Climate Risk Scorecard
Significant Progress
Some Progress
No Progress
Not Applicable
U.S. Department of the Treasury
Significant Progress
Reasoning
The Treasury has consistently and emphatically affirmed climate as a risk to the financial system. Secretary Janet Yellen and other senior staff have continued to deliver public remarks since the 2022 Scorecard acknowledging the systemic nature of climate-related financial risk:
Secretary Yellen comments at a meeting with the heads and private sector leads of several of the multilateral development banks (MDBs), underscoring effects of climate risk on vulnerable communities (July 2022)
Secretary Yellen statement a an FSOC meeting regarding the importance of creating the Climate-related Financial Risk Committee (CFRC) and the work of FSOC member agencies to advance knowledge on climate risk (July 2022)
Under Secretary Nellie Liang statement following the launch of Treasury’s Climate Hub (July 2022)
Under Secretary Liang remarks at the OFR’s Climate Implications for Financial Stability Conference (September 2022)
Deputy Secretary Wally Adeyemo remarks at the BPI Annual Conference on financing transition (September 2022)
Secretary Yellen remarks at Cypress Creek Renewables on the macroeconomic impacts of climate change (September 2022)
Secretary Yellen remarks at the Coalition of Finance Ministers for Climate Action meeting on the importance of finance in addressing climate change (October 2022)
Deputy Secretary Adeyemo remarks on the importance of the Inflation Reduction Act’s focus on equitable climate-related financial incentives (October 2022)
Superintendent Elizabeth Dwyer statement at an FSOC meeting on climate-related financial risk in the insurance sector, including an update on Hurricane Ian and its effect on local communities (November 2022)
Director Steven Seitz statement at an FSOC meeting on FIO’s climate-related efforts including the proposed data collection and international engagement (November 2022)
Assistant Secretary Alexia Latortue statement at COP27 on Treasury’s work to scale up public and private climate finance flows (November 2022)
OFR Acting Director James Martin remarks at the Financial Stability Conference (November 2022)
Deputy Assistant Secretary Sandra Lee statement on FSOC’s priorities, which include assessing climate-related financial risk (February 2023)
Secretary Yellen remarks at the first FSOC Climate-related Financial Risk Advisory Committee that climate risk “can lead to declines in asset values that could cascade through the financial system” (March 2023)
Assistant Secretary Graham Steele statements at Ceres Global on Treasury’s work to address climate-related risks in the insurance and other financial sectors (March 2023)
Under Secretary Jay Shambaugh comments regarding need for governments, regulators, and private companies to work together on addressing climate-related financial risks at a Brooking Institution event (April 2023)
Under Secretary Liang remarks at the International Swaps and Derivatives Association Annual General Meeting mentioning the importance of developing of voluntary carbon markets (May 2023)
Secretary Yellen remarks at a global event hosted by the Coalition of Finance Ministers for Climate Action, highlighting Treasury’s steps to address climate risk (June 2023)
Additionally, the Office of Financial Research (OFR) launched its Climate Data and Analytics Hub pilot in July 2022, a tool to help financial regulators assess climate-related financial stability risks, which was absorbed into the Joint Analysis Data Environment (JADE) after initial success with the pilot. Treasury also included addressing climate-related financial risks as one of its five goals in its FY 2022-2026 Strategic Plan, and provided an update on this work in its FY 2022 Agency Financial Report. Treasury’s OIG likewise added climate risks as a new Management Challenge in its 2022 update, stating that Treasury will play a significant role working with other federal agencies, foreign governments, and international financial institutions in addressing climate-related financial risk.
Next Steps
Continue to publicly acknowledge the systemic nature of climate-related financial risk in agency speeches and publications.
*These recommendations, all within the Treasury’s mandate and authority, are designed to address climate-related financial risks 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 noted in last year’s scorecard, Treasury has identified, inventoried, and planned for additional data collection and research on climate-related financial risk. FSOC is also developing climate-related risk indicators for the banking and insurance sectors and for capital markets, including new exposure metrics for bank and insurance holdings of commercial and residential real estate and other asset classes.
Treasury supports FSOC members in their own data collection, providing data it has collected, collection and analysis methodologies, and tools to collect additional data. Specifically, OFR meets with FSOC members to discuss the potential impact of climate change and monitors various sectors of the economy for impacts to financial stability. It is performing a survey of relevant commercial data vendors, government agency data sets, academic data hubs, and other key sources to identify, categorize, and share climate data with FSOC and its members.
OFR’s Climate Data and Analytics Hub pilot and upcoming JADE are intended to assist FSOC member agencies identify climate-related data gaps and evaluate how to close those gaps. OFR also held the OFR Climate Implications for Financial Stability Conference in September 2022, which included presentations by climate finance experts and panel discussions on macro-prudential issues, asset valuations, credit markets, stress testing, and financial system externalities. Similarly, Treasury’s SECURE integrated tool suite provides a data collection, modeling, and visualization platform to identify the operational links among financial institutions and supporting infrastructure. It also supports analysis of how physical hazards to critical infrastructure may impact financial sector operations.
Treasury also informed Ceres that OFR’s Research and Analysis Center (RAC) is working with FSOC’s CFRC to prioritize climate datasets that would be helpful in researching climate-related financial risk. To do this work, RAC researchers are primarily using OFR’s Analytical Environment (OFRAE), “which was designed and built specifically for the OFR to securely support computing-intensive work with large datasets.” In 2022, RAC conducted an inventory of available and necessary data for this research and worked with each FSOC agency to gather input on their priorities. It then identified the top priority climate datasets, which included public, academic, and commercial data. Since then, RAC has been working to obtain access to those datasets for OFR and FSOC member agency researchers.
Additionally, FIO issued two RFIs on climate risk in the insurance industry. The 2021 RFI focused on helping the agency better understand which data elements are necessary to accurately assess climate risk, which data elements remain unavailable, and how FIO could collect this data. The 2022 RFI focused on the agency’s proposed data collection relating to insurers’ underwriting metrics and related insurance policy information to help FIO assess climate-related exposures on insurance availability and affordability for policyholders. FIO has indicated it is working on addressing next steps on this proposed data collection.
In June 2023, FIO published a report analyzing climate-related issues and supervision gaps in the insurance sector, and provided 20 recommendations to better integrate climate-related considerations into regulation. This is an important report and FIO deserves credit for this valuable research. Treasury also participated in a Brookings event that reviewed the FIO report findings, reactions to the report, and efforts at the state level. Relatedly, Ceres hopes Treasury will provide public updates or outlines on the status of research and data it has obtained through the Climate Hub or other avenues.
Next Steps
Provide updates on the agency’s climate risk-related data collection and research, what additional data is needed, and its plan for collecting such data, including information and data collected through FIO’s most recent RFI.
Provide easily searchable access to white papers, blogs, infographics, etc. that demonstrate data collection and research on climate-related financial risk.
Issue a request for information on available data, models, or other information that could be used, in addition to existing data, to inform the agencies on climate-related risks to the financial system and the economy, including data on the adverse financial effects of climate on LMI communities.
Provide support to FFIEC members to conduct a climate risk policy spring to develop common definitions and review current and evolving risks to financial institutions.
Provide support to FFIEC members to develop a Climate Risk Assessment Tool similar to the Cybersecurity Assessment Tool to help financial institutions (particularly smaller, community financial institutions) identify their climate-related financial risks associated as well as their preparedness under various climate scenarios and actionable steps to mitigate risks.
*These recommendations, all within the Treasury’s mandate and authority, are designed to address climate-related financial risks 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)
Significant Progress
Reasoning
Treasury has addressed climate-related financial risks as an area of concern in multiple agency publications. In July 2022, the agency published a fact sheet describing FSOC and its member agencies’ progress in addressing climate-related financial risk. FSOC also heard updates from CFRC and other agency officials during five of its last eight public council meetings: July 2022, October 2022, November 2022, December 2022, and February 2023. The November 2022 meeting included an update and discussion on climate-related insurance gaps and FIO’s RFI.
Additionally, Treasury included addressing climate-related financial risks as one of its five goals in its FY 2022-2026 Strategic Plan, provided an update on this work in its FY 2022 Agency Financial Report, added climate risks as a new Treasury OIG Management Challenge in 2022, and included discussion of its climate risk work in FIO’s 2022 Annual Report. Likewise, FSOC included discussions of climate-related risks and member agencies’ progress in its 2022 Annual Report. Treasury also participated in the EU-US Joint Financial Regulatory Forum, which discussed issues related to sustainable finance and management of climate-related financial risks.
Next Steps
Provide updates on its climate risk-related activities outside of its scheduled, cumulative reports and assessments.
Establish a designated page on its website to provide updates on completed and ongoing climate risk-related activities, including what the Climate Hub, CFRC, CFRAC, and JADE are working on (such as what research each is undertaking and with which FSOC member agencies); announce other staff assigned to work on these issues, disclose budgets and resources; and other recommendations in this section.
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).
Some Progress
Reasoning
In October 2021, Treasury launched a study with the Financial Literacy and Education Commission (FLEC) on the impact of climate change on communities and households, focusing on low- to moderate-income (LMI) and historically disadvantaged communities. The FLEC Climate Resiliency Committee provided brief updates on its study and report during July and November 2022 FLEC meetings. These FLEC meetings also included further discussion of the financial impacts climate change has in agriculture and housing, particularly for those who are unbanked or in underserved communities.
Treasury also launched a series of roundtable discussions on Inflation Reduction Act programs that incentivize investment in underserved communities: October 2022, April 2023, and April 2023. Relatedly, Treasury and the Internal Revenue Service (IRS) issued two guidance documents on these Inflation Reduction Act programs, which describe program design, application process, and program criteria. In May 2023, Treasury convened a discussion on climate-focused community finance with Community Development Financial Institutions (CDFIs), highlighting how Inflation Reduction Act resources will be targeted to address climate challenges in underserved communities and how CDFIs may access and harness them.
However, no public information or analysis has yet come of the FLEC climate resiliency study, and no research on potential policy solutions or their impacts has been undertaken. Although Treasury previously indicated that the report would be published in 2022, it has since indicated to Ceres that it anticipates releasing the report in 2023. Similarly, although Treasury does not directly oversee financial institutions or the Community Reinvestment Act, it should consider providing recommendations to FSOC member agencies and their regulated entities regarding avenues to identify and address climate-related financial risks specific to LMI and other financial vulnerable communities, with particular focus on how to avoid inadvertently engaging in discriminatory practices (i.e. bluelining).
Next Steps
Actively and transparently engage in interagency coordination on assessing risk to financially vulnerable communities, provide updates, and publish findings.
Publish the FLEC Climate Resiliency Group’s report on the climate-related financial impacts to consumers and vulnerable communities.
Consider the policy implications of climate-related financial risk supervision and regulation on LMI and BIPOC communities.
Provide recommendations and guidance to FSOC member agencies on how to assess climate-related financial risks specific to vulnerable and underserved communities and how to avoid inadvertently engaging in discriminatory practices (i.e. bluelining).
Although Treasury does not oversee the CRA, consider issuing recommendations to the Fed, FDIC, and OCC to better align CRA activity with the needs of the communities that banks serve, consistent with a bank’s safety and soundness and incorporating climate-related financial risks to LMI and other financially vulnerable communities.
*These recommendations, all within the Treasury’s mandate and authority, are designed to address climate-related financial risks 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
In the FSOC’s 2021 climate report, Treasury noted the creation of what would become OFR’s Climate Data and Analytics Hub pilot to coordinate and enhance existing climate-related activities by harnessing tools, capabilities, and expertise from across Treasury and other financial regulators. OFR launched the pilot in July 2022 in partnership with the Federal Reserve Board and the Federal Reserve Bank of New York. The Climate Data and Analytics Hub was intended to help participating agencies integrate “climate-related data with their public supervisory data for a more precise view of the relationship between climate change and financial stability risk,” and is “equipped with statistical and visualization applications that will allow deeper insight into climate-related financial risks and vulnerabilities."
In April 2023, OFR announced it is developing an expanded and enhanced version of the Climate Data and Analytics Hub, following the successful pilot. The new platform, Joint Analysis Data Environment (JADE), will support comprehensive financial stability research by providing a platform to integrate and analyze a broad spectrum of financial and other relevant data. OFR anticipates releasing the JADE pilot in the second half of 2023 and plans to gradually expand its availability to all FSOC member agencies and include climate-related data.
In February 2022, the Federal Advisory Committee on Insurance (FACI), which provides advice and recommendations to FIO, launched the Climate Related Financial Risk Subcommittee. Similarly, Treasury co-chairs Helsinki Principle 4 (HP4) in the Coalition of Finance Ministers for Climate Action, which focuses on fiscal mitigation and adaptation policies.
In October 2022, Treasury’s FSOC established the Climate-related Financial Risk Advisory Committee (CFRAC) and announced the first 20 committee members. The CFRAC acts in a solely advisory capacity and is intended to assist FSOC in gathering information, conducting analysis, and making recommendations to identify, assess, and mitigate climate-related financial risks. The CFRAC reports to the Climate-related Financial Risk Committee (CFRC), which FSOC established in 2021.
In July 2021, Treasury appointed Graham Steele as assistant secretary of financial institutions. Treasury’s Climate Counselor John Morton, appointed in April 2021 to head Treasury’s Climate Hub (separate from OFR’s Climate Data and Analytics Hub pilot), resigned in December 2022. Treasury’s April 2023 action plan for increasing agency sustainability lists two Climate Hub senior advisors, but no climate counselor to replace John Morton has yet been announced. This action plan also includes implementing a climate literacy program for Treasury staff, with a completion goal of September 2023.
Treasury’s 2023 budget request also included a request for funding to support the Climate Hub and related staffing. Likewise, Treasury’s FY 2024 budget justification included funding designated to support Climate Hub and JADE resources and staffing.
Next Steps
Appoint and announce Treasury’s Climate Counselor/head of the Climate Hub, and staff that report to this appointee.
Continue work with the CFRC, CFRAC, FLEC, Basel, NGFS, and other interagency climate risk working groups.
Continue internal staff education and training on climate-related financial risks.
Update the Treasury’s Climate Action Plan to include how the agency will address climate-related financial risk and support FSOC member agencies, including goals and priorities.
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.
Not Applicable
Reasoning
This assessment category is not within the Treasury’s mandate or authority.
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
Although Treasury has limited direct rulemaking authority over financial entities, it is responsible for policy formulation and promoting conditions that protect the integrity of the financial system and has taken several steps towards assessing climate risk management and assisting financial regulators to address their climate risk-related supervisory efforts. Treasury is a member of the FSB taskforces working to establish effective and consistent supervisory and regulatory approaches to address climate-related risks within the financial sector, and participated in discussions regarding the FSB’s Roadmap for Addressing Climate-related Financial Risks.
The Office of State and Local Finance also reconvened its Summer Series on Resources for the State and Local Government Climate Transition to discuss climate-oriented tools and resources for the municipal sector and how state and local governments can implement opportunities in the Inflation Reduction Act. Similarly, Treasury held a discussion with senior Administration officials and representatives from CDFIs, researchers, and advocates on climate-focused community finance to “help[] open new channels for access to capital to financially underserved communities … which are disproportionately impacted by climate events” and how federal resources such as the Inflation Reduction Act’s Greenhouse Gas Reduction Fund will target those issues. A post-discussion listening session was held to hear best practices from CDFIs on climate-focused community finance.
OFR also launched its Climate Data and Analytics Hub pilot to coordinate and enhance existing climate-related activities by harnessing tools, capabilities, and expertise from across Treasury and other financial regulators. The pilot was intended to assist FSOC member agencies assess climate-related financial risks by integrating “climate-related data with their public supervisory data for a more precise view of the relationship between climate change and financial stability risk.” Following the pilot’s success, OFR announced the creation of JADE, which will support financial stability research by providing FSOC agencies a platform to integrate and analyze financial and other relevant data, including on climate risk.
In its 2022 Annual Report, FSOC named climate-related financial risk as one of four key priorities to address risks and vulnerabilities in the financial system. The report included a discussion of this risk and made several recommendations, including: (1) state and federal agencies coordinate to identify, prioritize, and procure data necessary for monitoring climate risk, (2) state and federal agencies continue to collect data on and study climate risk and how it factors into supervisory expectations of regulated entities’ risk management practices, (3) continue to promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to consider climate-related financial risks in their investment and lending decisions, and (4) have FSOC agencies enhance coordination of data and risk assessment through the CFRC.
FSOC provides an important forum for facilitating interagency discussions around best practices for climate risk management, and Secretary Yellen has publicly supported the financial regulators’ efforts to manage these risks. At the December 2022 FSOC meeting, Secretary Yellen “said she looked forward to continuing to work with [FSOC] members on this [FSOC] priority in 2023.” FSOC’s CFRC has served as a key forum for interagency information-sharing and coordination to advance the FSOC’s climate report recommendations, including through four working groups focused on data infrastructure, data requirements, risk assessment, and scenario analysis. The CFTC’s CFRAC also plans to enable gathering of information and analysis from a broad array of stakeholders to advance FSOC member agencies’ understanding of climate-related financial risks.
Additionally, FIO’s 2021 RFI included questions on climate-related issues or gaps in the supervision and regulation of insurers, and how FIO should assess the effectiveness of insurance regulatory and supervisory policies in addressing and managing climate-related financial risks. Similarly, FIO’s 2022 RFI, which focused on data collection from insurers, is intended to assist FIO in its assessment of climate-related exposures and help the agency build foundational knowledge to develop more comprehensive approaches to address climate-related financial risks in the future. In June 2023, FIO published a report analyzing climate-related issues and supervision gaps in the insurance sector, and provided recommendations to better integrate climate-related considerations into regulation.
However, Treasury has not yet adapted its work with CFRAC, OFR, or the FSB into concrete supervision and regulation recommendations for financial institutions or financial regulators. Relatedly, Ceres hopes Treasury will provide public updates or outlines on the status of research and data it has obtained through the Climate Hub or other avenues.
Next Steps
Draft recommendations, through OSLF or other appropriate Treasury offices, to enhance climate risk guidance or requirements for the entities it oversees and state insurance offices.
Through FIO, evaluate the adequacy of state insurance regulators’ oversight of climate-related risks.
Draft recommendations for FSOC member agencies regarding priority actions to address climate-related financial risks based on each agency’s individual mandate.
Develop a green taxonomy for U.S. financial institutions to identify sustainable economic activities that contribute to climate goals and encourage investors and institutions to implement long-term transition strategies and business model reforms.
Recommend to the Fed that prudential standards and reporting and disclosure requirements for nonbank financial companies and large bank holding companies be made more stringent than for institutions that do not present similar financial stability risks.
Through FIO, recommend that FSOC designate an insurer as an entity subject to regulation by the Fed.
Continue to support expansion of FSOC member agency internal climate risk management capacity.
Continue to include climate-related financial risk provisions in its Strategic Plans and Financial Reports to send a consistent message about climate-related financial risks.
*These recommendations, all within the Treasury’s mandate and authority, are designed to address climate-related financial risks 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).
Not Applicable
Reasoning
This assessment category is not within the Treasury’s mandate or authority.
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
Although Treasury has limited direct rulemaking authority over financial entities, it is responsible for policy formulation and promoting conditions that protect the integrity of the financial system, and has taken some steps towards improving public climate-related disclosure in that role. As noted in last year’s scorecard, Treasury’s Office of State and Local Finance convened a virtual roundtable for state and local governments that included discussion of best practices for climate risk identification and disclosure strategies in the municipal debt market. Secretary Yellen also publicly supported the SEC’s proposed climate disclosure rule.
FIO’s 2021 RFI also included a question on key factors for the insurance sector in developing standardized, comparable, and consistent climate-related financial risk disclosures, such as those set forth by TCFD. Its 2022 RFI focused on data collection from insurers relating to underwriting metrics and related insurance policy information. FIO’s planned climate report may also include an analysis of climate-related disclosures for the insurance sector.
Additionally, Treasury is a member of the Financial Stability Board (FSB) taskforces establishing enhanced climate-related corporate disclosures, a member of G7, and co-chairs the G20’s Sustainable Finance Working Group (SFWG). The SFWG is working to improve approaches to climate-related financial disclosures and reporting, and issued recommendations on improving sustainability reporting and disclosure standards. Following its April 2023 meeting, G7 released a communique “urg[ing] the implementation of mandatory climate-related financial disclosures that provide consistent and decision-useful information for market participants.” Treasury also met with asset managers and insurers in September 2022 to discuss opportunities and challenges of climate considerations in investment, including enhanced disclosures.
In its 2022 Annual Report, FSOC included a discussion of climate-related financial risk and recommended FSOC agencies continue to promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to consider climate-related financial risks in their investment and lending decisions. FSOC’s CFRC has also served as a key forum for interagency information sharing and coordination to advance the FSOC’s climate report recommendations, including on disclosure. However, FIO’s climate report is not yet published. Based on the FIO request for information, it is possible their final rule will provide recommendations to update or enhance disclosure requirements. Likewise, Treasury has not yet translated its work with the FSB and G20 into concrete analysis or implementation recommendations for financial institutions or financial regulators.
Next Steps
Issue recommendations on standards – such as the TCFD framework – for financial institutions and publicly traded companies to ascertain data on their GHG emissions to guarantee that disclosures among institutions are consistent, comparable, and reliable.
Draft recommendations, through FIO or other appropriate Treasury offices, regarding public disclosure requirements for the entities it oversees and state insurance offices, and update policies and recommendations to include climate related risks.
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
Treasury has consistently and emphatically affirmed climate as a risk to the financial system through numerous speeches and remarks publicly acknowledging the systemic nature of the climate crisis:
Secretary Janet Yellen conveyed the agency’s intention to work with IMF on forcefully addressing the threat of climate change (February 2021)
Secretary Yellen letter to G20 colleagues urging global cooperation to address climate change as a financial risk (February 2021)
Presentation on climate-related financial risks delivered at the first FSOC meeting convened by Secretary Yellen, chair of the Council (March 2021)
Secretary Yellen testimony at the Senate Banking Committee hearing (September 2021)
Publication of the FSOC Report on Climate-Related Financial Risk (FSOC report) (October 2021)
Secretary Yellen keynote remarks at COP26 in Glasgow at the Finance Day Opening Event (November 2021)
Secretary for Domestic Finance Nellie Liang remarks at the IIB Conference regarding climate risk and Treasury’s actions to address it (March 2022)
Secretary Yellen remarks at the Coalition of Finance Ministers for Climate Action (April 2022)
Climate Counselor John Morton comments at the Center for Global Development event (May 2022)
Secretary Yellen comments on the proposed SEC climate risk disclosure rule (May 2022)
Secretary Yellen testimony on climate-related financial risk and analyses at the House Financial Services Committee hearing (May 2022)
Additionally, Treasury has included the risks presented by climate change to the financial system in several agency publications, and created the internal Treasury Climate Hub to coordinate and enhance existing climate-related activities by harnessing the tools, capabilities, and expertise from across the agency. FIO is a member of the Sustainable Insurance Forum and joined the Network for Greening the Financial System (NGFS) in February 2022. As of October 2022, Treasury also co-chairs the G20’s Sustainable Finance Group. FIO also serves on the Climate Risk Steering Group of the International Association of Insurance Supervisors (IAIS). Most importantly, the Secretary of the Treasury chairs the Financial Stability Oversight Council (FSOC). Treasury provided a detailed update for the FSOC report on its activities related to climate risk management, created through FSOC the Climate-related Financial Risk Committee (CFRC) comprised of staff from the FSOC member agencies, and indicated that FSOC would form a Climate-related Financial Risk Advisory Committee comprised of external experts to report to the CFRC.
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.
Significant Progress
Reasoning
Treasury has identified, inventoried, and planned for additional data collection and research on climate-related financial risk. OFR continues to identify data gaps linking climate change and financial stability, evaluate how to close those gaps, and develop a research agenda around the risks climate change presents to financial stability.
Likewise, FIO issued a request for information (RFI) to help the agency better understand which data elements are necessary to accurately assess climate risk, which data elements remain unavailable, and how FIO could collect this data under its statutory data collection authorities and make it available to stakeholders as needed. By the end of 2022, FIO plans to publish a climate report that will include an analysis of climate-related disclosure requirements for the insurance sector, and expects to release a report that will identify climate risks in the insurance industry and any gaps in regulation.
In 2022, FIO also began analyzing the transition risk of insurers’ investment portfolios and the physical risk of property and casualty insurers’ current climate-related underwriting exposures. In February 2022, the Federal Advisory Committee on Insurance, which provides advice and recommendations to FIO, launched the Climate Related Financial Risk Subcommittee. Similarly, Treasury co-chairs Helsinki Principle 4 (HP4) in the Coalition of Finance Ministers for Climate Action, which focuses on fiscal mitigation and adaptation policies.
Treasury also supports FSOC members in their own data collection, providing data it has collected, collection and analysis methodologies, and tools to collect additional data. Specifically, OFR works with FSOC members to identify ways to provide climate data sources (including a pilot program to serve as a climate data hub), meets with FSOC members to discuss the potential impact of climate change, and monitors various sectors of the economy for impacts to financial stability. OFR is also performing a survey of relevant commercial data vendors, government agency data sets, academic data hubs, and other key sources to identify, categorize, and share climate data with FSOC and its members.
Additionally, OFR is developing a risk management program to provide a methodology for assessing sector operational risk, such as risk resulting from dependencies with other critical infrastructure sectors like energy and telecommunications. Similarly, Treasury’s SECURE integrated tool suite provides a data collection, modeling, and visualization platform to identify the operational links among financial institutions and supporting infrastructure. It also supports analysis of how physical hazards to critical infrastructure may impact financial sector operations. These activities will assist FSOC members in analyzing climate-related operational risk.
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.”
Some Progress
Reasoning
In October 2021, Treasury launched a study with FLEC on the impact of climate change on communities and households, focusing on LMI and historically disadvantaged communities. However, no information or analysis has yet come of this study, and no research on potential policy solutions or their impacts has been undertaken.
Next Steps
Publicly release the information and analysis it has obtained from its study with FLEC on the impact of climate change on communities and households.
Although Treasury is not a primary CRA regulator, consider issuing recommendations to the Fed, FDIC, and OCC to better align CRA activity with the needs of the communities that banks serve. This should be conducted in a manner consistent with a bank’s safety and soundness, including incorporating climate-related financial risks to LMI and other financially vulnerable communities.
*These recommendations, all within the Treasury’s mandate and authority, are designed to address climate-related financial risks 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
Treasury appointed John Morton as climate counselor to the Treasury secretary in April 2021, and Graham Steele as assistant secretary of financial institutions in July 2021. In April 2021, the agency created the Treasury Climate Hub, an internal working group led by Morton tasked with coordinating and enhancing existing climate-related activities by harnessing tools, capabilities, and expertise from across Treasury. Additionally, Treasury allocated a portion of its 2022 budget to FSOC’s commitment to coordinating regulators’ efforts to improve the measurement and management of climate-related risks in the financial system as the country transitions to a net zero carbon economy.
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
Treasury has taken several steps towards improving public climate-related disclosure. In March 2022, Treasury’s Office of State and Local Finance convened a virtual roundtable on best practices for state and local governments focusing on supporting resilience to the impacts of climate change, advancing the transition to a net zero economy, and enabling communities to benefit from the economic opportunities embedded within that transition. Similarly, FIO’s 2021 RFI on the Insurance Sector and Climate-Related Financial Risks included a question on key factors for the insurance sector in developing standardized, comparable, and consistent climate-related financial risk disclosures, such as those set forth by the Task Force on Climate-related Financial Disclosures (TCFD). FIO announced its intention to publish a climate report related to this RFI by the end of 2022, which will include an analysis of climate-related disclosures for the insurance sector.
Treasury is also an active member of the Financial Stability Board (FSB) taskforces working to establish enhanced climate-related corporate disclosures. Similarly, Treasury co-chairs the G20’s Sustainable Finance Working Group, which is developing a roadmap to guide G20 priorities, including how to improve approaches to climate-related financial disclosures and reporting.
However, FIO’s climate report is not yet published, and the report itself will not update or enhance disclosure requirements. Likewise, Treasury has not yet translated its work with the FSB and G20 into concrete analysis or implementation recommendations for domestic financial institutions.
Next Steps
Draft recommendations, through FIO or other appropriate Treasury offices, regarding public disclosure requirements for the entities it oversees, and update policies and recommendations to include climate related risks.
*These recommendations, all within the Treasury’s mandate and authority, are designed to address climate-related financial risks 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
Treasury has taken several steps towards assessing its risk management expectations and requirements on climate-related financial risk. FIO’s 2021 RFI on the Insurance Sector and Climate-Related Financial Risks included questions on climate-related issues or gaps in the supervision and regulation of insurers, and how FIO should assess the effectiveness of insurance regulatory and supervisory policies in addressing and managing climate-related financial risks. FIO announced its intention to publish a climate report related to this RFI by the end of 2022, focusing on insurance supervision and regulation, with an assessment of climate-related issues or gaps in the supervision and regulation of insurers. Treasury is also an active member of the FSB taskforces working to establish effective and consistent supervisory and regulatory approaches to address climate-related risks within the financial sector.
However, FIO’s climate report is not yet published, and the report itself will not update or enhance supervision. Likewise, Treasury has not yet adapted its work with the FSB into concrete supervision and regulation recommendations for domestic financial institutions.
Next Steps
Draft recommendations, through OFR or FIO, to enhance climate risk guidance or requirements for the entities it oversees.
Issue FIO guidance pursuant to the comments the office received on its RFI and other related analysis it has conducted on climate-related financial risks in the insurance sector.
*These recommendations, all within the Treasury’s mandate and authority, are designed to address climate-related financial risks 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 U.S. Department of the Treasury’s (Treasury) mission is to maintain a strong economy and create economic and job opportunities by promoting economic growth and stability at home and abroad, fostering improved governance in financial institutions, and managing the U.S. government’s finances and resources effectively. While Treasury itself has limited direct rulemaking authority over financial entities, it is responsible for policy formulation, promoting economic conditions that protect the integrity of the U.S. financial system, and fostering improved governance in financial institutions.
The Secretary of the Treasury chairs the Financial Stability Oversight Council (FSOC), which is responsible for identifying risks to the financial stability of the country and responding to emerging threats. FSOC facilitates regulatory coordination among financial regulators, facilitates information sharing and collection, designates firms and financial market utilities as systemically important, and intervenes with firms that pose a threat to financial stability.
The Office of Financial Research (OFR) supports FSOC and member agencies by collecting and providing data to FSOC, performing research, developing tools for risk measurement and monitoring, and assisting member agencies in determining the types and formats of necessary data.
The Office of State and Local Finance (OSLF) coordinates Treasury’s policies on state and local issues, providing research and analysis on infrastructure financing, developing policy responses to fiscally stressed entities, and serving as a central point of contact for state and local finance officials, municipal market regulators, standards bodies, and bankers.
The Federal Insurance Office (FIO) monitors all aspects of the insurance sector, including the extent to which traditionally underserved communities have access to affordable non-health insurance products. It also represents the U.S. on prudential aspects of international insurance matters.
The Treasury works with other federal agencies and international financial institutions to improve the safeguards of our financial systems and prevent economic and financial crises. As noted by FSOC, “[t]he increasing economic effects of climate change imply that climate-related financial risks are an emerging threat to the financial stability of the United States.” By addressing these risks, Treasury is fulfilling its duties to contribute to the greater stability and resiliency of the broader U.S. economy.
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