related financial risk supervision and regulation on LMI and BIPOC communities.
Provide recommendations and guidance to regulated entities to assess climate impacts on vulnerable and underserved communities, including resilience and adaptation standards, climate redlining, climate impacts on multi-family markets, etc.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
We assessed the extent to which the agency - consistent with its mandate and authorities and its membership in the Financial Literacy and Education Commission (FLEC) - has assessed and made progress on addressing climate risks to financially vulnerable communities.
“[C]oordinate the analyses of climate-related financial risks ... with their efforts to understand impacts on communities and households. FSOC members should, as applicable, integrate these analyses into the[ir annual] public reports.” (FSOC 1.6).
“[E]valuate climate-related impacts and the impacts of proposed policy solutions on financially vulnerable populations when assessing the impact of climate change on the economy and the financial system.” (FSOC 1.8).
“[FLEC members should] analyze and understand the impact of climate change on the financial well-being of financially vulnerable populations. FSOC members that are also FLEC members should actively participate in this analysis.” FLEC members include the Fed, OCC, FDIC, NCUA, SEC, CFTC, and FHFA. (FSOC 1.9).
Significant Progress
Reasoning
Considering the number of staff at the FHFA when compared to other federal financial regulators, the breadth of research the agency has undertaken on climate-related risk is notable. As discussed in last year’s scorecard, the FHFA issued an RFI on Climate and Natural Disaster Risk Management in 2021 to solicit public input on data availability, gaps, and linkages; physical and transition risk; FHFA’s supervisory and regulatory responsibilities, financial disclosures; affordability; and fairness and equity. In March 2022, the agency provided a synopsis of responses to the climate RFI. However, no updates on actions the FHFA will take as a result of this data collection have been made public.
As noted above, the FHFA’s Climate Change and ESG Steering Committee and working groups work on various aspects of climate-related risk to the housing finance market. The Data and Research Working Group is tasked with collecting data and developing plans to resolve data and methodological gaps, and staff are currently engaged in various climate-related research projects. From conversations with the FHFA, Ceres understands the agency has procured climate-related data from several sources and is making headway to procure additional data. The FHFA also indicated that it hired a geographer and acquired GIS software to support climate data analysis and research August 2022, and is continuing outreach to assess external vendors for climate risk data and analytics, including climate models, catastrophe models, and more disaggregated and accurate data on property location and flood damage. Fannie Mae is also using the climate risk analytics firm Jupiter to assess physical risk for its residential mortgage portfolio.
Additionally, staff members on the Climate Change and ESG working group are assigned to work with FSOC’s CFRAC on workstreams related to scenario analysis, data requirements and infrastructure, and risk assessment; the Network for Greening the Financial System on workstreams related to scenario analysis, taskforce capacity building, and supervision; and the Office of Financial Research’s Climate Data and Analytics Hub pilot on user acceptance testing, which will provide FHFA increased access to climate data and analytics. The FHFA also joined the Financial Literacy and Education Commission in July 2022 and FEMA’s Mitigation Framework Leadership Group in April 2023.
In November 2022, the FHFA’s Fall Econ Summit focused on climate risk in the housing industry included discussions from industry experts, GSE representatives, and academic papers. The FHFA has indicated to Ceres that the Fall Econ Summits focusing on climate risk will now be annual. In March 2023, the FHFA held a series of public roundtables that considered the mission and operational efficiencies of the FHLBanks, including a session on climate resiliency and risk management considerations. Fannie Mae is also partnering with housing industry leaders, such as the Insurance Institute for Business & Home Safety and the National Institute of Building Sciences, developing a roadmap on mitigation investment to better prepare the U.S. housing industry for climate resiliency.
The FHFA also presented multiple research papers relating to climate risk in 2023. At the American Real Estate Society’s Annual Spring Meeting and Conference, one of the biggest academic housing finance conferences in the U.S., FHFA researchers presented and received feedback on their findings following investigations of home prices after natural disasters using MLS data from areas impacted by Hurricane Ian, as well as property-level FEMA damage assessments. At the Association of Environmental and Resource Economists’ Annual Summer Conference, FHFA researchers presented a paper that investigated the relationship between household energy bills and their monthly mortgage payments, evaluating expenses relative to the cost of a mortgage and how climate may impact future costs.
FHFA researchers also attended the special issue Housing Sustainability and Affordability Conference to present two papers. The first presented a literature review on natural disasters, climate change, and current efforts to construct metrics analyzing the impact of climate risks on the economy. The FHFA expects this research to improve its abilities to take climate risk into consideration for its regulated entities. The second paper investigated the housing price impacts of New York City’s L-train subway shutdown following damage from Hurricane Sandy. The research found that sales prices for properties near the L-train fell after the service disruption was announced, suggesting that there are broad implications for climate-related effects on local infrastructure that may have spillover even years after the event.
Under FHFA’s guidance the GSEs are also involved in research and data collection on how physical and transition risk affect housing and mortgage risk. For example, both Fannie and Freddie plan to collect property-level elevation information in the Uniform Appraisal Dataset, a standardized industry dataset for appraisal information collected electronically through the Uniform Collateral Data Portal. In their 2022 10-Ks, Fannie and Freddie both describe the potential climate-related financial risks they have identified and how these risks affect housing and mortgage risk. Additional research produced by Fannie and Freddie from previous years, including on flood risk and resiliency standards, is available on their respective websites.
Next Steps
Provide updates on the agency’s climate risk-related data collection and research.
Provide easily searchable access to white papers, blogs, infographics, etc. that demonstrate data collection and research on climate-related financial risk.
Invest in high-quality, asset-level data on climate-related risks, including flood, wildfire, wind, and sea-level rise.
Issue an RFI on available data, models, and other information that could be used, in addition to existing data, to inform the FHFA on climate-related risks to the housing financial system, particularly the adverse effects of climate on LMI communities.
Host a panel at the FHFA fall Econ Summit focused on climate risks to and management considerations for the FHLBank system.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
We assessed the extent to which the agencies have advanced research and data collection on climate risk.
“Identify[] the data needed to evaluate the climate-related financial risk exposures of regulated entities and financial markets.” (FSOC 2.1).
“Perform[] an internal inventory of currently collected and procured data and its relevance for climate risk assessments." (FSOC 2.1).
“Develop[] a plan for procuring necessary data through data collection, data sharing arrangements and information purchased from data providers or other sources.” (FSOC 2.1).
“[F]acilitate the sharing of climate-related data across FSOC members and non-FSOC member agencies to assess climate-related financial risk, consistent with data confidentiality requirements.” (FSOC 2.2)
“[D]evelop consistent data standards, definitions, and relevant metrics ... to facilitate common definitions of climate-related data terms, sharing of data, and analysis and aggregation of data.” (FSOC 2.5)
Some Progress
Reasoning
The FHFA’s Climate Change and ESG Steering Committee established the Assessing Exposure to Climate Change Working Group to develop guidance on climate-related stress tests and scenarios to be run by the regulated entities. While there is no public progress or updates from this working group, the FHFA informed Ceres that it is continuing to work with its regulated entities to improve their understanding of physical and transition risk, and that the GSEs have developed roadmaps for climate risk scenario analysis and are engaged in developing methodologies for acute physical risk measurement and analysis.
In June 2022, FHFA staff began participation with the NGFS’ Scenario Design and Analysis workstream to enhance the agency’s understanding regarding best practices and available methodologies. Staff also attended the September 2022 NGFS Phase III scenario analysis launch event to hear recent updates on climate stress testing and scenario analysis. Likewise, FHFA staff continue to participate with FSOC’s CFRAC workstream on scenario analysis.
The FHLBanks also held a Climate Scenario Analysis and Stress Testing Symposium in June 2022 in which FHFA staff participated. The FHFA’s 2022 Fall Econ Summit on Climate Risk also included a session on climate stress testing, which included remarks from the GSEs climate officers as well as representatives from two data analytics firms.
Importantly, FHFA personnel have indicated to Ceres that they began reviewing scenario analyses to determine which types it will require the GSEs to run. The FHFA may also run its own scenarios to provide insights regarding the results its regulated entities obtain.
Next Steps
Issue an RFI to seek input on scenario analysis tools used by the GSEs, FHLBanks, or other industries to measure climate-related risks in the housing finance industry.
Design and conduct climate scenario analysis exercises with the GSEs and FHLBanks to assess safety and soundness and ability to withstand climate impacts, with scenarios that include physical and transition risks, disorderly transition, concurrent and consecutive risks, insurance gaps, impacts on multiple traditional risk categories, short- and long-term horizons, etc.
Increase capital requirements, capital buffers, and/or liquidity requirements where the results indicate insufficient levels to absorb losses.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
We assessed the extent to which the agencies have begun to assess, develop, and conduct climate scenario analyses at their supervised entities.
“[C]ollaborate with external experts to identify climate forecasts, scenarios, and other tools necessary to better understand the exposure of regulated entities to climate-related risks and how those risks translate into economic and financial impacts.” (FSOC 4.1).
“[U]se scenario analysis, where appropriate, as a tool for assessing climate-related financial risks, taking into account their supervisory and regulatory mandates and the size, complexity, and activities of regulated entities.” (FSOC 4.3).
“[C]onsider using common scenarios that build on existing work, including scenarios developed by NGFS and work at the FSB, as appropriate for the institutions and markets under consideration.” (FSOC 4.4).
Some Progress
Reasoning
In October 2022, Freddie Mac released its 2021 SASB report following FHFA guidance to align its metrics with Fannie Mae’s 2020 SASB report. Fannie Mae released its 2021 ESG report in December 2022 following FHFA guidance, and included information related to the GSE’s priority ESG topics, alignment with the SASB standard, and alignment with TCFD recommendations. Both Fannie and Freddie have additional ESG reporting available from previous years, including on green bonds and resiliency, available on their websites.
In November 2022, the FHFA organized a GHG accounting training for the GSEs with the Partnership for Carbon Accounting Financials. The FHFA’s Climate Change and ESG Steering Committee established the Reporting and Disclosures Working Group to provide guidance on the standards the GSEs and FHLBanks should meet and determine the frequency of ESG reporting, and works with the GSEs throughout development of the SASB and ESG reports. As the GSEs are under conservatorship, they cannot publish reports (including their SASB, ESG, and 10-K reports) without review and approval by the FHFA. Likewise, the FHLBank of Dallas published its 2022 ESG Report in April 2023 – this was the first such report in the FHLBank System.
Similarly, both Fannie and Freddie describe the potential climate-related financial risks they are exposed to in their 2022 10-Ks, although these filings do not quantify risks or disclose emissions data. However, the FHFA informed Ceres that the Reporting and Disclosures Working Group is engaging with the GSEs to ensure their preparedness for potential altered disclosure standards, such as the SEC’s proposed climate disclosure rule.
Next Steps
Continue to invest in high-quality, asset-level data on climate-related risks, including flood, wildfire, wind, and sea-level rise.
Collect and publicly disclose portfolio level and asset level data on climate risk.
Provide an explanation of how FHFA work in considering new disclosure needs and FHFA-directed GSE reporting will be used to improve public disclosure requirements on climate risk.
Publish working group progress updates on work with the GSEs to ensure their preparedness for potential altered disclosure standards, such as the SEC’s climate disclosure rule.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
We assessed the extent to which the agency has enhanced public reporting requirements for their regulated entities. The market is currently mispricing climate risk. The lack of consistent disclosure by entities supervised by U.S. financial regulators is an obstacle to market efficiency and to the accurate pricing of climate risk.
“[R]eview their existing public disclosure requirements and consider, as appropriate, updating them to promote the consistency, comparability, and decision-usefulness of information on climate-related risks and opportunities.” (FSOC 3.1).
“[C]onsider enhancing public reporting requirements for climate related risks in a manner that builds on the four core elements of the TCFD.” (FSOC 3.2).
“[C]onsider whether such disclosures should include disclosure of GHG emissions.” (FSOC 3.4).
“[R]eview banks’ public regulatory reporting requirements to assess whether enhancements are needed to provide market participants with information on institutions’ climate-related financial risks, taking into account a bank’s size, complexity, and activities.” (FSOC 3.7).
Significant Progress
Reasoning
While the FHFA has not yet issued supervisory guidance, its unique conservatorship relationship with the GSEs offers the opportunity to direct change in a more timely and direct manner, setting priorities and goals without needing to issue guidance or regulation. The Climate Change and ESG Steering Committee’s eight working groups regularly meet with FHFA’s regulated entities to guide their progress toward climate-related targets and measures.
The FHFA is also working with both Fannie and Freddie to update their governance structures, assigning climate risk oversight, management, and decision-making to one or more board- or management-level, establishing board goals, building out corporate leadership structure to assign climate responsibilities, and updating corporate risk strategies to include climate. For example, Freddie Mac created the cross-divisional Climate Risk Advisory Group to focus on climate risk, prioritize climate risk activities, and identify issues for escalation to senior management and the Board Risk Committee. Fannie Mae similarly assigned primary oversight of climate-related risks to the Board’s Risk Policy and Capital Committee, while the Board’s Community Responsibility and Sustainability Committee oversees development and implementation of climate risk management strategy. According to the FHFA, the FHLBanks are beginning similar governance updates.
The FHFA uses its annual Conservatorship Scorecard to communicate its priorities and expectations for the GSEs, including requirements to operate in a safe and sound manner while maintaining their goal of ensuring a reliable and affordable supply of mortgage funds, even in times of turmoil in the broader financial system. The 2023 scorecard directed the GSEs to undertake multiple initiatives on sustainability, resiliency, and integrating climate risk into risk management frameworks, which the GSEs are working on implementing in coordination with the Climate Change and ESG working groups.
Additionally, the FHFA’s 2022 Performance and Accountability Report also states that the agency “plans to issue climate risk examination guidance for evaluating the incorporation of climate risk into decision making of the Enterprises and FHLBanks.” The report also notes the agency’s intention “to seek opportunities to provide greater incentives for investments in climate resiliency and energy efficiency through its regulated entities.” The FHFA has informed Ceres that this includes arranging meetings between the GSEs and FHLBank System and other agencies and housing finance sector stakeholders, including the EPA and NAIC, to discuss energy efficiency and climate resiliency standards.
Next Steps
Provide clarity on FHFA’s efforts to address climate risk management expectations, such as including a specific section on the Climate and ESG website that explains the supervision and regulation work related to climate risk, how this work is supported by the various workstreams, and the nature of FHFA’s supervision the GSEs and FHLBanks.
Release its assessment of the climate RFI responses, and what actions FHFA will take based on its assessment.
Release its assessment of the FHLBank climate resiliency roundtable responses, and what actions FHFA will take based on its assessment.
Organize and collaborate on educational resources such as best practices, conferences, and webinars on climate risk for the GSEs and FHLBanks.
Issue supervisory guidance for the GSEs and the FHLBanks on best practices and expectations for climate-related financial risk management and resiliency standards.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
We assessed the extent to which the agencies have enhanced supervisory scrutiny of climate risk management at their supervised entities to ensure their resilience and the resilience of our financial system.
“[C]larif[y] or enhanced risk management expectations ... [and] guidance.” (FSOC 4.8).
“[R]eview[] regulated entities’ efforts to address climate-related risks." (FSOC 4.6).
“[R]eview[] existing ... guidance ... to identify where clarifications and enhancements are needed.” (FSOC 4.7).
No Progress
Reasoning
Ceres is not aware of any progress in this category.
Next Steps
Propose and issue regulation for the GSEs and the FHLBanks regarding climate-related financial risk management requirements.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
We assessed the extent to which the agencies have incorporated climate risk management expectations into their regulatory requirements for supervised entities to ensure their resilience and the resilience of our financial system.
“[C]larif[y] or enhanced risk management ... requirements.” (FSOC 4.8).
“[R]eview[] existing regulations ... and regulatory reporting to identify where clarifications and enhancements are needed.” (FSOC 4.7).
Significant Progress
Reasoning
FHFA has consistently affirmed climate as a risk to the financial system through numerous speeches and remarks publicly acknowledging the systemic nature of the climate crisis:
Former Director Mark Calabria’s remarks at the Climate and Natural Disaster Risk Management Public Listening Session (January 2021)
Former Director Calabria statement at FSOC meeting (March 2021)
Acting Director Sandra Thompson’s statement at FSOC meeting (October 2021)
Acting Director Thompson’s statement on holding Enterprises responsible for ensuring resiliency to climate risk (December 2021)
Acting Director Thompson’s remarks announcing membership in the Network for Greening the Financial System (NGFS) (May 2022)
Additionally, FHFA provided a detailed update to FSOC on its activities related to climate risk for the FSOC Report on Climate-Related Financial Risk (FSOC report), recognizing that the mortgage finance system may be exposed to climate change and natural disaster risk. In 2022, FHFA became a member of NGFS and launched the Climate Change and ESG website, which provides more detail on the working group process and areas of focus, documents FHFA’s progress, and invites the public to hold the agency accountable. Both Enterprises (Fannie Mae and Freddie Mac) have their own ESG websites that include climate sections. The agency also included the risks presented by climate change to the financial system in several agency publications, including its 2022-2026 Strategic Plan identifying climate as an objective under the strategic goal for ensuring entities’ safety and soundness.
Methodology
Recognizing that climate change poses a financial stability risk is a critical first step for all financial regulators and will send an important message to all financial market stakeholders. Such statements are particularly important, given the complex nature of climate risks and continuing ambiguities about the extent to which the issue falls under specific agency mandates.
We assessed the extent to which the agency has publicly affirmed the systemic nature of the climate crisis individually in official agency communications outside of the FSOC report.
Some Progress
Reasoning
Publicly available information suggests FHFA is conducting significant amounts of data collection and analysis. In the FSOC report, FHFA stated it is developing its climate change research agenda. This includes assessing potential data sources to assist in calculating transition costs and identifying and assessing the current and future exposure of the Enterprises and the FHL Banks to climate change and natural disasters. On its Climate Change and ESG website, the agency lists the creation of a new “Data and Research” workstream. FHFA personnel have indicated to Ceres that they are working to obtain more disaggregated and accurate data on property location and flood damage, and are determining which sources and models to use. The agency has hired a geographer and acquired GIS software to support this process.
The FHFA also issued a Request for Input on Climate and Natural Disaster Risk Management at the Regulated Entities (climate RFI) to solicit public input on data availability, gaps, and linkages, physical and transition risk, FHFA’s supervisory and regulatory responsibilities, financial disclosures, affordability, and fairness and equity. In March 2022, the agency provided a synopsis of responses to the climate RFI. Importantly, FHFA personnel have indicated to Ceres that they began reviewing scenario analyses to determine which types it will require its regulated entities to run. FHFA may also run its own set of scenarios to provide insights regarding the results its regulated entities obtain.
The Enterprises have also begun research into how climate risk impacts their sectors. Freddie Mac published several white papers assessing how resiliency can be increased to mitigate natural disasters and applied in conjunction to address resiliency most effectively, and reviewing the impact of its Green Up tools, which are aimed at improving water and energy efficiency for borrowers in workforce multifamily housing properties. Freddie Mac and Fannie Mae are developing a corporate framework for incorporating climate risks into their existing risk management structures, and ensuring that climate risk is considered in key business decisions. Both Enterprises are also developing ESG strategies, inclusive of strategies addressing climate risks and opportunities. For its part, Fannie Mae performed an analysis on a nationwide flood survey, producing research and analysis for external stakeholders. Fannie Mae’s Climate Impact team is also researching the Enterprise’s exposures, identifying best practices and strategies to mitigate the impacts of such events, and working to raise awareness on this issue. The team is analyzing its physical and transition risks, exploring climate-related transition scenarios and data needs to improve predictive results, and reviewing internal and external policies to identify changes to address rising climate-related risks
Although FHFA has made great strides towards collecting data on how climate change will impact its regulated entities, it should continue to provide more information publicly to determine whether the above efforts fulfill FSOC Recommendation 2.1.
Next Steps
Increase transparency and publicly provide information on its data collection and research.
Provide public and easily searchable access to white papers, blogs, or infographics on the Climate Change and ESG website that demonstrate FHFA’s data collection and research on climate risk.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
Producing quality research and data is critical to assessing and addressing climate-related financial risks. As stated in the FSOC report, “Analyzing climate-related financial risks begins with measuring and assessing risks from climate impacts. To do this, data is needed that captures the drivers of physical and transition risks that could impact households, businesses, the economy, and the financial sector (page 48).” We incorporated this new category in the 2022 Scorecard to respond to these critical data gaps.
We assessed the extent to which the agency has advanced work to make progress on FSOC Recommendation 2.1:
“Identif[y] the data needed to evaluate the climate-related financial risk exposures of regulated entities and financial markets within the context of each FSOC member’s mandate and authorities;
Perfor[m] an internal inventory of currently collected and procured data and its relevance for climate risk assessments; and
Develo[p] a plan for procuring necessary data through data collection, data sharing arrangements and information purchased from data providers or other sources.”
Significant Progress
Reasoning
Because FHFA is not a FLEC member, we did not evaluate that portion of the assessment for this category. However, the FHFA has made progress in addressing financially vulnerable communities within its mandate. In 2020, FHFA established the Climate and Natural Disaster Risk working group to improve its understanding of climate and natural disaster risks and their impacts on historically underserved and vulnerable communities. Likewise, FHFA established the Climate Change and ESG Consumer Protection Working Group, focusing on protecting vulnerable communities through the transition to a low-carbon economy. The agency also included a summary of stakeholder recommendations in its climate RFI synopsis on priority actions to address risks to vulnerable communities.
In October 2021, FHFA updated the multifamily loan purchase caps for the Enterprises, allowing loans on affordable units in cost-burdened renter markets and loans to finance energy or water efficiency improvements with units affordable at or below 60% of area median income to be classified as mission-driven. Freddie Mac published a white paper assessing how resiliency can be increased at the property level to mitigate against natural disasters, the disparate impacts of natural disasters to low-to-moderate income renters, and how mitigation efforts could be applied in conjunction with one another to address resiliency most effectively.
Next Steps
Publicly provide, via the Climate Change and ESG website, advances made on interagency coordination on assessing risk to financially vulnerable communities.
Compile work related to financially vulnerable communities and include a section on the Climate Change and ESG website that summarizes and documents the various streams of work underway on this issue.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
The FSOC report highlights the imperative to assess climate risks on “financially vulnerable communities,” given that “climate change disproportionately affects financially vulnerable populations potentially including lower-income communities, communities of color, Native American communities, and other disadvantaged or underserved communities.” This troubling reality is further compounded by the fact that vulnerable communities are “less likely to have the resources to protect and guard against damage to their properties or adequately deal with loss of income from an adverse climate or weather event (page 22).” While the significance of this issue is emphasized, it is qualified by an important warning against measures or actions that may unintentionally worsen existing inequalities.
We assessed the extent to which each agency, consistent with its mandate, authorities, and its membership in the Financial Literacy and Education Commission (FLEC), has advanced work to make progress on FSOC Recommendations 1.8 and 1.9:
“members, consistent with their mandates and authorities, evaluate climate-related impacts and the impacts of proposed policy solutions on financially vulnerable populations when assessing the impact of climate change on the economy and the financial system.” (FSOC 1.8)
“Treasury Department engage other members of the Financial Literacy and Education Commission (FLEC) to analyze and understand the impact of climate change on the financial well-being of financially vulnerable populations. FSOC members that are also FLEC members should actively participate in this analysis.” (FSOC 1.9).
FLEC members include the Office of the Comptroller of the Currency, Federal Reserve, the Federal Deposit Insurance Corporation, National Credit Union Administration, Securities and Exchange Commission, Commodity Futures Trading Commission.
Significant Progress
Reasoning
The FHFA established the Climate Change and ESG Steering Committee, consisting of FHFA leadership, and eight agency-wide working groups staffed with experts from across the agency.
These working groups coordinate FHFA’s climate-related activities which work with FHFA’s regulated entities, members of the FSOC Climate-Related Risk Committee, and other stakeholders. In particular, the FHFA’s Climate Change and ESG Working Group identifies opportunities to incorporate the principles and practices of diversity, equity, and inclusion within the ESG framework. The working group also monitors the Enterprises’ ESG-related activities, such as voluntary reporting, SEC disclosures, and green, social, and sustainable bond issuances. Similarly, the FHFA’s Climate and Natural Disaster Risk Working Group, the predecessor to the Climate Change and ESG WG Steering Committee and the eight working groups, was tasked in 2020 and early 2021 with improving FHFA’s understanding of climate and natural disaster risks and their impacts on the Enterprises, the national housing market, and historically underserved and vulnerable communities. This working group also reviewed the Enterprises’ risk management approaches that assess and address these risks, and ensures they continue to operate in a safe and sound manner and fulfill their critical missions to serve the nation’s housing finance system.
In November 2021, FHFA appointed Daniel Coates as the executive sponsor of the FHFA’s Climate Change and ESG Working Group, as well as the chair of the FHFA’s Climate Change and ESG Steering Committee. Kaitlin Hildner and Jessica Shui were appointed as senior advisor to Coates and project coordinator, respectively. In April 2022, FHFA assigned a staff member from these working groups to work with FSOC’s Climate-Related Financial Risk Committee.
Methodology
It is urgent that agencies establish sustainable, well-resourced capacity at the political and technical levels to address climate risk to meet the scale of the challenge and deliver on the administration and FSOC commitments.
We assessed the extent to which the agency has appointed dedicated staff to address climate risk to execute the agency’s climate commitments and FSOC recommendations. We assess, for example, the role, authority, and human and financial resources provided to staff dedicated to work on climate risk.
Some Progress
Reasoning
The FHFA has begun reviewing its regulations and exploring opportunities to strengthen its disclosure requirements regarding climate risk. The agency gathered recommendations and data regarding disclosure needs via its climate RFI and related Climate Listening Session. Information from these activities was documented in the FHFA’s March 2022 Synopsis, although it did not specify whether or how it will use this information to review and potentially enhance its existing public disclosure requirements. The FHFA’s Climate Change and ESG Reporting and Disclosures Working Group is working with FHFA’s regulated entities on ESG reporting and disclosures workstreams.
The Enterprises have also produced public information on climate risk. Both Fannie Mae and Freddie Mac released SASB reports in 2020 (the Sustainability Accounting Standards Board established standards that guide disclosure of financially material sustainability information by companies to their investors). Likewise, Fannie Mae’s 2021 Annual Report includes a section on climate change and natural disaster risk management, and Freddie Mac’s 2021 Annual Report includes a section on natural disaster and climate risk management. Fannie Mae also responded to FEMA’s RFI on floodplain management standards in 2022, recommending FEMA establish standardized flood risk disclosures, promulgate regulations requiring disclosures in various contexts, and improve the transparency and utility of the National Risk Index.
Next Steps
Provide an explanation of how FHFA work in considering new disclosure needs and FHFA-directed Enterprise reporting will be used to improve public disclosure requirements on climate risk, including on these issues on the Climate Change and ESG website.
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
The market is currently mispricing climate risk. The lack of consistent disclosure by entities supervised by U.S. financial regulators is an obstacle to market efficiency and to the accurate pricing of climate risk. In response, the FSOC recommended that members:
“review their existing public disclosure requirements and consider, as appropriate, updating them to promote the consistency, comparability, and decision-usefulness of information on climate-related risks and opportunities, consistent with their mandates and authorities.” (FSOC 3.1)
“consider enhancing public reporting requirements for climate related risks in a manner that builds on the four core elements of the Task Force on Climate-Related Financial Disclosure (TCFD)” (FSOC 3.2)
“consider whether such disclosures should include disclosure of GHG emissions” (FSOC 3.4)
Following on FSOC Recommendations 3.1, 3.2, 3.3, and 3.4, we assessed the extent to which the agency has enhanced public reporting requirements, consistent with its statutory mandates.
Some Progress
Reasoning
FHFA has made progress in addressing climate risk management expectations to strengthen its supervision and regulation of its regulated entities’ management of and reporting on the physical and transition risks that may arise from natural disasters and changes in climate patterns. In December 2021, Acting Director Thompson announced FHFA’s enhancement of its agency-wide monitoring and supervision of climate change issues, instructing the Enterprises to designate climate change as a priority concern and actively consider its effects in their decision-making. The FHFA’s solicitation of feedback in its climate RFI on disclosure opportunities is also an important step towards climate risk supervision.
The FHFA also monitors the Enterprises’ performance on climate risk-related issues through regular meetings to discuss climate change and natural disaster-related activities, industry developments, and concerns. The agency also maintains ongoing communication with the Federal Home Loan Banks, conducting risk-focused reviews that include natural disaster-related activities. In November 2021, FHFA published a conservatorship scorecard that will hold the Enterprises accountable for ensuring resiliency to climate risks and ensure a governance structure exists to prioritize the effects of climate change throughout Enterprise decision-making.
Next Steps
Publicly provide clarity on FHFA’s efforts to address climate risk management expectations, such as including a specific section on the Climate and ESG website that explains the supervision and regulation work related to climate risk, how this work is supported by the various workstreams, and the nature of FHFA’s supervision over its regulated entities and Enterprises.
Publicly release its assessment of the climate RFI responses, and what is planned as a result.
Explicitly describe in its Strategic Plan how climate will be integrated into standard risk-based supervision and expectations, and outline objectives and an approximate timeline
*These recommendations, all within the FHFA’s mandate and authority to implement, are designed to address climate-related financial risks and ensure FHFA-regulated entities fulfill their mission to serve as a reliable source of liquidity and funding for the housing finance market and protect our capital markets, financial system, and communities.
Methodology
Supervision and regulation of climate risk is urgently needed to ensure the resilience of supervised entities and our financial system.
Following FSOC Recommendations, we assessed the extent to which the agency has “clarified or enhanced risk management expectations, guidance and requirements (FSOC 4.8).” We will also consider if agencies have:
“reviewed regulated entities’ efforts to address climate-related risks (FSOC 4.6)
“reviewed existing regulations, guidance and regulatory reporting to identify where clarifications and enhancements are needed” (FSOC 4.7)
The Federal Housing Finance Agency (FHFA) is responsible for supervising and regulating the housing mission of Fannie Mae and Freddie Mac (GSEs), as well as the Federal Home Loan Banks. The FHFA was created upon recognition that the previous regulatory structure was not adequate to address the risks posed by the GSEs, a situation exposed by the global financial crisis and subprime mortgage securities meltdown of 2008.
The Federal Home Loan Banks (FHLBanks) are 11 regional suppliers of lendable funds to financial institutions of all sizes and many types, including community banks, credit unions, commercial and savings banks, insurance companies, and community development financial institutions. The FHFA is responsible for ensuring that the FHLBanks, which are cooperatively owned by member institutions, operate in a financially safe and sound manner.
Fannie Mae and Freddie Mac were established by Congress to help ensure a reliable and affordable supply of mortgage funds throughout the country. The GSEs can also help protect housing during extraordinary periods of turmoil in the broader financial system and support mortgage lending that finances affordable housing. In 2021, Fannie Mae and Freddie Mac guaranteed approximately two-thirds of new single-family mortgage originations during the first three quarters of 2021, and more than half of single-family outstanding mortgages at the end of the first quarter in 2022.
The GSEs are currently under conservatorship due to the substantial deterioration in the housing markets that severely damaged each GSE’s financial condition, leaving both unable to fulfill their missions without government intervention. As conservator, FHFA has broad authority over the GSEs, ensuring that they operate in a safe and sound manner through prudential supervision and regulation.
In general, major decisions made by the GSEs are directives from FHFA. The GSE boards and management teams must consult with FHFA on GSE decision-making to obtain approval or act as directed by FHFA. Due to this unique oversight relationship, Ceres will be evaluating GSE actions as FHFA actions. There might be actions or communications in progress from FHFA to the GSEs that have not been published or implemented yet, which due to their confidentiality nature, will not be considered in this assessment.
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